Participants

Brent Maedl; Director - Corporate Finance and Investor Relations; Broadstone Net Lease Inc

John Moragne; Chief Executive Officer, Director; Broadstone Net Lease Inc

Ryan Albano; President, Chief Operating Officer; Broadstone Net Lease Inc

Kevin Fennell; Chief Financial Officer, Executive Vice President; Broadstone Net Lease Inc

Michael Gorman; Analyst; BTIG

Caitlin Burrows; Analyst; Goldman Sachs

Mitch Germain; Analyst; JMP Securities LLC

Ki Bin Kim; Analyst; Truist Securities

Ronald Kamdem; Analyst; Morgan Stanley

Eric Borden; Analyst; BMO Capital Markets Corp.

Spenser Allaway; Analyst; Green Street Advisors, LLC

Presentation

Operator

Hello, everyone, and welcome to the Broadstone Net Lease's first-quarter 2024 earnings conference call. My name is Bailey, and I will be your operator today. Please note that today's call is being recorded.
I will now turn the call over to Brent Maedl, Director of Corporate Finance and Investor Relations at Broadstone. Please go ahead.

Brent Maedl

Thank you, operator, and thank you everyone for joining us today for Broadstone net leases First Quarter 2024 earnings call. On today's call, you will hear prepared remarks from CEO, John Marino, President and CEO, Ryno Bonnell and CFO. Kevin final operator will be available for the Q&A portion of this call.
As a reminder, the following discussion and answers to your questions contain forward-looking statements, which are subject to risks and uncertainties that can cause actual results to differ materially due to a variety of factors. We caution you not to place undue reliance on these forward-looking statements and refer you to our SEC filings, including our Form 10 K for the year ended December 31st, 2023. For a more detailed discussion of the risk factors that may cause such differences. Any forward-looking statements provided during this conference call are only made as of the date of this call.
And with that, I'll turn the call over to John.

