NNN REIT Inc

SWB:CZ2

Earnings Call Analysis

Increased FFO Guidance Amid Solid Fundamentals

Based on robust year-to-date performance, 2023 guidance for core Funds From Operations (FFO) was raised to $3.19-$3.23 per share with a higher acquisition volume midpoint of $750 million. AFFO dividend payout ratio stood at 68%, reflecting an annualized $188 million free cash flow. AFFO per share grew 3.4% after adjusting for pandemic repayments. Occupancy slightly decreased to 99.2%, while debt metrics like net debt-to-EBITDA at 5.4x and coverage ratios over 4.6x demonstrate financial stability. The company has a weighted average debt maturity over 12 years, indicating a strong position to handle market challenges and continue per share growth.

Strengthening Financial Performance and Raised Guidance

The company has projected robust performance, continuing into the fourth quarter. An indicative measure of this confidence is the increased guidance for 2023's core Funds From Operations (FFO) to $3.19 - $3.23 per share. This uptick mirrors the company's solid year-to-date performance and has led to the raised acquisition volume midpoint to $750 million from the previous target of $650 million.

Leadership Expansion and Capital Allocation Strategy

New leadership blood infuses the executive team with John Adamas appointed as Head of Portfolio Operations. His inclusion is a strategic move, expected to drive value for shareholders based on Adamas's significant experience and comprehensive oversight of crucial operational areas. The company has attained a fortified capital market stance after completing a strategic $500 million unsecured bond offering at a competitive coupon rate. Further, ending the quarter with no drawdowns on the $1.1 billion credit line and an impressive $550 million in transaction volume for nine months positions the company to face ahead with financial resilience.

Real Estate Portfolio Performance

The portfolio performance stands exceptionally high, boasting a 99.2% occupancy rate, which surpasses the historical average. With a strategic disposal of properties yielding $49 million, the activities reflect a selective and dynamic management approach, ensuring optimal reinvestment of capital. Simultaneously, the advanced divestitures converged at a 6.0 cap rate, with proceeds reinvested at a substantially higher 7.4%, underscoring the company's ability to identify and capitalize on value-enhancing opportunities.

Cash Flow and Cost Management

With a prudent dividend payout ratio at 68%, the company generated $141 million in free cash flow over the first nine months, exemplifying strong financial health and operational efficiency. Meanwhile, general and administrative costs are tightly controlled at about 5% of revenues, aligning with the set guidance for the year. This computation further indicates a wise appropriation of resources and careful financial stewardship.

Debt Management and Maturity Profile

The company maintains a weighted average debt maturity span exceeding twelve years, accompanied by a robust interest coverage and fixed charge coverage ratio of 4.6x. This long-term debt approach with fixed rates grants the company a competitive edge in mitigating refinancing risks that pervade the REIT sector. Besides, a strategic debt issue of $500 million with a 5.6% coupon rate during a tumultuous market signifies proactive and sagacious financial planning.

Market Dynamics and Future Growth

A prudent view into private market trends reveals a systematic rise in cap rates which aligns with the company's disciplined acquisition approach. This observation reflects the company's acumen in balancing growth, value, and risk. Further, the company remains guardedly optimistic, preparing to publish a more elaborate 2024 guidance to account for the evolving economic landscape. This hints at sustained, albeit moderate, growth based on a strong and consistent track record.

Occupancy Stability Amid Market Challenges

While a minor dip in occupancy was witnessed due to the bankruptcy of a tenant, management has built a conservative projection for rent loss into their guidance. This buffer instills confidence that the underlying business model remains resilient despite typical market fluctuations. It is a testament to the company's sound risk management practices and enduring operational strength.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to the NNN REIT Inc. Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

Please note this conference is being recorded. I will now turn the conference over to your host, Steve Horn, Chief Executive Officer. Sir, you may begin.

[Stephen Horn, executive]

Thanks, Ali. Good morning, and welcome to NNN REIT's Third Quarter 2023 Earnings Call. Joining me on the call is Chief Financial Officer, Kevin Hobi. As this morning's press release reflects M&M's performance in 2023 continues to produce strong results, including high occupancy solid acquisitions driven by our proprietary relationships, which is the MMN moat to creating quality earnings.

