Netstreit Corp

NYSE:NTST

Earnings Call Analysis

Strong investments and strategic adjustments drive NETSTREIT's robust Q3 performance.

In Q3 2024, NETSTREIT reported record gross investments of $152 million at a cash yield of 7.5%. With 671 properties fully leased, the portfolio maintained a weighted average lease term of 9.5 years. The company continued reducing its Walgreens exposure from 5.9% to 4.8%, aiming for below 3% in 6-7 quarters. AFFO per share guidance for 2024 was refined to $1.26-$1.27, sustaining a 66% payout ratio. Despite a net loss of $5.3 million, core FFO showed resilience, increasing over 3% year-over-year, while G&A expenses dropped significantly. The company remains optimistic about its strategic growth amidst evolving market conditions.

Company Overview and Strategic Direction

In the third quarter of 2024, NETSTREIT Corp achieved notable milestones, completing $152 million in gross investments, the highest recorded for the company, with cash yields averaging 7.5%. This strategic proliferation into sale-leaseback transactions allowed for a longer weighted average lease term of 12.5 years, and it attracted investment-grade tenants to bolster cash flow stability. The quarter's strong performance reflects a consistent commitment to prudent asset management and adheres to stringent underwriting standards aimed at sustaining tenant credit profiles and cash flows.

Financial Performance Metrics

The financial report revealed a net loss of $5.3 million or $0.07 per diluted share, while the core Funds from Operations (FFO) reached $24.9 million—up over 3% over the previous year—translating to $0.32 per diluted share. Adjusted Funds from Operations (AFFO) also maintained the same figure, affirming cash flow resilience despite the net loss. On the expenditure front, general and administrative expenses saw a decline of 16% year-over-year to $4.3 million, demonstrating effective cost management.

Balance Sheet Health

NETSTREIT's balance sheet remains robust, with total adjusted net debt at $569 million and a weighted average debt maturity of 3.3 years at a cost of 4.46%. The liquidity position is strong, amounting to $464 million, which includes $29 million of cash and a $250 million revolving credit facility. Importantly, the ratio of adjusted net debt to annualized adjusted EBITDAre stands at 4.0x, comfortably below the targeted range of 4.5 to 5.5x, reinforcing the firm's capability to manage its leveraged positions effectively.

Portfolio Adjustments and Tenant Concentrations

The company made significant progress in reducing tenant concentration in the portfolio. For Walgreens, their lease contribution decreased from 5.9% to 4.8%, with plans to further lower this to below 3% within the next 6-7 quarters. Despite industry-wide challenges, the management maintains that this reduction strategy and rigorous asset evaluations will mitigate risks and safeguard revenue streams going into the future. Notably, only 3% of rental revenue is due to expire before 2026.

Dividends and Guidance

As part of sustaining shareholder returns, a quarterly cash dividend of $0.21 per share was declared, reflecting a payout ratio of 66% of AFFO for the quarter. Looking ahead, the AFFO per share guidance for 2024 was maintained and slightly adjusted to a range of $1.26 to $1.27 from the previous $1.25 to $1.28. This showcases management's confidence in maintaining stable cash flows and compensating shareholders amid operational adjustments.

Market Insights and Future Outlook

As NETSTREIT looks towards the future, they recognize a favorable investment climate with improving disposition market conditions, as evidenced by their recent sales achieving favorable cap rates. The focus on partnerships with larger operators; and a shift towards investment-grade tenants, provides a strong foundation for growth. The ongoing economic considerations—particularly concerning consumer pressures—are being factored into strategic decisions, making proactive portfolio management crucial. The management believes that maintaining high-quality assets and sound relationships with tenants will mitigate risks associated with broader market fluctuations.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to NETSTREIT Corp. Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Amy An, Investor Relations. Thank you, Ms. An, you may begin.

[Amy An, executive]

We thank you for joining us for NETSTREIT's third quarter 2024 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and an updated investor presentation. Both can be found in the Investor Relations section of the company's website at www.netstreit.com.