John Moragne

Thank you, Brent, and good morning, everyone. As we discussed during our call last quarter, the largest variable in establishing guidance this year was the timing of our healthcare dispositions and the subsequent redeployment of proceeds generated from the portfolio sales. With our team's ability to execute in scale on both fronts early in the year, I am pleased to announce that we are increasing our per-share FFO guidance and establishing a range of $1.41 to $1.43.
Before opening the line for questions, we'd like to provide context for this update and our perspectives on the overall operating environment. As we have been emphasizing since February of last year, the macroeconomic backdrop and interest-rate environment has had a considerable impact on commercial real estate markets and in particular, the net lease transaction market. While the net effect has resulted in historically significant declines in transaction levels, this environment has also presented opportunities to think creatively and differently, while continuing to lean heavily on our existing relationships, disciplined underwriting and operational expertise. Our actions over the last 18 to 24 months have provided us the flexibility to continue making decisions we want to make in this environment, not decisions we were forced to make with the capital talent and experience we have at BNL, we are primed to drive long-term value creation and earnings growth. I am extremely proud of what our team has accomplished so far this year, including the sale of 37 clinically oriented healthcare assets in connection with our healthcare portfolio simplification strategy, generating gross proceeds of 251.7 million, closing of these 37 assets, along with an additional disposition completed after quarter end accounts for approximately 50% of the assets we have identified as part of our healthcare simplification strategy, and we remain in various stages of marketing and negotiation on an additional 20% of our clinical assets that we anticipate concluding later in 2024. The remainder will likely take additional time to achieve optimal disposition outcomes as part of this effort we continue to work through a final resolution for Green Valley Medical Center completed dispositions have successfully reduced our health care exposure to approximately 13% of our ABR as of March 31st. Our near term goal is to reduce our health care exposure below 10% of our ABR, at which point it will naturally become a less emphasized portion of our portfolio similar to office.
Turning to our investment activity, first quarter transaction market represented the lowest single-tenant net lease transaction volume in at least 15 years, highlighting the continued misalignment between buyers and sellers with a recently reignited rate environment further exacerbating the disconnect. We still believe a higher degree of selectivity is required as we navigate this environment and we are focused on sourcing off market investments and unique capital allocation opportunities where we can partner with developers and tenants seeking capital solutions as the constraints on traditional commercial real estate lending process.
Despite the challenging environment, our team was able to invest $202 million year to date with an additional $122 million of investments currently under control. We navigated the transaction environment by leveraging existing relationships. Sourcing nearly 150 million of our year to date investments through direct off-market deals that closed shortly after quarter end including an 84.5 million investment in retail assets located in one of the most highly trafficked trade areas in St. Louis. This unique opportunity stems from an existing relationship that resulted from our ongoing UNFI build to suit. It includes a 32.5 million investment in seven individual triple-net outparcel assets leased to strong national and regional concepts, including Bass Pro Shops, Chick-fil-A, LongHorn Steakhouse and Burger King to name a few. The remaining $52 million is transitional capital with portions designed to convert to a long-term ground lease subject to tenant consents. The 52 million covers the online portion of the retail center that is currently more than 95% leased. This was a unique opportunity in which we were able to step in as a holistic capital provider for the entire center and acquire seven triple net retail assets with a strong real estate fundamentals and tenants at above market cap rates.
The other significant direct transaction we closed after quarter end was a 65 million single-tenant industrial campus in California occupied by leading candy manufacturer. While we would normally wait until Q2 earnings.
To provide additional details on transactions closing in the quarter. We wanted to provide investors a sense of what we are working on in this environment, particularly given the proximity of these investments closing to Q1. We look forward to discussing these and other Q2 investments in more detail during second quarter earnings as we execute on our healthcare portfolio simplification strategy. Our overall portfolio composition is increasingly weighted to industrial and defensive retail and restaurant tenants, and it continued to perform well in the first quarter as evidenced by 99.9% rent collections, excluding Green Valley, and 99.2% occupancy as of March 31st, 2024. While our overall operating results remain strong, we are seeing incremental pockets of credit risk as the broader impact from the duration of higher interest rates appears to be having an effect, we remain vigilant in our tenant monitoring efforts and maintain great in our portfolio due to its highly diversified construction, which limits the impact of any potential individual credit event and our proven ability to manage through any such situation that may arise in this higher for longer environment where financial conditions are less conducive to the type of interest rate fueled growth that the net lease sector had grown accustomed to in the post GFC world net lease rates will need to focus on operational expertise and finding creative ways to generate deal flow and accretive growth in a historically low transaction environment like this we could choose to run up the risk spectrum in exchange for yield, but I don't believe that would be prudent due to potential credit risk and our view of the continuing risk reward and balance on higher cap rate deals and now is the time to be creative and opportunistic while maintaining underwriting discipline to position B. and L. as an alternative capital provider to take advantage of the commercial real estate lending pullback and to double down on the things that have made B&L successful over the last 16 years.
Solid portfolio and balance sheet fundamentals, operational expertise and a growth focused mindset with our industrial focused, but diversified investment strategy. I believe B&L presents investors with a differentiated approach to net lease investing in growth. The increased role we can play in development and build-to-suit transactions adds a compelling additional building block to our growth strategy. We view these types of opportunities as part of our core building blocks to sustainable long-term growth, which include best-in-class fixed rent escalations, investments in our existing tenants and assets, traditional external growth and development funding opportunities. While the combination of these building blocks will vary based on market conditions, they provide a compelling path to near and medium-term value creation and earnings growth.
With that, I'll turn the call over to Ryan, who will provide additional details on our transaction efforts, our building blocks for growth and portfolio updates.