We are in a position to continue the performance through the fourth quarter as our pipeline and capital are in place. Based on our year-to-date performance, we announced a further increase in our 2023 guidance for core FFO to a range of $3.19 to $3.23 per share. and we raised the midpoint of total acquisition volume to $750 million from $650 million. Before I get into the day-to-day operations and market conditions, I would like to discuss significant third quarter events for the company.

First, I'm excited to welcome Mr. John Adamas to the executive team as Head of Portfolio Operations. John joined NNN in 2003 and has been a valuable contributor since day 1. Currently, he is overseeing the asset management, leasing, underwriting, dispositions and development financing functions for the company. I'm confident we have the right person waking up every day thinking about the best way to extract value for the shareholders out of the already solid end portfolio. In addition, on the capital markets front, we completed a $500 million 10-year unsecured bond offering with a 5.6% coupon. In traditional NNN fashion, the execution and timing of the deal in today's market are looking pretty stellar. More importantly, the timely transaction has entered then in terrific position to continue executing the strategy. NNN's long-steaming discipline of being selective while deploying capital and opportunistic raising capital over the decades as and then in great shape. In a time of prolonged uncertainty like today's macroeconomic conditions and then discipline of maintaining a solid balance sheet and reasonable acquisition volume does put NNN in a place to execute the remaining deal flow for 2023, but more importantly, to execute 2024 with limited, if any, needs to access the capital markets.

At the end of the quarter, we had nothing drawn on our $1.1 billion line of credit after completing over $550 million of volume through the first 9 months. Coupled the line of credit with NNN's industry-leading free cash flow as a percentage of acquisition volume, we are ready to execute when the right opportunities present themselves. Shifting to the highlights of the third quarter's financial results. Our portfolio of 3,511 freestanding single-time properties continue to perform exceedingly well with 10.1 years of term, maintained high occupancy levels at $99.2 which remains above our long-term average of 98%, plus or minus, and only 27 vacant assets. With regard to acquisitions, during the quarter, we invested $212 million in 46 new properties at an initial cash cap rate, I can't stress enough cash cap rate of 7.4% and with an average lease duration of 16.5% -- 18 of the 34 closings were under $5 million, which shows NNN's belief that the smaller deals still move the needle, and we believe smaller fungible real estate is the best risk-adjusted investment.

The first 9 months, we invested roughly $550 million and 125 properties at a cash cap rate of 7.2%, which is about 100 basis points higher than the comparable period in 2022. Currently, the industry continues in the price discovery mode, and that is resulting in the overall market volume down nearly 50%, but we do see the bid as spread showing signs of tightening, so we will continue our thoughtful and disciplined underwriting approach. There has been an increase in cap rates for NNN as the year progresses, and we are seeing that trend continuing. NNN has been listed on the New York Stock Exchange since 1994. It's one of the few net lease companies that it's operated with success a high interest rate environment with a proven operating model and strategy over many decades. The model is about prudent capital allocation, creating predictable, consistent, high-quality cash flow by emphasizing acquisition volume through sale-leaseback transaction with our stable of relationships using the company's long-term triple net lease form, which is a lot more landlord-friendly than a 1031 market deal.

During the quarter, we sold 13 properties, 2 are [indiscernible] , raised $49 million of proceeds at a 6.0 cap rate and reinvested it at $7.4 million. Year-to-date, we have now raised approximately $90 million of proceeds from the sale of 26 assets, which included 7 vacant at a 5.8% cap rate. The mission is always to re-lease vacancies but we'll continue to sell nonperforming assets, if we do not see a clear path to generating rental income within a reasonable time frame. Our balance sheet is one of the strongest in the sector. Our credit facility has plenty of capacity -- as I mentioned earlier, we have no outstanding balance. We have no material denatures until mid-2024, and we have the industry best 12.6 year weighted debt maturity. NNN is well positioned to fund our remaining 2033 acquisition guidance [indiscernible] . With that, let me turn the call over to Kevin for more color and detail on our quarterly numbers and updated guidance.

