Broadstone Net Lease, Inc. (BNL) Q1 2021 Earnings Call Transcript

Broadstone Net Lease, Inc. (BNL)
Q1 2021 Earnings Call
May 05, 2021, 1:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to Broadstone Net Lease's first-quarter 2021 earnings conference call. My name is Andrew, and I will be your operator today. Please note that today's call is being recorded. [Operator instructions] I will now turn the call over to Mike Caruso, senior vice president of corporate finance and investor relations at Broadstone.

Please go ahead.

Mike Caruso -- Senior Vice President of Corporate Finance and Investor Relations

Thank you for joining us today for Broadstone Net Lease's first-quarter 2021 earnings call. On today's call, you will hear from our CEO, Chris Czarnecki; and our CFO, Ryan Albano. Before we begin, we want to remind everyone that the following presentation contains forward-looking statements, which are subject to risks and uncertainties, including, but not limited to those related to the ongoing COVID-19 pandemic. Should one or more of these risks or uncertainties materialize, actual results may differ materially.

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 31, 2020, 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. I will now turn the call over to our CEO, Chris Czarnecki.

Chris Czarnecki -- Chief Executive Officer

Thank you, Mike and welcome to everyone joining our Q1 2021 earnings call. As always, I would first like to wish our listeners continued good health and safety. In reflecting on the time since our IPO, I'm incredibly proud of our team, how they have executed our strategy, managed the portfolio and the results they've delivered. Our diversified strategy has produced predictable results and provided significant downside protection during this rapidly changing economic environment.

Our best-in-class geographic, property-type and tenant diversification has yielded rent collections among the best in the net lease space over the past year, and the first quarter of 2021 was no exception. Our portfolio operating metrics continue to reflect pre-pandemic levels, a trend that has continued for several quarters. During the first quarter, we collected 99.8% of rent and the portfolio was 99.7% leased as of quarter end. All deferral and abatement periods have concluded, and we are currently scheduled to receive less than $500,000 of remaining deferred rent, which is immaterial in comparison to our annualized base rent of more than $302 million.

With widespread vaccine distribution efforts well under way, significant reductions in case counts across the country and all of our tenants currently open for business, we believe our normalized pre-pandemic operating profile exhibited during Q1 should continue throughout 2021. While most of our tenants have seen limited disruption over the past 12 months, we expect macroeconomic tailwinds to continue to strengthen for certain property types more directly impacted by the pandemic, namely casual dining. In areas of the country that may experience a slower recovery, we believe that our granular diversification will continue to provide downside protection and position us for continued success. What we love about our diversified strategy is that it not only provides for a differentiated advantage during challenging economic environments, but it also positions us to excel and be nimble during periods of growth.

It is no surprise that the net lease space has returned to external growth, following a temporary pandemic-induced pause during 2020. An increase in capital-pursuing net lease opportunities, coupled with the pandemics creation of have and have-not asset types, has resulted in the competitive acquisition environment in 2021. Despite heightened levels of competition, our flexible capital allocation strategy continues to translate into a robust pipeline of attractive acquisition opportunities. Our diversified approach to investing gives us flexibility and allows to selectively pursue attractive risk-adjusted opportunities across a variety of asset types despite changes in sector-specific dynamics.

We have embraced the strategic flexibility throughout our 15 years of operating history, and our investment activity during Q1 2021 was no different. During the first quarter, we closed five transactions, comprising 28 properties for a total investment of $87.3 million. The weighted average going-in cash cap rate for acquisitions completed during the quarter was 6.4%. The leases include 1.4% weighted average rent escalations and a 15.3-year weighted average remaining lease term.

Although we've seen heightened competition in some of our core property types, such as industrial and quick-service restaurants, we were able to source and close acquisitions that possess risk-adjusted profiles complementary to our existing portfolio. Acquisitions completed during the quarter were more heavily toward select retail and healthcare property types, which we believe is a testament to the benefits of our diversified acquisition strategy. During the quarter, we acquired 24 select retail properties in two transactions for a total investment of $68.2 million. The properties primarily include carwashes and dollar store sites located in geographically diverse markets.

