Spirit Realty Capital Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 13 speakers on the call.

Operator

Good day, and welcome to the Spirit Realty Capital Second Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, There will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Pierre Raval, Senior Vice President of Corporate Finance and Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and thanks, everyone, for joining us for Spirit's Q2 2023 earnings call. Presenting in today's call will be President and Chief Executive Officer, Jackson Hsieh and Chief Financial Officer, Michael Hughes. Our Chief Investment Officer, Ken Heimlich will be available for Q and A. Before we start, I want to remind everyone that this presentation contains forward looking Although we believe these forward looking statements are based on reasonable assumptions, they are subject to known and unknown risks and uncertainties that can cause actual results to differ materially from those currently anticipated due to a number of factors. I refer you to the Safe Harbor statement in our most recent filing with the SEC for a detailed discussion of risk factors relating to these forward looking statements.

Speaker 1

This presentation also contains certain non GAAP measures. Reconciliations of non GAAP financial measures to most directly comparable GAAP measures are included in the exhibits furnished to the SEC under the Form 8 ks, which include our earnings release and supplemental investor presentation. These materials are also available on the Investor Relations page of our website. For our prepared remarks, I'm now pleased to introduce Jackson Chang. Jackson?

Speaker 2

Thanks, Pierre, and thanks everyone for joining our call this morning. At the beginning of this year, we outlined a plan for 2023 consisting of 2 primary objectives. 1st, implement a capital deployment strategy that utilizes free cash flow, asset dispositions and existing debt to yield favorable investment spreads without issuing new capital. 2nd, demonstrate the strength and diversification of our portfolio through consistent operating performance. Halfway through the year, we are on track to meet our goals with our 2nd quarter results building on what we accomplished in the Q1.

Speaker 2

During the quarter, we acquired $138,000,000 in assets, comprised of 11 properties across 5 transactions at a cash cap rate of 7.63% and an economic yield of 8.88%. This is the highest cash cap rate and 2nd highest economic yield we have achieved in the last 8 quarters and higher than those achieved in the Q2 of 2022 by 129 and 180 basis points respectively. In addition, we invested $30,000,000 in revenue producing Expenditures, primarily related to the development and tenant improvements at a 9.87% cash cap rate, resulting in total capital deployment of $169,000,000 and a cash cap rate of 8.03 percent, an increase of 166 basis points from the same period last year. We sold 18 occupied properties during the quarter for $41,000,000 at a cash cap rate of 6.27%. The average size of these transactions was $2,300,000 and consisted of QSRs, C Stores, Drug Stores And Red Lobsters.

Speaker 2

We generated a 176 basis point spread between the cash cap rate on capital deployed and our occupied dispositions. We also sold 12 vacant properties for 26,000,000 resulting in total disposition proceeds of $67,000,000 Our capital deployment net of dispositions was $102,000,000 Excluding vacant sales, the net effective cap rate was 8.61%. Consistent with our 2023 plan, we didn't raise any equity this quarter and funded our capital deployment with disposition proceeds, In place debt and free cash flow with no change in our leverage. The strength and diversification of our tenants, The industries they operate in and the quality of our real estate portfolio combined with better than anticipated investment spreads are allowing us to surpass our previous forecasts and revise our AFFO per share guidance upward for the 2nd time this year. As we transition into the back half of the year, we remain dedicated to achieving our 2023 goals.

Speaker 2

We will maintain a disciplined approach to our investments, poised to seize the most favorable opportunities that will yield optimal returns for our shareholders. With that, I'll turn the call over to Mike.

Speaker 3

Thank you, Jackson, and good morning, everyone. We are very pleased with 2nd quarter results. AFFO per share was 0 point 91 dollars $0.02 higher than last quarter, occupancy remained high at 99.8 percent and our acquisitions and dispositions were accretive to our earnings and portfolio metrics, including WALT and lease escalations. During the quarter, ABR increased by $5,500,000 reaching 694 point $1,000,000 with industrial growing to 26 percent of our portfolio. Other operating income increased by $1,300,000 from last quarter with approximately half the increase resulting from 2 small lease terminations and half from higher interest income.