[Kevin B. Habicht, executive]

Thanks, Steve. And as usual, I'll start with the cautionary statement that we will make certain statements that may be 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 $0.81 per share for the third quarter of 2023. That is up $0.02 or 2.5% over year ago results of $0.79 per share. First 9 months 2023 results were $2.42 per share, which represents an increase of 3% over prior year results.

AFFO for the first 9 months was $2.44 per share, and that represents a 1.2% increase over 2022 results. As we've disclosed since 2020, the last page of our press release provides details of the pandemic deferred rent repayments as tenants fulfill their deferred rent obligations. The repayment amounts, as you can see, are slowing from $14.5 million in 2022 to $3.1 million in 2023 and then at the bottom of that Page 13, we've provided pro forma per share amounts, excluding these repayments in both 2022 and 2023 to provide a look at the recurring fundamental per share performance. These adjusted results show 9 month per share growth of 3.9% for core FFO, and that's instead of a 3.0% headline number. and also shows 3.4% growth for AFFO, and that's instead of the 1.2% headline number. So 90 basis points higher for core, 220 basis points higher for AFFO versus the headline numbers. We think this just gives you a better picture of the core fundamental operating results of our business.

But overall, a good quarter, in line with our expectations. Moving on. Our AFFO dividend payout ratio for the first 9 months of 2023 was approximately 68%. And which resulted in approximately $141 million of free cash flow for the first 9 months after the payment of all expenses and dividends. And this equates to a $188 million annualized free cash flow rate. Occupancy was 99.2% at quarter end. That's down 20 basis points from prior quarter and year-end 2022. G&A expense was $10.2 million for the quarter, representing 5.0% of revenues and 5.4% for the first 9 months of 2023. But our midpoint guidance for this line item remains at $44 million for the full year of 2023, which would put our -- put it close to 5.3% of revenues for the year. We ended the quarter with [ $800.2 ] million of annual base rent in place for all leases as of September 30, 2023. As Steve mentioned, today, we increased our 2023 core FFO guidance, increasing the bottom end by $0.02 and the top end by $0.01 to a range of $3.19 to $3.23 per share. guidance was increased by the same amount to a range of $3.22 to $3.26 per share. This new guidance suggests 2% to 2.5% growth in core FFO for 2023 versus 2022 on the headline number.

But again, if the deferred rent repayments are eliminated from both years, then core FFO growth would be in the 3% to 3.5% range. Similarly, AFFO per share would go from around 1% growth at the midpoint for 2023 to around 3% growth if we exclude the deferred rent repayments. As we previously discussed, the more modest growth in per share results for 2023 reflects in part the high bar created by last year's 9.8% growth, the lack of tailwinds that were helpful in 2022 as well as the slowdown in the scheduled deferred rent repayments as noted on Page 13. The 2023 guidance and the key supporting assumptions are on Page 7 of today's press release with the only notable change, as Steve mentioned, the $100 million increase in our 2023 acquisition volume guidance now a range of $700 million to $800 million.

Switching over to the balance sheet. We maintain a good leverage and liquidity profile with $1.2 billion of liquidity at quarter end. We funded approximately half of our year-to-date $550 million of acquisitions with free cash flow, disposition proceeds and a little bit of equity issued very early this year. In mid-August, we opted to issue $500 million of 10-year unsecured debt with a 5.6% coupon and a 5.9% yield while we really had no pressing [indiscernible] to issue debt, we just wanted to stay in front of the curve in what appears to be a growing supply of debt issuance from a variety of sources. But as I've said, we'll know in a couple of years the wisdom of issuing that debt. So far, it feels like a reasonable call, and there is also very real value in maintaining our low balance sheet risk.

Our weighted average debt maturity remains over 12 years, which will help us slow the coming refinance headwind that all REITs are phasing. All of our debt outstanding is unsecured at fixed rates. A couple of numbers, net book to gross book assets was 40.9%. Net debt-to-EBITDA was 5.4x at September 30. Interest coverage and fixed charge coverage was 4.6x for the third quarter. We are happy to see more attention and discussion in the marketplace about capital allocation. Those of you who know us well, have heard us hanging that from the last few years. We believe it's one of the more fundamental issues for any REIT or frankly, any company valuing equity adequately, whether that equity is produced by free cash flow, disposition proceeds or new equity issuance is at the heart of growing per share results in our opinion, a low view of the return requirements for deploying equity and debt capital likely leads to suboptimal accretion when deploying that capital. not valuing equity capital rate also frequently leads to asset growth over time that is in our minds, not sufficiently accretive to per share results.