Ryan Albano

Thanks, John, and thank you all for joining us today. As John mentioned, during the first quarter, we were able to execute on a key piece of our healthcare portfolio simplification strategy through the completion of a portfolio sale comprised of 37 assets for 251.7 million at a cap rate of 7.9%. These dispositions reduced our medium term lease maturities and improved our overall portfolio WALT to 10.6 years. Additionally, the incremental proceeds from this sale add to our existing dry powder, placing us in a position of strength as we actively pursue high-quality investment opportunities as we step through this disposition effort and begin focusing on the remaining properties identified, we anticipate various transaction time lines that comfortably extend into 2025 given the need to address some combination of shorter lease duration, space utilization rates and elevated credit risks. As John and I have communicated in the past, we are intently focused on the tactical execution of our healthcare property sales and maximizing value for our shareholders.
Alongside our disposition efforts, we once again demonstrated our high degree of selectivity during the first quarter for funding revenue generating capital expenditures of $3 million and incremental UNFI development fundings of 36.9 million. In total, we have funded approximately $130.7 million towards the UNFI build-to-suit development through March 31st, and the project remains on track for delivery and rent commencement no later than October of this year.
Now turning our attention to new investment activity, while our standards remain very high for allocating capital to new investments. Our sourcing efforts have yielded several positive outcomes. As John highlighted in his comments, we favor opportunities that support growth for stable and healthy companies for situations where we can provide solutions to transactions that are disrupted by the current market environment. This has resulted in our evaluation of more opportunities for build-to-suit transactions for commitments of completed developments and other directly sourced opportunities in addition to selective regular way marketed transactions. These transaction formats allow us to access high-quality opportunities today through a differentiated sourcing model and create embedded AFFO growth for future periods, which when coupled with our in-place portfolio, rent escalations produce a compelling run rate growth profile before even considering contributions from external growth opportunities while facing historically difficult transaction environment, our pipeline remains robust given an influx of these types of opportunities, our focus on achieving appropriate risk-adjusted returns and creating long-term value for our business and its shareholders is resolute and the balance of real estate fundamentals and underlying credit support against prevailing market pricing on investments remains front and center in an environment where the traditional net-lease growth model and transaction environment is constrained. We feel confident in our ability to drive meaningful near and medium term growth through our capacity to leverage opportunities arising from our other core building blocks, investments in our existing assets and development funding opportunities in addition to our best-in-class fixed rent escalations.
Moving to our in-place portfolio. As we highlighted last quarter, we remain cautious on and continue to pay extra attention to industries that are sensitive to discretionary consumer spending, including some tenants that have been included in the recent headlines, the room place a home furnishings operator occupying one asset and accounting for 0.2% of ABR remains in Chapter 11 bankruptcy, during which time we continue receiving rents at the end of the bankruptcy proceedings, which we anticipate occurring later this summer. The tenant will vacate the property. In the meantime, our team is focused on determining the optimal next step for this asset at Red Lobster, representing 1.6% of ABR has notably been in recent headlines. Our 18 master lease assets maintain relatively healthy site-level performance, and we continue to monitor the situation as it unfolds. We are comfortable with our exposure, which we have reduced over the last several years remain cautiously optimistic about Red Lobster's future and know the quality of the underlying real estate represents a compelling value proposition to both Red Lobster and other potential users.
Lastly, we only have three vacant properties as of March 31st, including one that went vacant during the quarter upon the conclusion of our tenant's lease term, this property received significant interest and we have executed an LOI with a new tenant and are in the process of negotiating a lease, anticipating the tenant taking possession in late Q3 or early Q4. Beyond these properties, there is one additional tenant Shutterfly that will be vacating its space when their lease expires on June 30th. We have already executed an LOI and are in the process of negotiating a lease with a new tenant for this location. Our new tenant is currently targeting lease commencement during the fourth quarter, resulting in minimal downtime at the property.
In summary, the broader market environment for new investments is certainly challenging and higher interest rates and sustained uncertainty are increasingly adding risk to the macroeconomic equation. Despite the difficult backdrop, we continue to demonstrate a differentiated ability to allocate capital to investments that enhance the value of our highly diversified portfolio and execute on assets and portfolio management objectives that drive strong operating performance.
With that, I'll turn the call over to Kevin to provide an update on our financial results for the quarter.

Kevin Fennell

Thank you, Ryan. During the quarter, we generated FFO of 71 million or $0.36 per share, an increase of 5.9% in per-share results year over year results were largely driven by lower interest and G&A expenses. Bad debt in the quarter, excluding Green Valley was 15 basis points, driven by a small gap in rent from the in-place. We incurred 7.8 million of cash G&A during the quarter, which tracks in line to slightly better than guidance. We once again ended the quarter in a strong and flexible financial position despite not engaging in any capital markets activity.
From a leverage perspective, we ended the quarter in a position of strength at 4.8 times net debt down slightly from five times at the end of 2023, driven largely by disposition proceeds from progress on our healthcare portfolio simplification strategy, we are retaining mostly fixed rate debt capital structure with 30 million existing swaps rolling into Q4, and we routinely evaluate alternatives as we approach incremental floating rate exposure into 2025.
At our quarterly meeting, our Board of Directors approved a $0.29 dividend per common share and OP unit. This is a 1.8% increase from last quarter and a 3.6% increase over the dividend declared in the first quarter of 2023. This quarter's increase marks our seventh consecutive semi-annual dividend increase since our IPO and is payable to holders as of June 28th, 2024 on or before July 15th. Our dividend remains well covered and represents a highly attractive yield in this market environment.
Finally, as John previously mentioned, we are raising our per-share guidance from $1.41 to a range of $1.41 to $1.43 as our team's ability to execute on both our healthcare portfolio simplification strategy and growth objectives provides additional clarity on estimated per-share results for 2024. Our revised per-share guidance reflects the following key assumptions, which remain unchanged investment volume between 350 and 700 million, disposition volume between 305 hundred million dollars with ongoing health care sales accounting for the substantial majority and finally, cash G&A between 32 and 34 million.
With that, we will now open the call for questions.