On today's call, management's remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review [ Form 10-K ] for the year ended December 31, 2023, and our other SEC filings. All forward-looking statements are made as of the date hereof, and NETSTREIT assumes no obligation to update any forward-looking statements in the future.

In addition, certain financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and supplemental package for definitions of our non-GAAP measures, reconciliations to the most comparable GAAP measure, and an explanation of why we believe such non-GAAP financial measures are useful to investors.

Today's conference call is hosted by NETSTREIT's Chief Executive Officer, Mark Manheimer; and Chief Financial Officer, Dan Donlan. They will make some prepared remarks and then we will open the call for your questions.

Now I'll turn the call over to Mark. Mark?

[Mark Manheimer, executive]

Thank you, Amy, and thank you all for joining us this morning on our third quarter 2024 earnings call. I first want to congratulate the team on an outstanding quarter as we completed $152 million of gross investments, our highest quarter on record at a blended cash yield of 7.5% or 8% on a straight-line basis, which has been our average on a year-to-date basis.

Similar to last quarter, a greater portion of our third quarter investments were sale leasebacks as we have seen more attractive risk-adjusted returns emerge from our opportunity set within that marketplace. Additionally, by sourcing more volume from this channel, our quarterly acquisitions had a longer weighted average lease term at 12.5 years with more attractive rent growth profiles.

While our percentage investments leased to investment-grade and investment-grade profile tenants was below our portfolio average this quarter, we have continued to adhere to our stringent underwriting standards, which require healthy tenant credit profiles, strong unit level cash flow, generic single-tenant boxes, above-average foot traffic and replaceable rents among many other attributes. Included in this activity were 4 development projects totaling over $18 million that commenced rent in the quarter. As of today, our development pipeline consists of 8 projects with a total estimated cost of $22 million, which includes estimated remaining funding of $7 million.

Turning to the portfolio. We ended the quarter with investments in 671 properties that were 100% leased to 93 tenants operating in 26 industries across 45 states. From a credit perspective, over 75% of our total ABR is leased to investment-grade or investment-grade profile tenants. Our weighted average lease term remaining in the portfolio is 9.5 years with less than 3% of ABR expiring through 2026.

In addition to a robust quarter of investments, we also saw continued progress on the asset management front, which is indicative of the strength of our industry relationships and the speed of which our team can move when asked to perform. This was evidenced by our third quarter disposition activity as we executed on various strategic asset sales that reduced select tenant concentrations while accretively recycling the proceeds into investments with longer leases and better rent escalations. All told, we completed 8 dispositions in the quarter for total proceeds of $24 million at a weighted cash yield of 7.3%.

Turning to our industry concentrations. While the pharmacy and dollar store industries have garnered a number of less than positive headlines over the past few months, we remain eminently comfortable in the long-term productivity of our assets within these industries. Due to the in-depth analysis that we complete at underwriting, coupled with consistent dialogue we have with these operators, we do not currently foresee any discernible economic impact to our earnings stream from these industries, which represent just 50 basis points of total expiring ABR between now and 2028 year end.

As it pertains to Walgreens, we continue to believe that their planned store closures, which are likely to focus on near-term lease expirations and unprofitable locations should have minimal to no impact on our occupancy. Amongst many other factors, our conviction in this view is driven by the fact that more than 2/3 of our stores were purchased pursuant to blend and extend transactions, which is not only indicative of Walgreens' long-term commitment to our sites, but also supports our view that our rents are more replaceable versus market.

However, we felt it prudent to demonstrate that we can quickly and meaningfully reduce tenant concentrations, even those that are perceived to have challenges while simultaneously reinvesting the proceeds at an accretive level. As outlined in the supplemental, we have reduced our Walgreens concentration from 5.9% at second quarter end to its current concentration of 4.8%. While we endeavor to have all tenant concentrations below 5% longer term, our Walgreens concentration should decline further in coming quarters. Our weighted average lease term with Walgreens is approximately 10 years with just 1 lease expiring before 2030, which we believe has virtually 0 renewal risk given its exceptionally high front-end sales and its 99th percentile national ranking on placer for foot traffic.