The leases are subject to a weighted average rent escalation of 1.1% and have a weighted average lease term of approximately 16.3 years. Acquiring strong-performing sites under long-term leases with experienced operators is an exciting addition to the retail segment of our portfolio. We've also added four healthcare properties as part of two transactions for a total investment of $19 million during the quarter. The properties include several plasma collection centers and a newly constructed eye care facility leased to an existing tenant.

Releases are subject to a weighted average rent escalation of 2% and have weighted average lease terms of approximately 11.5 years. We continue to view healthcare as a unique differentiator for us, and we intend to remain focused on adding attractive assets leased to tenants affiliated with large health systems or significant regional physicians groups. Spending on the healthcare transactions completed during the quarter, the acquisition of the newly constructed eye care facility demonstrates our ability to work with our existing tenant base to drive new growth opportunities. Additionally, through our work on the property management side of the business, we also successfully identified and released a previously vacant healthcare property during Q1 under a new 15-year lease with the same tenant, building strong relationships that lead to new acquisition opportunities with existing tenants has been and will continue to be a key strategic focus.

Although the acquisitions we completed during the first quarter were more heavily weighted toward select retail and healthcare properties, we continue to source and evaluate opportunities across all of our core property types. Despite some minor seasonality in volume, typical of the first quarter of the year, we are very pleased with our current pipeline and have $206.5 million of additional transactions under our control, which we define as either under contract or executed letter of intent. These opportunities are well diversified across industrial, healthcare and select retail assets. With nearly $300 million of acquisitions either closed during the first quarter or currently under our control, and a robust underwriting pipeline of Q2 and second half of 2021 opportunities, I'd reiterate our confidence in our initial full-year acquisitions guidance range of $450 million to $550 million.

Ryan will provide a more complete update on our 2021 full-year guidance in just a few moments. During the quarter, we sold eight properties for $23 million at a weighted average cap rate of 7%, representing a $3.5 million gain over original purchase price. These sales continue to reflect our disposition strategy focused on risk mitigation and included several noncore healthcare assets and weaker performing casual-dining locations. We continue to closely monitor and assess the long-term impacts to segments of the portfolio that have been more directly impacted by the COVID-19 pandemic, namely casual dining and office properties.

Granular tenant diversification, long-term leases and strong tenant credit affords us the opportunity to patiently assess all available options to preserve and enhance long-term shareholder value. As of March 31, our portfolio included 660 net leased properties located across 41 U.S. states and one property in Canada. The portfolio had a weighted average remaining lease term of 10.6 years, with 2.1% in-place contractual annual rent escalators.

Occupancy increased 50 basis points quarter over quarter to 99.7% as we successfully retenanted three properties during the first quarter, leaving only six of our 661 total properties vacant at quarter end. Our forward loose maturities continue to be negligible and represented just 0.3% of ABR in 2021 and a total of 2.7% of ABR through 2023. Lastly, I'd like to highlight some exciting governance-related news that was announced earlier in the quarter. During Q1, our board of directors nominated Denise Brooks-Williams and Michael Coke for election to the board at our annual meeting, which will be held this month.

I look forward to welcoming both nominees to the board of directors as each brings a wealth of experience in their respective industries. Ms. Brooks-Williams currently serves as the senior vice president and CEO of the North Market for the Henry Ford Health System, a leading not-for-profit healthcare and medical services provider in Michigan. Denise has more than 30 years of experience in the healthcare industry and will contribute immensely as we seek to expand our healthcare portfolio.

Mr. Coke is the co-founder and current president of Torino Realty Corp, a publicly traded REIT focusing on infill industrial properties in six major coastal markets and has over 30 years' experience in the industrial real estate sector as well as significant experience as a director and executive of publicly traded REITs. With that, I'll now turn the call over to Ryan to provide additional detail on our Q1 results and our full-year 2021 outlook.

Ryan Albano -- Chief Financial Officer

Thanks, Chris and thank you all for joining us today. I'll begin with an update regarding the strength of our balance sheet and liquidity profile as well as some exciting developments that occurred during the first quarter of the year. We are committed to maintaining significant liquidity and financial flexibility as we continue to make progress toward our 2021 growth objectives. As of March 31, we had approximately $885 million or 98% available capacity on our revolving credit facility.