Speaker 3

Please note that the higher interest income, which resulted from unusually high cash balances related to the drawdown of $300,000,000 in term loan proceeds was mostly offset by the corresponding interest expense, so no impact to AFFO per share. Cash G and A fell to $10,100,000 from $10,600,000 last quarter, primarily driven by the timing of certain employee benefit expenses that fall into the Q1. Our cash G and A margin fell to 5.3%, approximately 30 basis points lower than full year 2022. Turning to our balance sheet. We closed the quarter with liquidity of $1,600,000,000 comprised of cash and availability under our credit facility and delayed draw term loans.

Speaker 3

Our leverage, which we define as adjusted debt Annualized adjusted EBITDAre remained flat at 5.3x compared to the Q1 and dropped by one turn inclusive of our preferred equity. Regarding our guidance, we are revising our AFFO per share range to $3.56 to $3.62 and our disposition range to approximately $400,000,000 while maintaining our capital deployment range of $700,000,000 to 900,000,000 Consistent with our 2023 plan, we believe these targets allow us to achieve our capital deployment objectives absent any capital markets activity while maintaining low leverage levels. With that, I will turn the call back to the operator to open it up for Q and A. Operator?

Operator

We will now begin the question and answer session. And you would like to withdraw your questions, please press star then 2. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question today comes from Joshua Dennerlein with Bank of America.

Operator

Please go ahead.

Speaker 4

Yes. Hey, guys. Thanks for the time. One thing I've kind of noticed is on the acquisitions, it looks like the wall It's kind of getting longer. This quarter was 15.3 years.

Speaker 4

Is that something you guys are pushing to Shiv or just like the market is getting a longer wall these days?

Speaker 2

Hey, Josh, it's Jackson. I'll take that one. I mean, we're focused on primarily looking at new sale leaseback opportunities. So I'd say at a minimum, Those start with a 15 year and generally can be up to 20 year new leases on our lease form. So that's primarily driving That Walt.

Speaker 4

Okay. Okay. Good to know. And then maybe just one follow-up, just the cap rates. Do you think we're still See more cap rate adjustment higher or do you think that's kind of at a stabilized rate at this point?

Speaker 2

I can say what we're seeing, it's I mean, I think generally, I'd say they're pretty stable right now. The thing that we're noticing is that we have 2 investment pipeline meetings, 2 investment committees a week and The volume of things that are coming into our pipeline are increasing and they've continued to increase since the last quarter. So I wouldn't say the cap rate has increased, but the volume of opportunities seems to be increasing. So That's encouraging for us.

Speaker 4

Thanks, Jackson.

Speaker 2

Thank you.

Operator

The next question comes from Michael Goldsmith with UBS. Please go ahead.

Speaker 5

Good morning. Thanks a lot for taking my question. Jackson, just to follow-up on your last comment was when you said the volumes are picking up. Is that specific to one asset class, like industrial or retail? Or is it just across the board?

Speaker 5

And any Further detail you can talk about in terms of where there are greater opportunities would be helpful.

Speaker 2

I mean, I think I would say across the board generally from what we see, I feel like there's a little bit less competition in the industrial space That we're focused on right now. And I think if I were to guess, just make up, I think one of the reasons why you're More volume is, I think people their companies are looking for liquidity, right? And they're trying to find the most efficient way to get it. Clearly, there's challenges in the debt markets, corporate debt markets, bank markets, very selective. So the sale leaseback opportunity is really a great source of liquidity and really hits right in the middle of what we're trying to accomplish.

Speaker 2

So I think some companies probably sat on the sidelines hoping things might get better. And I think they're just deciding, hey, these are the rates we need to move forward. And so, the thing that's most encouraging for us is, we're seeing really good real estate opportunities, good credit opportunities What we believe are attractive cap rates. I mean, these were cap rates a year ago that would have been in the mid-sixes, low-sixes for the same type of opportunity. So in some regards, I think companies are just deciding we need to move forward.

Speaker 2

And I think That's going to help us as we get into the back half of this year in terms of our acquisition volumes.

Speaker 5

Got it. That's really helpful. And then on the opposite side During the quarter, how did your cost of capital trend? Are you seeing any movement up or down? Or any visibility in the near to Intermediate term about the trajectory where you think you can be back in the market and Starts to drive accretive growth through borrowings and acquiring?

Speaker 2

Mike, do you want to take it?