Lastly, while there is nothing to report on this front as of today, we have received a fair amount of inbound interest in our Walgreens locations, largely from large-format convenience store operators who are currently willing to pay high rents for high-quality locations similar to the properties that we own. We are also nearing a highly positive outcome as it relates to our Big Lots, which currently stands at 80 basis points of total ABR. As a reminder, prior to 2024, we decreased our Big Lots concentration from 11 stores to 8 stores in order to protect our cash flow in the event a financial restructuring occurred, which indeed happened this September.

Of the 8 locations, one was assigned to Ollie's Bargain Outlet, an existing investment-grade profile tenant of ours. Another site is being marketed for lease in [ Bowie ] Maryland, where we have received a number of attractive LOIs from major retailers and grocers, and the remaining 6 locations have all been assumed by Big Lots. As part of the negotiation, we extended the lease term to an average of 7.5 years, albeit we did agree to provide some short-term rent relief during the bankruptcy process, which we expect to conclude sometime in December. Looking out to 2025, we should experience little to no loss in our rental stream from the 8 assets while gaining longer lease terms from better credit profiles at proven rents.

While we prefer not to have any noise around the health of our tenants credit, we believe it is important to demonstrate that our underwriting of assets proved to be sound and resulted in minimal disruption to our cash flows. As a reminder, we view corporate credit, unit level cash flow production and the fungibility of our real estate as moats of protection around our rental streams. We are not simply buying high credit quality assets and hoping for the best. Our strong underwriting and asset management capabilities have and we believe will continue to help us generate extraordinarily consistent portfolio cash flow for our shareholders.

Lastly, before I hand the call over to Dan, I'm pleased to share that effective October 1, Lori Wittman was appointed the Chair of the Board of Directors. Lori has been a valued member of our Board going back before our IPO, and she has consistently demonstrated a deep understanding of our business and a commitment to our success. Her continued service will be instrumental as we execute on our strategic vision and long-term growth.

With that, I'll hand the call to Dan to go over our third quarter financials and then open up the call for your questions.

[Daniel Donlan, executive]

Thank you, Mark. Looking at our third quarter earnings, we reported a net loss of $5.3 million or $0.07 per diluted share. Core FFO for the quarter was $24.9 million or $0.32 per diluted share, and AFFO was $24.8 million or $0.32 per diluted share, which was an over 3% increase versus last year.

Turning to the expense front. Total recurring G&A declined 16% year-over-year to $4.3 million, while recurring cash G&A declined 24% year-over-year to $2.9 million. In addition, with our total recurring G&A representing 10% of total revenues in the quarter versus 15% of total revenues in the prior year quarter, our G&A continues to steadily rationalize relative to our revenue base.

Turning to the balance sheet. Our total adjusted net debt, which includes the impact of all forward equity as of quarter end, was $569 million. Our weighted average debt maturity was 3.3 years, and our weighted average interest rate was 4.46%. Including extension options, which can be exercised at our discretion, we have no debt maturing until January 2027. At quarter end, our liquidity was $464 million, which consisted of $29 million of cash on hand, $250 million available on our revolving credit facility and $185 million of unsettled forward equity.

Turning to leverage, our adjusted net debt to annualized adjusted EBITDAre was 4.0x at quarter end, which remains well below our targeted leverage range of 4.5 to 5.5x.

Moving on to guidance. We are maintaining our 2024 AFFO per share guidance midpoint and updating the range to $1.26 to $1.27 from our prior range of $1.25 to $1.28. Lastly, on October 18, the Board declared a quarterly cash dividend of $0.21 per share. The dividend will be payable on December 13 to shareholders of record as of December 2. Based on the dividend amount, our AFFO payout ratio for the third quarter was 66%.

With that, operator, we will now open the line for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Wes Golladay with Baird.

[Wesley Golladay, analyst]

As you look into the fourth quarter and maybe the first quarter of next year as you're resetting some of your non-core assets, do you still expect to maintain an accretive acquisition spread versus your dispositions?

[Mark Manheimer, executive]

Yes. We do, Wes. I think just looking forward to the fourth quarter and maybe early in the first quarter where we have some visibility, we expect cap rates to stay pretty close to where they are right now, maybe slightly below where we've been for the first 3 quarters. But the dispositions that we're looking at currently are at lower cap rates than what we achieved in the third quarter.