Our net debt at quarter end was approximately $1.5 billion, resulting in a net debt to adjusted EBITDAre of 5.25 times. Coupled with limited near-term debt maturities, our substantial liquidity allows us to be strategic in accessing the capital markets and positions us well to execute on our growth objectives. As we discussed during our Q4 earnings call, we received an initial credit rating of BBB with a stable outlook from S&P in January. We have already begun to reap the benefits of this credit rating in the form of interest savings as the interest rate on our existing unsecured bank term loans and revolving credit facility were reduced by 25 basis points in February.

The second credit rating further diversifies our potential available funding sources by providing us access to the investment-grade bond market. In addition, Moody's reaffirmed our Baa3 credit rating and updated its outlook from stable to positive during the quarter. These two actions further validate the strength of our diversified strategy and our commitment to conservative balance sheet management. On March 12, we amended our $450 million 2026 unsecured term loan, reducing the applicable margin by 60 basis points.

In connection with the amendment, we elected to repay $50 million in outstanding principal, bringing the outstanding balance to $400 million as of March 31. The interest rate savings associated with both the S&P credit rating and term loan amendment will have positive impact on our 2021 full-year earnings and our cost of debt in future years. Now, turning to our Q1 2021 financial results. We reported AFFO of $49.4 million during the first quarter of the year, representing $0.31 per diluted share.

These results are in line with expectations and represent a $0.01 or 3.3% increase on a per share basis when compared to Q4 2020. The increase quarter over quarter was primarily driven by the impact of late Q4 acquisition closings and a partial quarter of interest savings associated with the S&P rating. We expect our late-quarter acquisition closings in March, the repricing of our bank facilities following the S&P rating in February and the amendment to the 2026 term loan in March will all serve as tailwinds for our upcoming second-quarter earnings. During the quarter, we incurred total G&A expenses of $10.6 million, which includes onetime separation costs associated with the departure of an executive officer during Q1.

After adjusting for these onetime costs as well as $0.9 million of routine stock-based compensation expense, we incurred $7.6 million of cash G&A during the quarter, which is slightly better than the low end of our initial guidance range when annualized. Following the completion of the first quarter of the year, we refined our 2021 AFFO per share guidance upward to reflect our confidence in the strength of our current acquisition pipeline as well as the various expense-savings measures achieved during Q1. For fiscal year 2021, we currently expect to report total AFFO per diluted share between $1.28 and $1.34, which represents an implied growth rate of 9.2% at the midpoint over our annualized Q4 2020 results of $1.20. This guidance is based on the following key assumptions: acquisition volume between $450 million and $550 million, disposition volume between $50 million and $100 million and total cash G&A between $32 million and $35 million.

As we discussed during our Q4 earnings call, our per share results for the year are sensitive to both the timing and amount of acquisition, disposition and capital markets activity that occur throughout the year. Finally, based on our performance to date and strong acquisition pipeline, we are pleased to announce that our board meeting held on April 30, our board declared a $0.255 distribution per common share and OP unit to holders of record as of June 30, payable on or before July 15. The $0.05 increase represents 2% growth in the quarterly distribution rate per share. We will continue to evaluate future increases to our dividend with our board as we continue to grow our earnings base and intend to target a long-term AFFO payout ratio of approximately 80%.

With that, I will turn it back over to Chris for closing remarks.

Chris Czarnecki -- Chief Executive Officer

Thanks, Ryan. Our team is excited to continue to demonstrate the strategic advantages of our diversified strategy, not only as it relates to risk mitigation but also in our ability to grow through accretive acquisitions. Q1 was another excellent example of the benefits of our approach to net lease investing and portfolio construction. I'm encouraged by our normalized operating profile exhibited during the first quarter and feel confident that we have positioned ourselves to create meaningful shareholder value in both the near and long term.

This concludes our prepared remarks. Thank you for your time and attention this afternoon. Operator, you can now open the line for questions.

Questions & Answers:

Operator

[Operator instructions] The first question comes from John Kim with BMO Capital Markets. Please go ahead.

John Kim -- BMO Capital Markets -- Analyst

Thanks. Good afternoon. There was an announced M&A transaction, which indicated in the industrial sector, sub-5 cap rate for net lease industrial assets. Can you just describe what you're seeing as far as assets that you're looking at in industrial where cap rates are today versus where they were maybe a few months ago?