Speaker 3

Yes, sure. We saw some marginal improvement in our cost of capital, both on the equity and say the long term debt side. Nothing that Would make us want to go explore issuing more long term capital. Remember, we have we're very early in the term loan market. We have a lot of term loan Fast, we haven't drawn yet.

Speaker 3

And all of it is fixed at very low rates to maturity. So we have enough debt to really take us that's fixed to take us into next year. So we can be patient on that. And again, we have cash on the balance sheet. We have a good disposition program.

Speaker 3

So we'll be inquisitive at the right time. We have seen some incremental Improvement, but not enough to make us want to get out there yet and less yields on our acquisitions go materially higher.

Speaker 5

Thank you very much. Good luck in Macauf.

Speaker 2

Thanks. Thanks, Michael.

Operator

The next question comes from Greg McGinnis with Scotiabank. Please go ahead.

Speaker 6

Hey, good morning. Jacqueline, given the substantial investment yield on the revenue producing CapEx, can you just provide some details around those investments, It looks like there in terms of continued investment and the types of yields you expect over the next year?

Speaker 2

Yes. I mean, look,

Speaker 7

I think

Speaker 2

on our CapEx investments, Yes. There's always going to be a smaller portion of what we do in a given year. I think that what we're seeing is tenants where we have existing SiP master leases or sale leaseback business, they're needing changes to their facilities, either expansion or new facilities or adding on to facilities and coming back to us is 1 efficient because they know We have a very credible source of funding, but more importantly for our shareholders, you're getting paid To put this capital out now finally. And it also kind of opens the door to give us an opportunity to have discussion around our lease term, Provisions in the lease. So it's a kind of a give and take, but it's a very positive one for us.

Speaker 2

And so Yes. We'll continue to be very selective about it, but it's not going to be a material part of our business going forward. It's a pretty high bar right now. But most importantly, I do think we used to talk about forward commitments being 50 basis points premium, people used to talk about that. I'd say that premium is much higher now.

Speaker 2

If you're going to forward commit, we'll provide any type of development CapEx funding. It's I'd say it's closer to 100 basis points premium to a stabilized cap rate.

Speaker 6

So I guess and then just thinking about where those investments are going, is that primarily industrial? So maybe as The industrial percentage of portfolio increases, that level of opportunity increases?

Speaker 2

I think it's less it's we're kind of more Agnostic to property type, it's really how good is the customer, how good is the real estate, what the position of our real estate within that master lease. So we look at it really less focused on industry type, but More of how can it improve our yields as well as potentially improve certain aspects of a master lease. We'll look at it that way as well.

Speaker 6

Okay. And just one more for me if I could. Given this increasing volume of potential acquisition opportunities, Coupled with the low cap rate achieved on dispositions, does full year investment guidance potentially feel Conservative, especially given the other liquidity that's available on the term loans?

Speaker 2

I wouldn't say it's conservative. I mean, We've been pretty methodical about what we've been doing, as you can tell, through the 1st two quarters. I'm saying that the volumes of things that we're seeing are increasing. So you probably see that in the Q4, but I'd say our guidance, we feel good about where it is right now. I wouldn't say it's conservative or aggressive, right in the middle.

Speaker 3

We'll always be selective.

Speaker 2

Okay. Thank you.

Speaker 8

Okay. Thanks, Greg.

Operator

The next question comes from Haendel St. Juste with Mizuho. Please go ahead.

Speaker 8

Hey guys, good morning.

Speaker 2

I had

Speaker 8

a few questions, I guess, more broadly on the Tenet, the health of Tenet. So can you, I guess, first discuss how You're seeing the portfolio performance versus expectation categories that are doing well and maybe better than expected in categories that you've been We're concerned watching more closely and how your watch list has changed over the past quarter or 2. Thanks.

Speaker 2

I mean, look, I'll start with, I think portfolio is doing great. We're not concerned about any aspect of it. Of From time to time, you'll focus on particular tenants. But I feel like our industries, our mix right now are ideal. And we've got a really good balance of retail, mission critical industrial, industrial outdoor storage.

Speaker 2

Industrial It's very, very well diversified. I mean, if you look at our square footage, we're over 55,000,000 plus square feet. The industrial Position is 50% of that. So we're half and half of our GLA right now is in the industrial space. So I would say overall, we're very comfortable with our industry mix.