[Wesley Golladay, analyst]

Okay. And then how do you see your Dollar General exposure progressing over the next year or so? And then can you comment on the quality of your locations? You gave a nice little analysis about your Walgreens being blend and extends and high foot traffic, but can you maybe unpack the Dollar General exposure?

[Mark Manheimer, executive]

Yes, sure. So the Dollar General portfolio that we have, I think, is a little bit unique in that we were able to partner with the tenant and get most of our leases extended and then really the ones that weren't extended, we've gone out and sold the vast majority of those. So we're left with just under 15 years weighted average lease term with an average of 1% annual increases in the leases. So a little bit unique when you compare our dollar store portfolio to others.

But yes, I mean, there are a number of loans in there. So I think those will get paid off here in the next year or so. So that really kind of brings the concentration down below 10% just with that. And then we are looking at a handful of dispositions just to try to get that concentration down a little bit, which I think will certainly be well below 10% here in the next couple of quarters.

[Operator]

Next question comes from the line of Haendel St. Juste with Mizuho.

[Ravi Vaidya, analyst]

This is Ravi Vaidya in the line for Haendel. So the drugstore and pharmacy exposure decreased 160 bps sequentially. Can you offer some comments on the disposition market and maybe also the element of seller financing when addressing the Walgreens dispositions? Is this something we should be expecting going forward?

[Mark Manheimer, executive]

Yes. Thanks, Ravi. Yes, I mean, I'd say the dispositions market has gotten a little bit better. As I think a lot of you are aware, the 1031 market really did kind of dry up over the past year, but is starting to come back a bit. So we're seeing more interest in our assets. And as you mentioned, the success that we've had in pretty quickly reducing our exposure in the pharmacy sector. We did use seller financing on a couple of the transactions in the third quarter. And kind of really the thinking there was we were able to get an interest rate slightly higher than the cap rate that we sold the assets at, so kind of maintained a healthy yield, but those were assets that we felt like the rent was a little bit above market, so reduced our exposure by more than the error that we felt like was in the rent.

We do not think that we're going to be using seller financing much more in the future, but it is a tool that we reserve the right to use in the event that it gets us to a better outcome. So specifically around those Walgreens, we sold in the third quarter, the average cap rate was about a 7.2% and the interest rate was slightly higher than that. So I think 7.2% and change. So certainly felt like that was a pretty good outcome. But in the fourth quarter, we've been able to sell some assets without using seller financing and think that's likely going to be the path that we go on a forward basis.

[Ravi Vaidya, analyst]

Got it. That's helpful. Just one more here. What would you say is a steady acquisition run rate for the next 5, 6 quarters on a longer-term basis, particularly given the fact that outstanding equity has decreased and the current [ WACC ] is a bit elevated?

[Mark Manheimer, executive]

Yes. Look, I mean, I think if -- given where our cost of capital is today, we're not able to achieve sufficiently accretive spreads to acquire at the pace that we're acquiring at today. So I think it just remains to be seen what our run rate would look like. I think the team is certainly built to do anywhere from net investment activity of $100 million to certainly $150 million. Right now, though, we do have plenty of capacity to continue to invest. And I think as we see our cost of capital season over the next couple of quarters, we'll think about how that impacts our ability to grow on a go-forward basis.

[Operator]

Next question comes from the line of Smedes Rose with Citi.

[Nicholas Joseph, analyst]

It's Nick Joseph here with Smedes. Sorry if I missed it, but just on the Big Lots, I understand the additional term there. But from a cash rent perspective, what's the rent difference going forward versus what was in the previous leases?

[Mark Manheimer, executive]

Yes. So we've got the one location that is being marketed for sale. We do think that there is -- it's likely...

[Daniel Donlan, executive]

For lease.

[Mark Manheimer, executive]

Yes, for lease, sorry, likely not selling that. So up for lease, we're talking to a number of different retailers and grocers. We do think that the rent is likely to be at or even a little bit higher. So when it's all said and done, we think the rent is going to be equivalent to where we are today or where we were going into the bankruptcy.