Chris Czarnecki -- Chief Executive Officer

Sure. Thanks, John. Yeah, definitely saw that transaction and understood where pricing was for that. I would say for us, we are working on a number of industrial transactions.

And frankly, with our diversified approach, we're looking at a spectrum of cap rates and so probably just going more broadly for a second. Definitely are seeing and working on industrial acquisitions in the low 6% cap rate range. Still seeing some good opportunities with the respective term there, maybe the 10- to 15-year range and annual bumps being north of one and a half percent. Certainly, things have traded past that range as well for certain instances, and we were not as inclined to follow that just given the risk-reward trade-off there and whatnot.

And then maybe just to carry that through since pricing is always a popular discussion point. On the healthcare side, seen our opportunity set probably in the mid-6% cap rate zone. There having maybe a little bit of a shorter lease term, say, seven to 10, 11 years in that zone. Still strong annual rent escalations in that one and a half to 2% or greater zone.

And then on the select retail side, maybe mid- to upper 6s more term, longer term and correspondingly, potentially lower annual rent increases as well. So that's sort of the broad spectrum of what we're seeing. But for sure, the industrial segment would be in the lower end of the going-in cap rate range.

John Kim -- BMO Capital Markets -- Analyst

So when you heard about the transaction last night or this morning and then also discussions that in the market, they're seeing cap rates in the mid-4s. Does that surprise you?

Chris Czarnecki -- Chief Executive Officer

I would say there are certain transactions that we've seen go that low as well. I think it just depends on facts and circumstances and the tenant credit profile and a whole host of other factors in lease term as well. So I would probably characterize more of the transactions going in the 5% zone, but the mid four, I guess, it doesn't strike me as completely off the mark. At the same time, I think it depends on whether you're talking about investment-grade tenants or non-investment-grade tenants as well.

And to my knowledge, the FedEx component of that portfolio is heavily investment-grade, which could drive that. And then there's a pretty diversified mix of tenants underneath of the FedEx piece as well. So there's probably facts and circumstances that drove some of that pricing as well.

John Kim -- BMO Capital Markets -- Analyst

OK. And Chris, on the $206.5 million of assets you have under control, can you provide some more color on your typical closing rate when you have something under letters of intent or are under contract, the timing of closing as well as the asset mix?

Chris Czarnecki -- Chief Executive Officer

Sure. Maybe I'll start backwards going forward. I'd say the asset mix in that $206 million is a pretty nicely balanced mix between industrial, a couple of healthcare transactions and then a couple of select retail transactions as well. Probably the only thing that isn't in there is QSR assets right now.

So pretty, pretty healthy balance across the board there and obviously evolving by the day. I would characterize from a timing perspective, I'd say the vast majority of it or the bulk of it, at least we would expect to be Q2 closings subject, of course, to ongoing diligence. There are certain things that will be a Q3 acquisition within that number as well. But at the same time, we're also working on transactions and that could be Q2 closes that haven't been awarded yet as well.

So -- but bulk of it would still be anticipated for Q2, subject to our diligent efforts wrapping up. And then on the closing front, John, one of the things we talked a lot about in the early days of the IPO and I think still holds true today is we tend to overload our front-end efforts on diligence, and really wanting to stand behind all the LOIs and contracts we signed. So that doesn't mean we're shortchanging this process, but it probably means we have a pretty elevated closure rate around what we actually report out there. And I think that's why we were feeling confident in being able to talk to you about those numbers today.

John Kim -- BMO Capital Markets -- Analyst

OK, great. I just have one more question. During the quarter, you eliminated the CIO role at the company. How does that impact your investment decision process? And is there any impact to G&A because of this?

Chris Czarnecki -- Chief Executive Officer

Sure. So it hasn't really changed our investment process at all. The only thing that has -- is a little bit different is we've expanded our investment committee to include some of our senior vice presidents who are sector lead experts in -- on the AM and PM side and whatnot. We haven't made any corresponding adjustments to G&A.

We would anticipate continuing to look at adding some personnel to the investments team over the course of the year. And so didn't really make any adjustments on the G&A guidance there. At the same time, I'd also point out that our acquisitions team today is larger than when we did the IPO. We had added a few folks in the subsequent quarters.