So we're glad the topic is getting more attention. Unfortunately, only now that the capital markets are rock here and the citing contrast of recent years is producing some indigestion in every corner of the investment world. Over the last few months, we've been talking with investors about what the world might look like in a no new equity environment. which is why we're glad that our free cash flow from operations relative to our typical acquisition volumes will help us better navigate that rocky capital market environment. We will likely give more details in this regard on next quarter's call in connection with our 2024 guidance. So in closing, I think we're in relatively good positioned to navigate the elevated economic and capital market uncertainties and to continue to grow per share results, which we view as the primary measure of success. And we are mindful this is a long-term multiyear endeavor. The fundamentals of our business remain in good shape, occupancy, re-leasing, renewals, acquisition and disposition volumes and cap rates. So feel good about where we are at the moment. With that, we will open it up to any questions.

[Operator]

Thank you, sir. At this time, we will be conducting our question-and-answer session.

[Operator Instructions] Our first question is coming from Josh Dennerlein with Bank of America.

[Joshua Dennerlein, analyst]

Yes, I appreciate the time. Maybe I'll just start with a big picture question. Just kind of thinking through the dynamic that we're seeing in the public markets. Like how should we kind of think about like the response in the private markets for cap rates going forward?

[Stephen Horn, executive]

Josh, I appreciate the question, Steve. The private market, we don't bump into them, especially in the last 18 months. We haven't seen it at all. However, the picture as far as cap rates, we're seeing a trend up in cap rates for NN's target market and more it's a result of then still being selective. If I had to do $1.3 billion, $1.5 billion, my selectivity goes down, so therefore, I have to win more deals.

But our relationship with tenants who are sophisticated understand with debt market pricing that cap rates have to go up. So we're seeing a pickup, and you see it in the numbers, 15, 20 basis points a quarter. And I'm expecting that trend to continue through the first half of the year. Second half is too far out to speak of.

[Joshua Dennerlein, analyst]

Okay. I appreciate that color. And then, Kevin, maybe just maybe some for later, but just kind of curious, I think you started to mention it a little bit. Just kind of -- I think you have pretty good free cash flow, just kind of how you think about how you can kind of layer in acquisitions with that free cash flow without additional equity? And then just like -- I'm just trying to think maybe what kind of base rate we can get out of you for volumes?

[Kevin B. Habicht, executive]

Yes. And we'll go into more detail as we lay out guidance for 2024. But the math that we've talked generally about and this is not guidance, to be clear. As if you think about $180 million a year of free cash flow, which we, by the way, charge in our minds as we think about deploying that capital at about 8.5% cost to us. It's not 3. You could leverage that, call it, $100 million round numbers, maybe a little bit more.

And so that would create around $300 million of acquisitions. And then if we're selling $100 million of properties in a given year, so disposition proceeds enter into that equation, that would take acquisition volumes to around $400 million potentially, in a very leverage-neutral light capital market footprint kind of way. And so that's the way we would think about it, I think, generally. But we'll, like I said, we'll look to provide a little more detail on our thoughts on that next quarter.

[Operator]

Our next question is coming from Ron Kamdem with Morgan Stanley.

[Ronald Kamdem, analyst]

Just a couple of quick ones for me. Just -- I saw the occupancy dip 20 basis points quarter-over-quarter. Maybe can you talk about that and Lupin, just how bad debt is trending and what's baked into the guidance?

[Kevin B. Habicht, executive]

Yes. I wouldn't read too much into that. As Pete folks know, we had 3 Bed Bath & Beyond that went dark on us as they've filed for bankruptcy projected all the leases. So that's a chunk of that 20 basis points decline and the rest is a little bit of noise. As it relates, more broadly speaking, -- we don't have any -- I mean, look, we got a lot of concerns because we leased properties to retailers so we're perpetually worried.