[Nicholas Joseph, analyst]

And for the existing leases that will continue with Big Lots?

[Mark Manheimer, executive]

Yes. There is a small amount of rent decrease there, including we're not collecting rent here during the bankruptcy period. But I think the increase in the rent that we're likely to get the [indiscernible] will likely offset that.

[Nicholas Joseph, analyst]

Got it. And then just on the acquisitions, obviously, the proportion of IG came down in the quarter. You mentioned on the sale leaseback. What are the expectations for that percentage going forward as -- would you expect to see more IG acquisitions in the future quarters? And if so, how are you thinking about cap rates there that would make it more attractive versus what you saw this previous quarter?

[Mark Manheimer, executive]

Yes, Nick. And that's exactly what was really kind of driving our decisions around what we were acquiring in the second and third quarter. We just saw much more attractive risk-adjusted returns on the larger operators that might not have an investment-grade rating, certainly not going out and doing a lot of the small deals with 4 or 5 unit operators, but still larger operators that we're comfortable with where we're getting really strong unit level economics and replaceable rents. And so that has been an area where we've been pretty successful with. I would expect the fourth quarter to see that investment grade kick up a little bit higher than it's been in the second and third quarter.

[Operator]

Next question comes from the line of Ki Bin Kim with Truist Securities.

[Ki Bin Kim, analyst]

Just going back to the Walgreens and Family Dollar topic, can you just maybe provide a high-level view on what you think the remaining asset sales, what those cap rates could be? And is your ultimate goal -- I guess, what is your ultimate goal? Like how much to lower the percentage ABR from those type of tenants?

[Mark Manheimer, executive]

Yes. Thanks, Ki Bin. So yes, I mean, as it relates to Family Dollar, as you're aware, we've been selling down that exposure over the past couple of years, really starting with the assets that we felt like were not either not profitable or not very profitable. And so we're really currently left with a portfolio of Family Dollars that generate positive cash flow. We think they're good stores. That being said, we're likely to continue to sell that exposure down over the next year or so. And so that's down to a little bit more than 1% of ABR.

And then as it relates to Walgreens, as we mentioned in the prepared remarks, we've gone from 5.9% to 4.8% pretty quickly. I would expect to see us continue to sell that down, maybe not quite as quickly as we did in the third quarter. But I think kind of a target of getting that below 3% is achievable here in the next 6 or 7 quarters.

[Ki Bin Kim, analyst]

And on pricing, if you can provide some parameters, please?

[Mark Manheimer, executive]

Yes, sure. So I mean, we were able to sell the Walgreens in the third quarter at a lower cap rate than our disposition cap rate. And so that is encouraging. We just know that we're going to have to take our time to find the right buyers and understand that these are stores that are unlikely to be closed. And we feel like we can continue to see pricing certainly [ inside an 8 ].

[Operator]

Next question comes from the line of Kathryn Graves with UBS.

[Kathryn Graves, analyst]

So acquisitions obviously accelerated in the quarter. I was wondering if you could speak a little bit on how you're characterizing the current transaction environment, especially compared to the first half of 2024, both as far as maybe increasing opportunities, but then on the flip side, maybe increased competition for deals?

[Mark Manheimer, executive]

Yes, sure. So we've certainly seen the opportunity set pick up quite a bit from earlier in the year. The competition, we are expecting that to kick up, but really haven't been running into much competition when we're out looking for locations. Really, the competition for us has really been seller expectations for the past year plus, and that continues to be the case. But we're seeing great opportunities on the investment grade side, sale leaseback side, blend and extend side, on the development side. So we're pretty excited about what we're seeing out there. It's just going to be a matter of where our cost of capital is.

[Kathryn Graves, analyst]

Got it. And then my second question, you mentioned in the prepared remarks about sort of getting ahead of Big Lots prior to 2024. I'm wondering if you can speak to any current consumer trends or other components of proactive portfolio management that you're monitoring right now?