Speaker 2

If we can lighten up our movie theaters, I think we would do that as I've said in the past, But we're in no rush because our movie theater tenants are extremely diverse and are doing well. So Maybe I don't know, Ken, if you want to talk about credit watch list?

Speaker 9

Yes. Credit watch list, P and L, continues to be very Manageable, it's relatively stable. We're in a position now where we have a much Deeper relationship with all of our tenants. So but overall, it's very stable, not seeing an increase.

Speaker 3

Okay, great. Great. Thank you for that.

Speaker 8

On the theaters, I guess, I've noticed, I think there was a $2,000,000 straight line reserve in the queue from bankruptcy, not sure what tenant that was, but assume that was tied to movie theater sales. Is that right?

Speaker 3

No, sorry. That was not up, Moody. That was another small operator One off that has run into some issues that we put on a cash basis last quarter.

Speaker 8

Got it. Got it. Okay. And then in the Q, you also think you bought $10,000,000 of term loans for $0.79 on the dollar. I know it's not a big novel amount, but just curious on It's the borrower is an existing tenant or anything you could tell us about it?

Speaker 8

Thanks.

Speaker 2

Yes. I mean, I'd describe that as an existing tenant. From time to time in the past, we've bought debt of tenants. You get a different kind of reporting, TENS, than what you see in a lease. So sometimes we see that as a tool to get More insight into a company's credit, which gives you a different relationship versus landlord.

Speaker 2

And I'd also say that that's not going to be an expanding part of what we do. It's a super select and one off.

Speaker 8

Got it. Appreciate the color. Thank

Speaker 2

you. Sure.

Operator

The next question comes from Anthony Paolone with JPMorgan. Please go ahead.

Speaker 10

Thank you. Good morning. Jackson, can you talk about just your thoughts on how much runway you have as we start to look out to 2024 To continue to be able to sell at lower cap rates than what you're basically investing in?

Speaker 2

To be honest with you, we could do it for a long time. That's not to say we will do it for a long time. I'd like to be Issuing equity and financing the normal way. The things that we're selling, we laid out Earlier this year that we thought the spread might be something like 100 basis points between our dispo cap rate, acquisition cap rate. And that mixes in what I'll call accretive sales that there'll be some defensive sales that are part of that mix.

Speaker 2

But with the size of portfolio that we have, Anthony, there's just there are a lot of assets, obviously, we've been selling. The things that we've been selling, I would describe as really middle of the fairway type of assets. They're not the best, obviously, and we don't have a lot of worst. So they're just generally pretty average. The dispo cap rate range This quarter was on the low side, 4.95% cap rate, up to a 7% cap with the majority being in the low 6s In terms of the cap rates that we were able to execute, a lot of lease we sold a lot of properties at Couple of properties had flat leases, lower bump structures, some were non reporting.

Speaker 2

So there were things that We feel like we can they're right to be sold and we can reinvest in things that have longer wall, we think have a lot of cap rate compression. We're buying growing businesses across the country, especially in the industrial side, where we think that will be much more accretive for our shareholders, not just from earnings, but also from an NAV standpoint. But to answer your question, yes, there's a long runway to do this strategy. I'm hopeful that this is just this year's strategy Next year we go back to normal things and I think we're getting closer too. Obviously, our cost of capital is getting closer to the point where we can Move forward if we want to pursue that, what I'll call regular way financing via the capital markets.

Speaker 10

Okay. And then Mike, just for you, can you I think you'd mentioned it, but what was the lease Termination in the quarter, I'm just trying to understand in your guidance for the second half of the year, it implies a little bit of a drop down from the $0.91 you Reported to about $0.89 and so just wondering if that's a part of it or kind of what the items driving that are?

Speaker 3

Yes, I'll tell you, there's obviously there's some rounding there. So we did have about $500,000 of lease termination income in the 2nd quarter. That causes around $0.91 Without that, you'd be about $0.90 If you look at the second couple of quarters, Q3, Q4, It's kind of rounding. I know it's like right there at that 89.5% to midpoint of our guidance kind of rounding to 90%. So you're kind of flat, if you kind of remove that other income in the back half of the year.