So feel really good about where they're performing, and I think it shows through in the forward pipeline that I just talked about.

John Kim -- BMO Capital Markets -- Analyst

Great. Thank you.

Operator

The next question comes from Anthony Paolone of J.P. Morgan. Please go ahead.

Anthony Paolone -- J.P. Morgan -- Analyst

Great. Thank you. I may have missed this, but did you comment on the yields on your pipeline overall in terms of the $206 million? And also just contractual rent bumps, given the first quarter I think it was a little on the lighter side versus your portfolio average.

Chris Czarnecki -- Chief Executive Officer

I'm sorry, would you repeat the second piece? And Tony, I just couldn't hear you for one second.

Anthony Paolone -- J.P. Morgan -- Analyst

Yeah, the contractual bumps because I think in the first quarter, they were a little bit inside of where your portfolio average generally is.

Chris Czarnecki -- Chief Executive Officer

Yeah. I'm sorry. Thank you. So in terms of the yields for the under-control assets is kind of exactly what I said from an underwriting perspective.

So it's -- that's -- probably that 6% to 7% -- not probably, was the 6% to 7% cap rate range and having a weighting or an individual property type drive where some of those yields fall. I didn't -- we didn't talk about the specific weightings there. In terms of the annual rent bumps, I would say that there's a range that's fairly characteristic of the property types we're underwriting. But a number of the medical and industrial still being in the 2% zone.

One and a half to 2% zone, depending on each individual transaction.

Anthony Paolone -- J.P. Morgan -- Analyst

OK. And as you're out in the market looking at transactions, are there any particular types of bidders that you're going up against more frequently or not that are cutting you out of certain areas? Or any trends on that side in terms of who's showing up to transact?

Chris Czarnecki -- Chief Executive Officer

Not dramatically different than prior quarters. I'd say it again, because we are so diversified in the spectrum of opportunities, really, it varies by asset class. Some of the more retail-oriented peers in the space would certainly be interested in some of the select retail assets we're doing. And we have seen them in the last six months or so, being competitors.

On the medical side or the healthcare side, it varies, again, having a more niche focus there. We tend to see more private buyers and a little bit more private equity-oriented buyer there. And then on the industrial side, again, you see certain net lease REITs being active there, and they've stayed fairly consistent and a few more institutional buyers as well. So I don't think the competition landscape has changed.

I think it just varies by product type and we've seen that hang pretty consistently over the last quarter.

Anthony Paolone -- J.P. Morgan -- Analyst

OK. And last question, just on the Art Van boxes out, I think you mentioned a vacant -- or the occupancy pickup related to maybe healthcare in the quarter. So does that lead you still with some Art Van to backfill? Or what's the update there?

Chris Czarnecki -- Chief Executive Officer

Sort of yes and no. So we highlighted the healthcare BowX Acquisition because it was a really nice tie together with growth continuing to grow with that tenant as they look at build-to-suit opportunities plus them leasing some of our space. We did lease two Art Van boxes during the quarter as well, which accounted for a good -- which accounted for the other two sites releasing this quarter. And so then that leaves us with just fairly -- with two very small assets left.

I think it's around 10% of the original ABR portfolio -- ABR of the Art Van portfolio, and we're even looking at selling or leasing those. So more progress on that front. So eight of 10 have been released at this point.

Anthony Paolone -- J.P. Morgan -- Analyst

Great. Thank you.

Chris Czarnecki -- Chief Executive Officer

No problem. Thank you.

Operator

Our next question comes from Caitlin Burrows with Goldman Sachs. Please go ahead.

Caitlin Burrows -- Goldman Sachs -- Analyst

Hi. Good afternoon. I was wondering maybe if you could just go through -- you talked about the expected cap rates for the different categories going forward. But even without industrial, the cap rate in 1Q was relatively lower.

So just wondering if you could go through kind of what contributed to the cap rates of acquisitions in the first quarter and just the expectation for that to pick up going forward.

Chris Czarnecki -- Chief Executive Officer

Sure. Yes, so I think, again, fairly -- it's always of facts and circumstances relative to any acquisition we do. And so trying to give some degree of general framework is what I was searching for there, Caitlin. During the quarter, there was a pretty good band of cap rates as well.