Question and Answer Session

Operator

Thank you. (Operator Instructions) Michael Gorman, BTIG.

Michael Gorman

Yes, thanks. Good morning. I was wondering if you could spend a little bit of time as you're talking about how you think about the investment environment right now. And John, you talked about being I'm a little bit more innovative and focusing on your skill set. And Ryan, you talked about some of the opportunities you're seeing. Can you talk about how you're thinking about stratifying the opportunities and the returns required as you think about additional build-to-suits or kind of innovative transactions like the retail center closed after the quarter end?
Yes.

John Moragne

Thanks, Mike. As we were talking about in the script. And as I think everyone knows, this is the lowest sort of marketed transaction volumes we've seen at least 15 years. Conversions are a lot harder right now. So you're having to work a lot harder to find these deals. It's not the same environment that net lease got to enjoy for 15 years post GFC. So we're focused, as we talked about during the call on finding direct deals, leveraging our relationships. We're very proud of 150 million that we were able to close so far year to date as a result of direct relationships with Sansone, our partner on UniFi, as well as the partner on the retail center, as well as direct relationships on the industrial campus that we acquired in California building from that and touching on the core building blocks that we think we provide from a differentiated growth strategy and in that lease is the opportunity to do more build-to-suits we're seeing right now and evaluating opportunities in mid-market industrial on straight way deals as well as some retail. But a lot of the good opportunities we're seeing right now are build to suit for commits the disruption that we've seen in the last call it year and a half and commercial real estate lending persists and will persist for some time. So being able to step in as a whole as a capital provider as an alternative capital provider we think is really attractive. The yields that we're seeing right now are solidly in the sevens, no stuff. That isn't something that really works for us. As we as I said during my remarks, you there is an opportunity right now to run up the risk spectrum if you're looking for yield. But that's not something that we've always been comfortable with, and we're certainly not comfortable with it today. So we're solidly in the sevens, and we think there's great opportunities, both in sort of regular way acquisitions as well as the build to suit and adding to those core building blocks.

Michael Gorman

That's helpful, John. And I guess maybe just kind of self-evident. But as you get closer to the rent commencement on the UniFi, I assume the appetite to take on new build to suit goes up. Can you give a sense for kind of where where that that appetite sits in terms of as a percentage of the total business to have a development pipeline underway?

John Moragne

Yes, there's a strong appetite for it. And UniFi is progressing really, really nicely right now. We're expecting to come online at the end of Q3 or the beginning of Q4. As we talked about before, it has an absolute rent commencement date of October 15th at the latest, but we believe it's going to come online earlier than that. And so as we are winding down our remaining commitment there to fund that starts to open up the opportunity for us to look at additional build to suit. And when we look at our core building blocks, having a laddered build to suit structure out into the future over the next 12 to 18 to 24 months, we think is a really attractive growth for investors to look at as you roll from one year to the next already having a built in investment pipeline that you know is going to come online from those build to suits, we think should be provide a differentiated approach to growth that you don't see in the same material way across our industry that we're able to do with these larger industrial build-to-suits. So that's a key focus for us right now as a percentage, it's pretty significant in terms of the pipeline. And, you know, not all of those worked out, but we're actively pursuing a handful of them and are excited about a few of them coming online in that 25 time line.

Michael Gorman

That's great. And maybe just last one for me. I know it's not directly comparable, but obviously, a lot of headlines lately in the pharmacy space and with Walmart with its health clinics. And I'm just curious and you had good execution on the healthcare properties year to date have you seen any change in the tone or the tenor of the discussions you're having? And in the last month or so, just in terms of how investors are thinking about the health care space and the healthcare real estate specifically?

John Moragne

Yes, I think the tone people, I think, are comfortable with the approach that we're taking. We're very pleased to have roughly 50% of our goal already out the door. The plan in the near term is to get our overall healthcare allocation below 10%. At that point when you're single-digit ABR becomes naturally a less emphasized portion of the portfolio. And so that's the goal that we have here. We've got a good line of sight to the next 20, 25% and we anticipate that that would close in the second half of 24 nine in the last 25% will take a little bit more time. I think it's in healthcare, you're looking at a lot of haves and have nots. There's places that are really well structured. And so from an investor sentiment standpoint, depending on where they're looking at the healthcare sector, there can be a lot of comfort and excitement of our own. And then there's a lot of places that are really struggling. And so where we sit and I think executing on the strategic plan fits well in terms of getting rid of that complexity, getting rid of an asset class that is not core to our long-term growth strategy and we're excited to continue executing on it over the course of the next year or two.