Speaker 3

The interest income piece of that, again, that was offset by higher interest expense. We actually made about a $20,000 spread on Having that extra debt drawn and having cash on our balance sheet, ironically, our invested cash is making a little bit more than Our 475 that we get charged on that term loan today, haven't seen that since 2008. But For the back half of the year, we do have, again, some rent disruption built in, consistent with our guidance we put out at the beginning of the year. That was a little more back half weighted. So we saw that assumption in there.

Speaker 3

There's some conservatism built in there. And also as you saw, we took up our disposition guidance And we typically have a view that our dispositions are going to come in a little quicker than the acquisitions. The acquisitions are a little more weighted towards Q4, our dispositions are a little more weighted to Q3. Jocelyn, it's a little pressure just on the quarter over quarter AFFO per share. So it's just some assumptions like that moving around We caused a little bit of flatness in the back half of the year, if you look at the midpoint of guidance.

Speaker 2

Okay, great. Thank you. Thank you.

Operator

The next question comes from Ki Bin Kim with Truist. Please go ahead.

Speaker 4

Thanks. I was wondering if you can just provide an update on At Home and how their sales or EBITDA productivity has trended over the past

Speaker 9

Hey, Ki Bin, this is Ken. Yes, Basically, no, we're not concerned with the long term aspect of At Home. Obviously, they're normalizing after Just an incredible run up in sales during COVID. But obviously everybody I'm sure has seen they Recently completed some debt transactions. They got incremental liquidity of $200,000,000 to $300,000,000 and Very importantly, they pushed out their maturities to 2028.

Speaker 9

But, no, we're still we still believe in their underlying business model. So no, no concerns.

Speaker 4

And on Party City, there was some news that The company might consider spinning out its balloon business, which I believe is one of your warehouses focuses on. Any kind of high level thoughts you can share On how that might impact you guys?

Speaker 9

Yes. On Party City, they expect them to emerge From bankruptcy during the Q3, yes, there are some last minute things back and forth going on. But At the end of the day, I would submit that our path on Party City really confirms what we've always believed in. You've invested mission critical real State, everything turns out okay. We have had zero disruption in any of our lease obligations, be it rent, taxes or anything.

Speaker 9

So, yes, there's some things going on right here at the end of the bankruptcy, but we don't expect those will have any factor in us getting rent payments going forward, Zero concerns.

Speaker 2

And Ki Bin, I would say just on that facility, I've been inside that balloon manufacturing facility. And it's I described it as a It's just a turnkey operation. They do design, procurement, distribution out of that facility. It's a very sophisticated Manufacturing facility that can kind of punch out different designs, paint on Mylar, It's we're super comfortable with that. That's going to be a business, it's going to be around a long time in that facility.

Speaker 2

And as Ken said, whether It spins out or doesn't spin out, really doesn't matter. It's going to just be a very valuable business within a very valuable piece of real estate that we own In that little submarket in Eau Claire.

Speaker 4

Okay. Thank you.

Operator

The next question comes from Rob Stevenson with Janney. Please go ahead.

Speaker 7

Good morning, guys. Just one for me. Jackson, despite comparable operations at a solid balance sheet, the stock continues to trade 1 of the lower multiples and higher dividend yields in the peer group, other than maybe increasing the industrial exposure or the IG tenant base, What do you think drives at least a relative revaluation, if not an absolute one here?

Speaker 2

I mean, I think for me, what I believe is we just keep doing what we say we're going to do, which is try to punch out solid acquisitions, Fund ourselves accretively. It's a mystery sometimes why we're trading at this kind of multiple When the portfolio is so solid, so diverse, I think in time, we'll be able to close that gap. And so we believe That we have a plan that can demonstrate the ability of our team as well as the Performance of our underwriting and the real estate assets and tenants. So that's our playbook right now.

Speaker 7

Okay. And then when you're looking at the back half of the year On the stuff that you guys are either negotiating under contract, is it highly likely that the acquisitions are going to continue to be tilted towards Industrial or are there some big sale leasebacks in the retail space that will sort of even that out? How should we be thinking about that in terms of the asset base at year end.

Speaker 2

I mean, from what we see right now, it's if I were to guess, it'd probably be industrial. But that being said, There are some large portfolios in the retail side that are floating around out there and we're evaluating them as well. One of the things that we're starting to see is just the amount of repeat business coming out of our existing database. We don't break it down every quarter, but I can just tell you it's increasing and we're getting better Investment opportunities from existing owners and operators within our tenant base.