But yes, in terms of our exposure and how we're thinking about not reserve, but our guidance incorporates typically 100 basis points of rent loss for things that might not go well. And so we're this feels like at the moment, it will be -- despite assuming 100 basis points, this feels like it will be more of a normal year of, call it, 40 to 50 basis points of kind of rent loss from a variety of things, which includes tenant bankruptcies and also in the weeds that it's the things that we do on a daily basis as we're thinking about future renewals and dealing with those from maybe a defensive position and making sure to support our occupancy and consistent cash flow. At times, it makes sense to trim rent a bit to get lease extensions. And so from time to time, we'll do a little bit of that.

So all of that's baked into that kind of rent loss number. But so far this year, it's playing out as a fairly typical year, which for us is 30 to 50 basis points of rent loss. But as I said, we assume in our guidance that will lose around 100 basis points.

[Ronald Kamdem, analyst]

Got it. And that's pretty conservative. So just going back to the acquisition, obviously, over $200 million this quarter. I think all your peers have talked about basically activity slowing in this rate environment. So I guess I'm just trying to figure out, is this an environment where -- and then is potentially better positioned because you're only trying to do $400 million, $500 million, $600 million -- or is the messaging that you guys are seeing slowing as well and we should think about acquisitions next year potentially being down and so forth. So I'm not asking for guidance for next year, obviously. Just trying to get a sense of how that pipeline of the building and if you guys are being impacted just like your peers?

[Stephen Horn, executive]

I think the opportunity set is still the same out there minus some M&A activity that has definitely slowed down. Our pipeline has never really been more robust. It's more NNN being disciplined when allocating capital to what acquisition opportunities that are out there. I'll let Kevin talk about 2024. But as far as the opportunities of it, it's as good today as it was 6 months ago, and cap rates are increasing. New money going out the door is higher today than it was 2 weeks ago.

[Kevin B. Habicht, executive]

Yes. And as it relates to next year, we'll give more detail around what we're thinking for that number. As I just heard on the prior question, we think we have in essence, kind of capital in hand, if you will, to do a decent amount of acquisitions. But it's all -- it's frankly all dependent on kind of returns.

I mean -- and so we're not we are not particularly focused on trying on asset growth. We're trying to grow per share results at the end of the day. And that's a little bit or a lot of bit of acquisitions, the returns that we can achieve and the accretion that we can achieve will drive kind of our thought process on acquisition volume.

[Operator]

Our next question is coming from Eric Wolfe with Citi.

[Eric Wolfe, analyst]

I just want to clarify on the guidance. You're still assuming 100 bps of credit loss versus the 40 to 50 basis points that you're sort of trending to. And then if you could just remind us in terms of defining that credit loss to would include, say, like the vacant properties that you decide to sell and not being able to recoup the full NOI after reinvestment? Or do you sort of think about that separately? Just trying to understand what's included in the full credit loss.

[Kevin B. Habicht, executive]

Yes. That's fair. Yes. So yes, we are assuming it for the fourth quarter, 100 basis points granted it's only a quarter's worth of rent, 100 basis points. And now to your second part of that question is that, yes, it would not assume reinvesting disposition proceeds of a vacant property that's, in our minds, a little bit separate bucket. And it's a little bit of a sum cost in that a vacant property. It may have had some rent a year ago, but of late, and the rent obviously is 0. And so there's potential upside, obviously, from reinvesting kind of those proceeds that had no return for a period of time. And so -- but yes, that's not included in our thoughts around the 100 basis points.

[Eric Wolfe, analyst]

Got it. That's helpful. And then I guess just given the rising rates that we've seen, I mean, would you expect that cap rates would say, move over 8%. And if you think about the cadence of your acquisitions. Obviously, you mentioned the advantage you have in terms of free cash flow, being able to fund those acquisitions without incremental capital issuance, but would you rather hold a higher percentage of that cash now just thinking that cap rates are likely to move up in the future or just kind of keep the acquisitions consistent quarter-to-quarter?

[Stephen Horn, executive]

In our business, there's not much consistency quarter-to-quarter. We like to look at kind of the entirety of kind of the 12 months. But yes, we are being prudent allocators of capital currently, where we have passed on deals that were in the mid-7s that we feel should have an ante. So we are holding a little cash on the side because we believe cap rates in the first quarter will be higher than they are today.