Operator

Caitlin Burrows, Goldman Sachs.

Caitlin Burrows

Hi, good morning. Just as a follow-up to that last one. So you mentioned how on about 50% of what you want to sell in the healthcare portfolio is now done and you're in talks on another 20% to 25% and the rest TBD. So could you talk a little bit more about the differences between the properties that you expect will take longer versus those that you've already closed or are in talks on, sir, so the one that will take a bit longer are likely to be one-off transactions.

John Moragne

They were not ones that were viewed as being a fit for larger portfolio deals, larger portfolio deals. If you're looking at the private institutions or the public rates that are evaluating no health care assets that are on the market right now need to fit a certain playbook for them, not everything that we've owned and acquired is going to do that. As a reminder, we've been acquiring health care since 2009, 2010 going back to some of the earliest years of our 16 year operating history. So there's a lot that's in there. And so these one-off transactions and that last little bit our focus is optimal disposition outcomes. We're not looking to sell these at just any price. And we are good asset managers. We have really strong operational expertise. We're in the real estate business. And so our plan is to look at each of those individually, not rush through a decision on them. And if it takes a little bit of opportunity, no effort for us to work with the tenant on a lease extension or maybe we need to invest some dollars into it to get the asset repositioning where it's going to be attractive for somebody to buy on a one-off basis. That's what we're going to do. So it will take a little bit more time to work through those, but that's okay, got it.

Caitlin Burrows

And just for the additional healthcare asset sales that you expect to happen in 2024, would you expect those would be in a single transaction or multiple?

John Moragne

We're currently working on one single transaction, but it would have staged closings. So we would tried to time it out in a couple of different tranches over the course of the second half of the year.
Got it.

Brent Maedl

Okay.

Caitlin Burrows

And then just to follow up on the build to suit opportunities to I guess what does on the on land that you already have? You mentioned maybe 12 to 24 months kind of outlook or impact, but it seems like it could take longer if you need to get the land and the approvals and permitting. So just wondering if you could talk about that kind of what you have, what you know, no impact on timing?

John Moragne

No, we're not buying land for spec development services. These are deals already in place. We would acquire the land on the front end in connection with funding the deal. But these are opportunities. We're looking at where the lands already been identified and it's already been identified. And so there's no risk that you would traditionally see in sort of spec industrial development.

Caitlin Burrows

So like somebody else has already worked on getting it set up or it just seems like from what we hear on the industrial side, like there's some time it takes from talking to a potential partner and saying we're going to build this to actually being able to put a shovel in the ground? Is it that that process has already happened or somehow you're able to do it more quickly?

John Moragne

No. And process already happened, I think of this as the same sort of scenario we've been seeing the last 12 months starting for us with UNFI, the dislocation you're seeing commercial real estate lending where they haven't been able to find a capital provider but they've already got a project in mind. They've got the lands secure. They've got the permits. They need. They're ready to break ground, but they don't have the funding to do it and we can step in and provide them with funding.

Operator

Mitch Germain, JMP Securities LLC

Mitch Germain

Thanks so much. John, are you do you have a committed team?
Well, it is now dedicated to these development opportunities or is it just part of the broad give us the skill set of your acquisitions people?

John Moragne

Yes. So we have we're leveraging existing experience and expertise. Our head of acquisitions has done a significant number of build to suits over the course of his career. We have a 25 year licensed architect on staff that's able to come in and provide us with really strong expertise in working through the build structure and the construction over the course of the time. And we've got a team that having gone through this with UNFI as well as a handful of retail sites during 2023. That's continuing to grow their expertise. So it's built into the fabric of our acquisitions and investment team, and we're very excited about the types of opportunities that they're seeing.

Brent Maedl

Great.

Ryan Albano

And I think you had said you're looking at yields in the mid-7 area, give or take right now is that consistent with a true one?
These development transactions or the transactions may be skewed a little bit higher versus what you could be acquiring a similar asset?

Brent Maedl

Yes, runs the gamut.