Speaker 7

Okay. Thanks guys. Appreciate the time.

Speaker 8

Sure.

Operator

The next question comes from Wes Golladay with Baird. Please go ahead.

Speaker 3

Hey, good morning, everyone. I'm just curious if you have any developments that you're funding that will open in the second half. And maybe a question for offline, but if you have, it would be great. Do you have the amount of, I guess, what we call CIP that you spent the money, but you're not really getting

Speaker 9

This is Ken. There's no Huge meaningful project that opens up in the back half of the year. As Jackson mentioned That revenue producing CapEx line has a mix of TI dollars. So that's obviously Folks that are already open, we're just improving our real estate. There are a couple of development projects, but Whether or not any of those open before the end of the year, not quite sure.

Speaker 9

Possibly, but nothing I would suggest that is Going to move the

Speaker 2

needle.

Speaker 3

I mean, there's one there's like one project that's not at material.

Operator

The next question comes from Ramakanth With Morgan Stanley, please go ahead.

Speaker 11

Hey, just two quick ones. So one on the disposition guidance range. Just can you talk a little bit about Just the activity that you're seeing and what you're putting out, what you're looking to put out and what are the likelihood of actually hitting the top end of that guidance In this environment?

Speaker 2

Yes. Look, we the reason why we increased that guidance, Well, we actually went into the market with a larger tranche of properties, and they're very strategic in terms of What they're in terms of targeting different small retail buyers, 1031 type buyers, so you've got that out there. We've got some risk mitigation assets into the market, which who got time will tell whether those will get sold or not. And I'd say like it's the other thing I mentioned about what we're seeing most recently is Some of these small retail buyers are actually now able to get debt commitments again, which is a little encouraging. For a while there, It was getting very challenging from some of the regional banks, but we've noticed recently in our disposition effort, The ability of potential buyers to get 60% LTV bank loans as part of All right, just both process, which I think is encouraging from what we're trying to do.

Speaker 2

Great.

Speaker 11

If I could ask one more. Just so looking at the and I think looking at the acquisitions in the quarter, I think the question came up already on the Walt. I'll add to that in terms of the rent bumps as well. And then I think about that 8% plus cap rate. The question is, how do you get comfortable and how do you sort of make investors comfortable that You're not going too far out on the risk curve and you're still sort of balancing basically the acquisitions that you're doing at a cost of capital that But not reaching too far out on the risk curve.

Speaker 11

Thanks.

Speaker 2

Yes. I mean, look, I Thanks. I would just tell you anecdotally, the assets that we're selling in the 6s probably a year ago would have been in the 5s. Some of the retail assets that you can buy right now, even investment grade will be closer to the high 6 Cap rate, if the Walt was sort of say 10 years, the things that we're seeing are just, in my opinion, very, very solid We will send investments. One of the deals that we did this past quarter was For a distributor of original OEM parts for the automotive industry, very, very successful business, very sticky business.

Speaker 2

We did a sale leaseback for a company that does that manufactures pipe fittings and flanges down in the Houston area. We did a food manufacturing company up in the Boston MSA area that does Confection Cakes confection and cakes and bagels, we did an entertainment asset. So all of these are really solid businesses. The price per square foot is reasonable. The market rents make a lot of sense and they're mission critical for these companies.

Speaker 2

The same opportunities, like I'm saying, would have been in the mid-6s last year. And so we don't believe we're going out on the risk spectrum at these cap rates. These are well underwritten credits in very, very viable industries at really attractive price per square foot. And just all cap rates have increased. So we could clearly stay in the high 6s or 7s, but Look, you're not going to get the unit reporting, you're not going to get the wall, you're not going to get the master leases or necessarily the mission critical aspect of what we're seeing on the investment we're doing.

Speaker 2

So I don't believe we're taking more risk at all, to answer your question.

Speaker 11

Great. That's it for me. Thanks so much.

Speaker 2

Sure.

Operator

The next question comes from Linda Tsai with Jefferies. Please go ahead. Hi. Just two questions. In your 1Q supplemental, you showed unreimbursed property costs of 1.5%, but we didn't see it this quarter.

Operator

Just wondering why it was taken out?