So when the right opportunity presents itself, it's a cap rate game right now. You go back to the GFC, when everybody shut it down, that was access to capital wasn't there. But as I stated in my opening remarks, we've been doing this a long time, management and NNN. So we know how to navigate the capital markets and the higher cap rate, and the proven investment model. So yes, I expect cap rates. It's a long-winded way of saying cap rates will be higher in the first quarter than they are today.

[Kevin B. Habicht, executive]

Yes. And this is Kevin, Eric. I'll just add a little bit to that because I want to dial the lens back kind of not the next quarter or 2, even the next year, but that is a piece of the rationale for us probably not acquiring as much as we did 2 and 3 years ago. We clearly were tempering acquisitions volumes at a point in time when cap rates were at record lows, and we weren't buying 5 -- half rate deals. We just -- to us, it didn't have appropriate returns in our minds for how we burden our capital in our minds for deploying them.

And so -- so yes, we appreciate the sentiment of kind of where you're going. We don't think about it too much on a month-to-month or quarter-to-quarter kind of basis. But yes, longer term, we do think about those kinds of things. When should we be accelerating acquisitions, when should we be tempering acquisitions? Or when should we be standing still. And so -- but we think about those things on maybe a longer-term basis. Anyway, I'll leave it there.

[Operator]

Our next question is coming from Spenser Allaway with Green Street.

[Spenser Allaway, analyst]

Can you perhaps just provide some color on what AFFO growth would look like in '24 absent any acquisitions?

[Stephen Horn, executive]

Yes. As far as acquisition buying for 2024, we're going to hold off, given any guidance until most likely the February call. But as Kevin kind of stated in the beginning of the call, we could roughly do $400 million, $450 million without tapping the capital markets and being leverage neutral.

[Spenser Allaway, analyst]

Okay. And then just maybe on the re-tenanting side, just given the economic backdrop, has conversations becoming more difficult, just given the current environment as you think about retenanting or....

[Stephen Horn, executive]

So it's interesting. This year, year-to-date, we actually have a recapture rate of about 87% of the prior rent. But I really -- that's not apples-to-apples to a lot of numbers you hear stated in our market. Because we don't like to give capital expense to tenants. I mean we could just buy up the rent. So that 87% recovery year-to-date is kind of an as-is recovery rate.

But no, it is surprising, Spencer, that we've had such great success this year. Historically, we have about a 70% recovery rate. So no, we're not having any issues retending any assets currently.

[Spenser Allaway, analyst]

Okay. And then just maybe one more, if I may. You talked about [ passed on ] deals, which in your mind have been mispriced. Do you have a sense of what percentage of the deals you've recently looked at that you ultimately passed on due to the bid-speddynamic?

[Stephen Horn, executive]

So whatever you hear from our competitors that they've looked at, we've looked at it as well. We don't track that, to be honest with you. Our selectivity, our closure rate and stuff like that. But what I have seen is deals that I really thought were priced well and then the movement in the market was so fast as far as the debt side that we pulled out of transactions because they became mispriced.

But the bid ask is tightening up. If the 1031 deals to me are the most mispriced because the sellers are still living back a year or 2, and they think they can still get that pricing. The sale-leaseback market, I find is moving a lot faster than call it the investment-grade market because they understand the true cost to get the deals done. But the investment-grade companies can still tap the market and get debt, it's a loan to value of close to 100% of the sale leaseback. But that's what we find. The sale-leaseback market is moving a little bit quicker.

[Operator]

Our next question is coming from Brad Heffern with RBC Capital Markets.

[Brad Heffern, analyst]

Kevin, the ABR this quarter didn't go up as much as I would have expected, just given the amount of investment activity you had. Was there something that fell out of ABR with someone moved to cash?

[Kevin B. Habicht, executive]

No. We didn't move anybody to cash. A little bit of that is the and that comes from the split-funded transactions we do where we're funding the construction of sale-leaseback properties for us over time. And so rent typically does not show up in our ABR until completion. And so that's why that's lagging a little bit.