John Moragne

Mid-sevens is really on a blended basis. There's a handful of things that we're looking at in that low seven to seven cap range, annual things in the higher cap range, a place that we continue to see a lot of great benefit from the build to suits in the industrial space as well as sort of regular way acquisitions is what the straight line yield on these becomes when you start building in long lease terms with the rent bumps in the rent bumps are consistently above 2% at this point, 2.52753%. Those straight line yields on these opportunities are really attractive even when you're talking about cap rates in the low sevens.

Brent Maedl

Great.

Ryan Albano

Well, so for me, the on your reference, 25, 30% of the healthcare expected sales may be maybe kind of extended into 2025. Was that always the expectation or did that come about from the education of marketing properties and seeing where the demand in the market was.

John Moragne

So I think the answer is both as we as I talked about during our Q4 earnings call, it takes a long time to run a process and get to the point where we were when we made the announcement about the healthcare portfolio simplification strategy in February, we have started that process early in 2023 work through the process internally and with our Board over the course of the summer, brought on JLL and CBRE to work with us on the process in the fall. So we went into it with an open mind as to how we might be able to execute on it. But when we came out and announced the strategy to the market, we fully anticipated that we'd be able to execute really quickly on the first half, the next 25%. We were looking to stretch out a little bit in the last 25%. We're going to be onesie-twosies that we're going to take more time. So this is exactly what we thought it was. And we started talking about this a few months ago.

Operator

Ki Bin Kim, Truist Securities

Ki Bin Kim

Thanks, and just going back to the last question on the additional 20% of healthcare assets that you might look to sell, any sense of what the cap rate range might be similar to the first half.
Okay. And going back to your comments about consumer health and maybe the impacts of inflation that certain retailers might be feeling. I know you went through a list of some of the credit risks that you see today. But do you see other restaurants or retailers that are perhaps kind of getting closer to that red zone where it's hard to know what are you more about consumer discretionary industries like restaurants, casual dining, some retailers, wherever else are absolutely focused for us right now.

John Moragne

The ones that we talked about are the ones that are at the top of our list for things that we're concerned about. And it's sort of an obvious list that we've been talking about for a little bit here, but there still continues to be some resiliency. Our rent coverage ratios are still strong. You saw us announce more than 3.2, I think for this for this quarter for our restaurant assets. The retail stuff continues to perform generally well. They are experiencing some pressures on a corporate basis, but our sites themselves continue to perform well. And that gives us a lot of confidence.

Brent Maedl

And you don't have a ton of lease expirations this year or next year, I think are 80 basis points this year. And then 1.6% next year. Any early indications of renewal probabilities for those type of tenants for the year?

John Moragne

We're really pleased with it. On an aggregate basis. We're north of 100% rent recapture on those. So some good assets that are rolling that had below-market lease expirations next year. We're starting to work on it now, but no direct line of sight or absolute view as tenants are going to continue to work on those right up until they make a final decision.

Operator

(Operator Instructions) Ronald Kamdem, Morgan Stanley.

Ronald Kamdem

Page 2 quick ones are just starting on the guidance raise on sort of a redeployment, our timing and so forth is really interesting, but trying to figure out what's what's the bad debt assumption in the guidance? And does that change at all? And to be a little bit more specific, I curious about Red Lobster and what's sort of contemplated bad debt number?
Hey, Brian, it's Kevin.

John Moragne

I'll take the first part and John, you take the second, but we started the year with 75 basis points of cash revenue, which we did last year as well. We hold that throughout the year. And so as you saw at 15 basis points for the quarter, operating inside of that we'll certainly update as the quarter rolls forward, the will go forward.
And on the Red Lobster point, we're actively monitoring that. I mean, it's certainly in the news anticipated bankruptcy, they haven't done it yet, but we've gone through and evaluate our portfolio every single quarter for the last few years, as we've talked about a handful of times, we reduced that exposure from 25 assets down to 18. When we first initiated that position in 2016, it was 4.5% of our ABR. It's 1.6% today. Some of that attrition from the growth in the portfolio. Some of that from us being we'll sell it off. We've got really strong real estate about two times coverage across the portfolio the real estate is performing well there. Red Lobster on a going forward basis is going to need the real estate to build, operate the restaurants and get people in the door and we think that we offer that to them. But even if we're just looking at it from investment from our standpoint were $0.82 on the dollar out of these including the one Red Lobster that we sold at a mid six cap rate in Q4. So it doesn't take much for us to get our money back out around the business of just making our money back up. And we expect that there's going to be plenty of opportunity here into the future work. As I've said, a handful of times, we're cautiously optimistic about where this goes, even if it goes through a Chapter 11, Thai Union proved to not have the chops to be able to manage casual dining in the continental United States and someone's going to see good opportunity here with a strong brand, strong real estate, strong historical performance, and we'll be able to take it over and be able to do something with it. So I feel good about cautiously optimistic, I should say about where we're headed.