Speaker 3

Hey, Lynn. This is Mike. We actually took it out, I think, it's the first in 3 years. It's actually asked us about it. So we You kind of dropped it, and we do have that information in our SIP where you can calculate it.

Speaker 3

But, it was 1.7% for the quarter and it's driven a little hard by timing of Some real estate tax reimbursable and CAM expenses, but I'd expect to migrate around that 1.5% to 1.7%, well under the 2% that we had Put out an Investor Day a few years ago. But the information is in there. We just no one really focused on it. None of our peers report it.

Operator

Okay, got it. And then the strategy of not increasing your leverage using free cash debt and acquisitions to fund acquisitions. I know it's not exactly ideal, but the hand that's been dealt for now, how do you think about the level of earnings growth this can support?

Speaker 3

It's interesting because this year we were hit with some pretty big interest headwinds, interest rate headwinds for the from last year. In fact, if you go back to our original guidance about February, we gave you Q4 annualized, which was a $3.52 We did that because Q4 had the full impact of rising rates on us for last year. Compare that to our midpoint of guidance, that would imply 2% growth this year. So right there, you can see that even this strategy of recycling can produce some growth. We're pretty bullish about next year given that all of our debt is fixed at pretty low rates.

Speaker 3

But we feel like we have a good plan for growing going forward. We'd surely like some help on the equity side to grow more and faster. But we do feel like the way our balance sheet is locked in, the yields and spreads that we're producing, we can produce Better growth going to 2024.

Speaker 2

Thanks. Thank you.

Operator

The next question comes from Michael Gorman with BTIG. Please go ahead.

Speaker 12

Yes, thanks. Good morning. I just wanted to go back to some of the prior comments and just ask about the current tenants in the portfolio, kind of Looking at your new investment opportunities coming from increasing sale leaseback volume because of what's going on in the financing markets, How good of a read through do you have on your existing tenants and how they're handling the challenges in the financing markets and understanding the coverages are still strong? What's going on below the EBITDA line for your existing tenants that are, I would assume, facing the same financing markets that the new sale leasebacks are?

Speaker 2

Yes. It's hard to generalize a good question. We monitor it every day basically is the answer. It's just in our normal dialogue. And we have a CRM That we are utilizing now through Salesforce, that's really helping us at the senior management level.

Speaker 2

And so what I can tell you, we're seeing is, The companies are doing better than people expect. There's real on shoring happening. There's real manufacturing happening. I still think that labor is still an issue for some of our tenants that are in that manufacturing sector in terms of getting people On the job to procure and finish out items that are being manufactured. And on the retail side, generally the way our tenants are set up, they largely were Pretty smart during COVID in terms of recapitalizing their balance sheets, getting debt termed out, reequitizing, going public.

Speaker 2

And so we feel really good about their very sophisticated and they're good operators. So we have largely been Pleasantly surprised with the credit worthiness of the portfolio at this point. Of course, you've got a couple of areas, you're always couple of tenants that are always Watching more carefully, but generally it's not because of necessary financing that got them into trouble or interest rates. Yes, there's some other kind of issue that might be affecting them. But I'd say overall, we feel very, very good about The health of our portfolio and it's reflective in our ability to generate very little rent disruption.

Speaker 2

The loss rent we talked about was 0.2%.

Speaker 12

Great. That's very helpful. And then Jackson, maybe just on that same vein, and I'm sorry if I missed this, but As you're thinking about investment opportunities and investment volumes, how does that look coming from the existing tenants and existing Chips, the volume that's coming through that pipeline recently?

Speaker 2

Yes, it's coming from all It's a good healthy mix between coming from existing tenants, which are really led by our asset management team and also just third party New opportunities, new tenants that are looking for financing or new sponsors and that's being procured by our acquisition teams. So it's a healthy mix that we're seeing. That's why I said like the pipelines of investments that we're evaluating has increased meaningfully over the last several weeks. And 80% of the business this quarter, I think, is existing tenants.

Speaker 12

Great. Thank you for the time.

Speaker 2

Great. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Jackson Shea for any closing remarks.

Speaker 2

Thank you, operator, and thank you all for participating. I'd also like to thank Our professional and colleagues over at Spirit Realty, it's been a very good quarter and we're quite enthusiastic about what we see right now. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Spirit Realty Capital Q2 2023
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