[Mark Manheimer, executive]

Yes, sure. So I mean, certainly, the lower income consumers have been under pressure. That's kind of really creeped up into the middle-income consumer. Even job growth has slowed. So we're being pretty cautious around the consumer and making sure that not only are we investing in businesses that we think have a mode of protection around what's going on with the consumer, but then also making sure that the companies have balance sheets that can withstand some disruption and unit level economics where we've got a pretty solid cushion there. But yes, I mean, I think it continues to just be maybe slightly worse than it was a quarter ago with really kind of the same issues.

[Operator]

Next question comes from the line of Upal Rana with KeyBanc Capital Markets.

[Upal Rana, analyst]

Mark, you talked about the relative strength on your remaining Walgreens. How does that differentiate from the 2 assets you did sell in the quarter?

[Mark Manheimer, executive]

Yes, sure. I mean the assets that we sold, we think, are good assets, maybe a little bit shorter in lease term. And so we know that not only will there likely be a focus on the total ABR that we have with Walgreens, but then also what does the lease expiration schedule look like? And so really kind of pushing out, as we mentioned, we don't have any leases expiring until 2030 other than one that generates phenomenal sales on the front end and has phenomenal foot traffic where we think it's extraordinarily unlikely that they would close that store.

So really continue to strengthen that portfolio, push out -- have longer weighted average lease term. We went from 9 to 10 years during the quarter as well. So I think upgrading the quality is important. Walgreens continues to face pressures on reimbursement rates on the drugs that they provide. And so we're keeping an eye on that. There's -- we want to be prepared for the event that things get worse. We don't know if they're going to get worse or better, but we feel like we're pretty well positioned in the event that things get a little bit worse.

[Upal Rana, analyst]

Okay. Great. That was helpful. And then how would you describe sellers at this point in the cycle? Given we've had a 50 basis point rate cut already and there's a likelihood of another 25 basis point cut this week, and then we've also seen the 10-year sort of climb higher by over 60 basis points. So I want to kind of get your sense on where sellers are at this point.

[Mark Manheimer, executive]

Yes. I think the move back up on the tenure has really calmed down some of the sellers that -- and really a lot of brokers that were thinking that it was the last call for the cap rates that you could get before because they're all going about to fall. And obviously, that just really isn't happening with the increase in the tenure. So if anything, I think it's become a little bit easier to find sellers willing to transact.

[Operator]

Next question comes from the line of Greg McGinniss with Scotiabank.

[Greg McGinniss, analyst]

Are you able to give us maybe a few more details around the non-investment-grade acquisitions that you completed this quarter, whether that's the names of the tenants or some of the deal terms, just so we can better understand what you guys were doing in the past?

[Mark Manheimer, executive]

Yes, sure. I mean you saw that the weighted average lease term, maybe a little bit longer, a little bit in the C-store space, a handful of retailers that are kind of BB or BB+. So I guess, potential that they could get upgraded one day. But one of the big focuses that we've had over the past really couple of years has been to increase the internal growth of the portfolio. I think we started out of the IPO at 65, 70 basis points, something like that. And we're now over 1% of internal rent growth. So I think that's certainly been a focus and this past quarter's acquisitions certainly help with that.

[Greg McGinniss, analyst]

Okay. And just a couple of clarifying points. One on the Big Lots rent relief. So is that the full 80 basis points just not paying for what this month, last month and then expected to start paying again in December? Or how should we think about that?

[Mark Manheimer, executive]

We expect them to start paying again in January.

[Greg McGinniss, analyst]

January. Okay. Last one for me. There's already been a lot of focus on Walgreens on the call, but CVS is closing stores as well. Have you heard anything from them regarding potential store closures? Or how do you feel about those assets in the portfolio?

[Mark Manheimer, executive]

Yes. I mean, we feel very strongly that we've got a great relationship with CVS. A lot of the CVSs that we acquired were blend and extend transactions as well, and we've got a pretty good understanding as to how they're doing within the 4 walls of the assets that we own and feel like we've got an exceptionally strong CVS portfolio. And I think the stores that they announced that they were closing, I think, was really about 2.5 years ago where they said they're going to close 900 stores over the next 3 years. So that should really be winding down here in 2024.