But with time that will normalize, if you will, once projects get completed. But as we discussed, I think, last quarter, activity, which typically is 15%, 20% of our investment activity is going to be closer to 40% of our investment activity this year, which we like at the margin, to be honest. But that's the piece of that puzzle, I think, that's probably missing for you.

[Brad Heffern, analyst]

Got it. And then can you just walk through the current watch list. You mentioned the Bed Bath & Beyonds already, but anything else you're keeping an eye on?

[Kevin B. Habicht, executive]

Yes. Lots of stuff, but that we always worry about lots of stuff. I would say kind of at the top of the list, if you will, we've got Three big lots. So we're watching that. We've got 2 JoAnn. These are all very small exposures. We've got some we're still watching our fishes restaurants exposure. That's a bigger exposure just because it doesn't feel like they've totally got it down to the COVID fog, if you will, yet. But I mean, there fine and they're covering rents, but they just are a little slower, and it's focused on a few stores within that part of our portfolio and then maybe at home, but they've got liquidity in the near term.

But I mean, those are the kinds of names that we think about. Having said all that, at the first of the month, I'm not running down the hall and asking if the rent came in. It doesn't feel that dire, if you will. But we're just watching those and we feel like our exposure generally is fine as it relates to tenant credit and b, that shows up in our kind of rent loss, which like I say, 100 basis points we assume is in a normal year, and we won't hit that kind of rent loss this year. So that suggests I think things are going okay.

[Operator]

Our next question is coming from Rob Stevenson with Janie.

[Robert Stevenson, analyst]

Steve, can you sell more of your non-top tier assets and you're doing at similar cap rates. I mean a 6% cap rate is pretty good on the LA Fitness, United Rental, bikes and whatever else you sold during the quarter, and it's well below implied cap rate on the stock recently. So curious why not sell more to finance mid-sevens acquisition, if you could do that reliably and on scale?

[Stephen Horn, executive]

No, absolutely. That's part of the exercise we go through. We have the luxury of being in business for a long time, 3,500 assets approximately. So we have a lot of the diamonds in that portfolio over the years. But when we look at dispositions, and I agree with you, that 6% cap rate at 5.8% for the year is a phenomenal cap rate compared to what the industry is doing. But no, we have the opportunity. We're running the math. If we sell something at 6 cap what share price because we do view dispositions, you have defensive -- so you're just improving the quality of the portfolio. But we also look at it we're selling a piece of the company. So if we sell to a 6% cap, it's like issuing equity at a certain share price. So it definitely could be a higher disposition in 2024 potentially.

[Robert Stevenson, analyst]

Okay. And in terms of what you've sold, has it been a high concentration of 1031 buyers? Or has it been all over the place in terms of the other side of the transaction on dispositions for you guys year-to-date?

[Stephen Horn, executive]

Primarily, it's been the 1031 market, and then there's been a couple of what we call owner users or user owners of the asset. But primarily, we sell into the 1031.

[Robert Stevenson, analyst]

Okay. And then, Kevin, a couple of questions for you. The 3 Bed Bath & Beyonds that you talked about earlier, have they been sold or being marketed for sale? Are you trying to retenant them? And what's been the sort of tenor on that recently?

[Kevin B. Habicht, executive]

Yes. No, plan A for us is to try to re-lease it, and we've got active dialogue on 2 of the 3. And so that feels like it's actually going reasonably well. And so -- and our rents there were I think, $13 a square foot, the expiring rent from Bed Bath. And so a manageable kind of rent situation.

[Stephen Horn, executive]

Yes. Just a little follow-up. Yes, we're expecting slightly better than that recapture on the Fed base with no CapEx.

[Robert Stevenson, analyst]

Okay. So those are likely to be retenanted rather than being sold vacant.

[Unknown Executive]

Correct.

[Robert Stevenson, analyst]

And then last one for you, Kevin. Is the $500 million debt offering prefunding the June 24350 maturity? Or is that incremental capital for you guys and you'll look to do something on the $350 million next year as you get closer?