Brent Maedl

Great. And then on the portfolio simplification, obviously a big chunk of it got done so so nicely done with the sort of move in rates. Does that could the timing slip a little bit? Or do you have sort of enough line of sight where you do feel like you'll be below that 10% and by the end of the year or potentially?

John Moragne

Yes, we're pretty confident we will own 10% by the end of the year with the next 20, 25%, having a good line of sight to where that's headed. That gives us a lot of confidence. And then as we work through the rest of the portfolio on individual basis, we think we can get there pretty pretty confidently and then we'll take our time with the rest of it. As we said, focus there is optimal disposition outcomes and not just sort of pushing about the back the truck.

Brent Maedl

Thanks much.

Operator

The next question is a follow-up question from Caitlin Burrows from Goldman Sachs. Please go ahead. Your line is now open.

Caitlin Burrows

Hi. I don't know if you're suggesting this might be something more for the second quarter call, but I was just wondering if you could talk about on the retail deal for a little bit kind of how it came to be. It seems like a different kind of unique strategy. And in terms of I think also the wording in the press releases that you invested or something rather than acquired. So invested in that property seems like you're generally like keeping the outparcels and then will be ground leasing the rest of the retail center. But could you just kind of talk about how that came to be and if that's something you'd be interested in doing more of?

John Moragne

Yes. So this is one that we're really excited about. I think it's a great example of the creativity that we can show in a market like this net lease rates, as I said during my prepared remarks, I think we're not going to be able to rely on the low interest rate fueled growth that we saw for 15 years post GFC. We have to start relying on real estate expertise, operational expertise, direct relationships, finding creative solutions and the pullback in commercial real estate lending has provided us that opportunity, and we're jumping into it with both feet. So this is a direct opportunity that was brought to us. We partnered with sandstone on this sandstone is also our partner on UNFI, and they have been managing this retail location for 30 years initially constructed it. So we have a ton of confidence in their ability to manage this the current well, not the current where they are, but the prior owner had a closed-end fund that they needed to harvest and roll those funds into something else and make distributions to LPs. And they were in a position where there wasn't a huge opportunity from commercial real estate lending or other capital sources to fill the gap, and we were able to do so. And so we went in and this is a creative unique solution where we're really, really happy to have acquired at above average cap rates, seven retail sites that have a ton of value.
As I mentioned in my remarks, Bass Pro Shops, Chick-fil-A and Longhorn Steakhouse, Burger King, I mean, really some quality names that we can add to the portfolio. And to do that, we needed to step in and provide a holistic capital solutions. So the transitional capital we've provided to this site, it's really in two tranches. One tranche, Spencer, as you alluded to as Caitlin excuse me, we are looking over time to shift that into a ground lease. There's some work to do. We've got to work with the tenants on that. So we need to see where that one goes. And the second tranche of that is likely a three to 5-year hold period. It's transitional. I sense that there's some lease-up activity and some lease extensions that need to be done, we're already 95% leased on this site. So it's in great shape and then converting that overtime as they look to find a long-term permanent owner since it has been a great partner. There are other people out there that have similar situations. This is a creative opportunity for us to allocate capital in an environment where you're seeing historical lows on traditional net lease transaction activity. And so we'll happily look at these. This may be a unique one-off opportunity that we pursue, and it may be something that we do again we'll just have to wait and see what the opportunity set brings us.
Got it.

Caitlin Burrows

That sounds good. And then maybe just similarly on the industrial deal, I guess bigger picture like to have acquisition cap rates in the mid 7% range for retail and industrial does seem like a really good outcome for you guys. So incremental to what you just said on the retail side, is there anything else you could add for kind of how you expect to achieve those kinds of yields over the rest of the year? And if there's any other additional color you could give on the industrial property again, like how you sourced it, what made it unique for you guys on anything else?