[Operator]

Next question comes from the line of Josh Dennerlein with Bank of America.

[Farrell Granath, analyst]

This is Farrell Granath on behalf of Josh. I was curious, in terms of bad debt, kind of considering your previous levels that you've been assuming, would you ever consider maybe even next year increasing assumptions of bad debt just given headlines and current risk associated with pharmacies and retail in general?

[Daniel Donlan, executive]

Farrell, it's Dan. The answer is no. And I would note that we didn't necessarily have credit losses this quarter or this year. We simply had a temporary rent relief. So as you think about kind of our expectations coming out of 2024 for the core portfolio, the prior model would have assumed that these credit -- that credit losses would have stayed in perpetuity when, in fact, they're only temporary in nature. So as we think about the core portfolio coming out of 2024, it's actually in a better position than what we envisioned when we set guidance in January.

[Farrell Granath, analyst]

Great. And also one more about also given current headlines, I know you went through a lot of the underwriting parameters that you set. But I was curious, is there anything that you're being more scrutinous about or either requiring more P&L reports among tenants kind of just going forward in your underwriting?

[Mark Manheimer, executive]

Yes. So yes, I mean, I think we've had a pretty good understanding as to how the tenants are doing within the 4 walls of the boxes that we own. And I think we are very careful about what we put into the portfolio. I think if there is maybe a lesson learned, it would be just having some higher concentrations with publicly traded companies where there's just a lot of news and noise -- potential noise around their performance on a quarterly basis can then turn around and impact us. And so we certainly feel very strongly that the assets that we put in the portfolio are going to continue to pay rent and are going to be good performers for the company.

[Operator]

[Operator Instructions] Next question comes from the line of Ki Bin Kim with Truist Securities.

[Ki Bin Kim, analyst]

Just a quick follow-up on Walgreens. How do you gauge the health or performance of those Walgreens compared -- I mean, I guess you can't really compare it to the entire chain because it's different locations, but how would you describe the quality of the Walgreens or Family Dollar stores that you have remaining?

[Mark Manheimer, executive]

Yes. I think that we've got locations that are going to stay open and continue paying rent and that are profitable locations for each of the tenants. And so we get some information from the tenant that's required on lease, and then we've got a very strong relationship with both of those tenants. So we have pretty open conversations about what they're thinking about doing within the -- with the stores that we own. And so that's allowed us to get out ahead of some potential closures and some potential risk, which is, I think, really imperative. It's not only when you acquire the asset having those conversations, but an ongoing basis with our asset management department with the tenants. And so that's really what gives us so much confidence that we've got locations that are going to continue to perform well.

[Ki Bin Kim, analyst]

And I'm not sure if the front-end sales is the primary driver versus pharmacy sales. I'm just curious about that. But would you -- do you have a view on the 4-wall profitability of those locations?

[Mark Manheimer, executive]

Yes. I mean we certainly are very confident that the locations that we own are profitable. When you think about the -- what's -- where the profitability is coming from, their issues really are more related to the pharmacy side of the house and the reimbursement rates that they're getting have decreased some due to Medicare Part D and some just from insurance companies. And so that's been not only timing, but also the rates that they're getting reimbursed have been more difficult on pharmacy. So not only are you seeing Rite Aid gone from what, 2,400 to 1,200 stores that cut in half. We mentioned earlier, CVS closing 900 stores looking at where Walgreens was a few years ago to where they are now, all told, you're talking about the 3 largest chains closing 4,000 stores.

And then there's also -- it's an even worse situation for the independent pharmacies, which are likely to see about more than 1/3 of their stores closed. So I think it's really been driven by the reimbursement rates, mostly from the government, but also insurance companies. And the front end, that's only 25% of the revenue is really coming from -- 1/4 of the revenues coming from the front end of the store. That's under pressure, but that's not what drives the profitability of pharmacies.

[Operator]

Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Mark Manheimer for closing comments.

[Mark Manheimer, executive]

Thanks, everybody, for joining today. We certainly appreciate everybody's interest in the company and look forward to seeing many of you at the upcoming conference season.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.