[Kevin B. Habicht, executive]

Yes. I mean I'll be trying to be sufficiently elusive. I mean we don't give any capital market guidance. And so I view kind of money as somewhat fungible. It does clear off our bank line, which would allow us to effectively take or pay off that maturing debt next June with our bank line or we could do another debt offering in that regard. And so we're -- we try to be opportunistic on capital market activities, and we'll just see how things play out in the coming months as it relates to that.

But I will say, doing that deal in August gives us more optionality, which is something we crave in terms of managing the balance sheet is never to get us in a position we have to do one thing or another. And so it just creates more liquidity. The dollars are fungible. We'll see where all land eventually. In the meantime, they're headed towards acquisitions, and we'll see the 24 holes.

[Robert Stevenson, analyst]

How was the demand on that deal? Is it -- could you have materially upsized that at that pricing if you wanted to and just elected not to? Or is that where the demand was at that point in time for that type of paper?

[Kevin B. Habicht, executive]

The demand for that deal was very good. So after we announced pricing of where that we would price we had $2.5 billion of orders at that price. And so it was 4 to 5x oversubscribed. It was a solid execution. We could have done more and maybe in hindsight, 1 day, we'll think maybe we should have, however, that is the largest debt transaction we've ever done. So we did size it up, if you will, relative to where we've operated in the past.

And -- but yes, it was a really solid execution at that time. I'm not sure that the market is as robust today as it was at that point in time. But anyway, yes, we're really pleased with that outcome.

[Operator]

Our next question is coming from Linda Tsai with Jefferies.

[Linda Yu Tsai, analyst]

Can you talk about trends in the sale leaseback market and what percentage of the volume this quarter was done with existing relationships and how that compares to last quarter?

[Stephen Horn, executive]

Hey Linda, this is Steve. It's relatively the same. It's kind of that 3 quarters for the sale leaseback. And that's reflected in our 16.5 year lease term for the quarter. But the trend as far as percentage, it's the same. And it pretty much -- over a 12-month period, it's pretty consistent. Our acquisition guys, they are always out there looking for new relationships to grow the company. but we do lean into our relationships at kind of that 75% level.

[Linda Yu Tsai, analyst]

And then in terms of the acquisition cap rate being up about 100 bps year-over-year, 7.4% this quarter, how close is that to where you might have expected to land versus what you were thinking at the beginning of the year?

[Stephen Horn, executive]

At the beginning of the year, we're definitely up higher. But as far as starting midyear, we're landing what I'm expecting and I'm expecting it to increase in the near term as well.

[Linda Yu Tsai, analyst]

And then on the 20 bps quarter-over-quarter increase over the past 2 quarters, is that like the same run rate for next quarter?

[Stephen Horn, executive]

It's probably pretty close. As far as new money going out the door, absolutely. It's above that trend. But we have the -- what we call the split-funded deals that we're funding construction that are building the asset. So you have a little bit of a headwind because that money -- we committed 3 months ago, 2 months ago. So it's kind of a little older money.

[Operator]

Thank you. [Operator Instructions] Our next question is coming from Josh Dennerlein with Bank of America.

[Unknown Analyst]

This is Daryl Granite on behalf of Josh. Actually, just touching on the split fund developments just mentioning. I was curious if you could give some color on the sort of retailers that fall into that bucket? And any delivery timing and yields that you can touch on?

[Stephen Horn, executive]

Primarily are split funded because we only do split funded deals with relationship tenants. So it pretty much compromises our quarterly acquisition pictures -- so kind of automotive services, a little bit of the family entertainment primarily. Now as far as timing, we deal with small box retailers. So by the time we buy the ground, it could be 120 days before it's delivered and they start paying rent.

[Kevin B. Habicht, executive]

Yes. So maybe one way to think about pricing on that is whatever our cap rates were last quarter, maybe that's where the switch fund was priced will play out over the next 3 to 6 months as the project gets completed and so is just a guide.

[Operator]

We currently have no further questions in queue at this time. So I will hand it back to Mr. Horn for any closing remarks.

[Stephen Horn, executive]

Thank you for joining us on the call this morning, and we'll see many of you, I guess, in a couple of weeks at NAREIT. Have a good day. Thanks.

[Operator]

Thank you. This concludes today's conference, and you may disconnect your lines at this time, and we thank you for your participation.