John Moragne

Yes. So the industrial dealer we sourced directly sourced internally from a personal relationship. It was an opportunity that was brought to us because they were looking for someone that would provide surety of closing ease of execution and the ability to cut a big check and provide a holistic solution for that acquisition that they were working on. We're very pleased with it. We'll have more detail on that in the future. But again, it's a industrial campus in California. You're in the seven cap range on that. That feels really good right now going into the future and take the other part of your question, we are continuing to see some good opportunities, mid-market industrial in that seven cap range. We're excited about those. So is everybody else, if you look at what a lot of people are pursuing right now from publicly buyers as well as private institutional buyers. They really like mid-cap industrial. So those are highly competitive. We're going to continue to exercise really strong disciplined. We're not going to chase those to a place where the risk reward doesn't make sense anymore. And if we lose them, we lose them. That's okay. And conversions are harder right now, but if we can find the right ones and the right relationships, and that's why the direct relationships and the off market opportunities are. So critical right now, if you're trying to build a pipeline by going off and just bidding on the things that are showing up in the e-mail blast or the brokers that's going to be pretty hard over the next little bit here. So working on those working on creative opportunities like the retail center and working on building out and laddering out that pipeline of build-to-suit transactions. This is where a lot of our focus is right now.

Operator

Eric Borden. BMO Capital Markets.

Eric Borden

Good morning, everyone. Just on that last point around laddering, the potential development opportunities, how are you guys thinking about that just given the delay between the capital outlay and then when NOI. kind of comes online for you guys?

John Moragne

Yes, there's a balance there. I think it's really attractive from a differentiated growth strategy, but you have to balance it with current rent-paying new opportunities.
One of the things that we want to spend time on is the pro forma leverage that we included this quarter for the first time, we are sitting on a low levered position already at four eight. But when you pro forma in the way that were UNFI coming online, you get down to 46. So we've got a lot of room there, but it is a balance between these things with capitalized interest. There is some near is some current benefit as we are funding these over time, but the real benefit is when they come online. So being able to ladder them, I think, is important if you've got these big, huge balloons and nothing between that gets a little bit more difficult. But if you've got them coming online in a more consistent basis, which is the hope that we have, we need to prove that out, then it starts to be a really attractive way to we allocate capital.

Brent Maedl

That's helpful. And then outside of your traditional net lease transactions, some of your peers have had success in the sale leaseback financing market. I'm just curious to hear your thoughts around what you're seeing today and if that is a potential solution for you guys to kind of grow externally?
Yes, there's still some sale leasebacks that we're evaluating.

John Moragne

The key thing for us is why is the company pursuing it? Do they have a growth objective? Is there an acquisition that they're working on, Tom, we're not necessarily interested in solving a capital structure problem if it's not one that we feel really confident about going forward if they've got limited access to alternative sources of capital. And so they're turning to the sale-leaseback market, but it's more limited now than it was. I think there's a lot of corporate coffers that are pretty full cash right now. And so they're not necessarily needing sale-leasebacks in the same way that they used to. But we'll absolutely evaluate them when they come online and really hone into why what is the point what's the purpose that they're driving for the funds that they're seeking?

Operator

(Operator Instructions) Spenser Allaway, Green Street Advisors, LLC

Spenser Allaway

And maybe just a bigger picture question, just given the more cautious cost of capital signal that's being provided by the market, right now, how has your thinking changed if at all, regarding redeploying the disposition proceeds into new investments versus buying back shares, bringing down leverage further or perhaps just sitting on dry powder until that cost of capital improves?

John Moragne

Yes. So our job is to allocate capital in the 70s where possible. And so we're always evaluating all the alternatives that are in front of us and the ones that you've set out are really the ones that we're thinking about more in a great spot right now from a leverage standpoint. So we have looked at paying down some debt, but where our debt currently sits relative to what we can get on a straight-line yield basis from investing in new opportunities isn't necessarily that attractive, particularly given the additional cash proceeds that we have from healthcare sales. But if you take share repurchases, we have that tool in the toolkit for a reason, it's something that we'll evaluate and we'll think about given where our shares are trading currently at an implied cap rate north of 8% factor, we are in a low levered position. The fact that we have some additional dry powder relative to the health care sales makes it an interesting conversation. So it's something that we'll evaluate and make sure that we're at allocating capital to the most M&A space possible.

Operator

As a final reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. There are no additional questions waiting at this time. So I'd like to pass the call back over to John Chironna for any closing remarks.

John Moragne

Thank you, and thanks, everybody, for joining us today. And I hope you can hear the confidence and the conviction that we have and the execution we've had so far this year and where we believe we're headed over the course the rest of the year. We look forward to talking with you more about it at the upcoming conference season. Thanks all and have a great day.

Operator

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.