I think one of the lower cap rate transactions we did was -- the trade-off was having a new 20-year master lease with the leading carwash operator. And so that maybe took that cap rate a little bit lower than you might have expected for a select retail asset. And so that was a component of it. But otherwise, I think most -- the entire quarter was fairly well boxed in the mid-6 zone.

So...

Caitlin Burrows -- Goldman Sachs -- Analyst

Got it. OK. And then for the transactions in the quarter, I think you said that they were four or five. Just wondering if you could go through how those were sourced mix of existing tenants or otherwise.

Chris Czarnecki -- Chief Executive Officer

Yes, absolutely. So the healthcare deal, I highlighted, which had the releasing and the acquisition during the quarter was obviously an existing tenant that we've known and have done repeat transactions with. One of the retail opportunities was through regular way brokerage. And then one of the other select retailers that had a good chunk of dollar stores in it was with a developer that we have worked with on multiple transactions over the years as well.

So that was a repeat developer relationship there.

Caitlin Burrows -- Goldman Sachs -- Analyst

Got it. OK. And then maybe on -- yeah?

Chris Czarnecki -- Chief Executive Officer

No. I was going to say just the take away is the way I think about it is that our existing tenant base, our existing portfolio, the relationships on either the developer or direct side, we have, plus the brokerage network are all important to us, and we're trying to pull from each one of those and it certainly ebbs and flows at different times, but that's the principal set of deal sourcing we're looking at.

Caitlin Burrows -- Goldman Sachs -- Analyst

Yeah, that makes sense. And then maybe moving on to the dividend increase. It was a little sooner than we were expecting. So just wondering if you could go through the decision to increase the dividend now versus waiting a little bit and what factors were taken into consideration?

Chris Czarnecki -- Chief Executive Officer

Sure. So absolutely, I think and Ryan is welcome to jump in here with me as well. We're obviously looking to be in the 80% zone for a payout ratio component. Considerations that we took through at the board discussion were obviously the performance of the portfolio and being fairly -- or completely back to normal at this point in pretty much every circumstance and seeing good collections trends and not having any tenant issues to speak of.

Certainly, the acquisition pace increasing and the confidence we had in where the pipeline was going. And hopefully, you saw that through the discussions we've had today so far, also factoring in the term loan savings that Ryan highlighted, that wasn't in our initial guidance, and so wanted to -- enjoying some significant benefits from that. And so all those factors together were -- gave us the confidence and felt like it was the right time to make a first adjustment upward.

Operator

The next question comes from Chris Lucas with Capital One. Please go ahead.

Chris Lucas -- Capital One Securities -- Analyst

Hey. Just a quick one for me. Ryan, on the guidance you provided for us, with some of the assumptions in the fourth-quarter earnings call, you had noted that G&A would be between $32 million and $35 million. I guess I'm just trying to make sure that I understand how that number relates to the first-quarter result, which included severance and then you had some accelerated vesting as well.

So it came in a bit hot. And just curious as should we be thinking about the aggregate number? Or should we be adjusting that for the sort of onetime items in the first quarter to get to that sort of $32 million to $35 million number?

Ryan Albano -- Chief Financial Officer

Sure. The way that I'm thinking about it right now, if I look at that $32 million to $34 million, I'd say that -- I think I've also stated before, say, call it about $8 million, give or take, of cash G&A on a run rate basis. On a comparable basis, I'd call this quarter about $7.6 million. And the way that I'm thinking about that is the $10.1 million of total G&A adjusting out for some of the onetime-related items on severance and then some acceleration of stock-based comp associated with that same departure.

And then as well as our regular routine stock-based comp being adjusted out, brings you basically from the $10.6 million down to the $7.6 million, which is really the comparable number to our guidance.

Chris Lucas -- Capital One Securities -- Analyst

Great. That's all I have. Thank you.

Operator

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

Michael Gorman -- BTIG -- Analyst

Yeah. Thanks. Good afternoon. Chris, sorry if I missed it, but could you just talk a little bit about the office portfolio and how you're thinking about it strategically? And what kind of deal flow and competition you're seeing in the marketplace.

Obviously, with the announced transaction activity last week, there's going to be a strategic spin-off dedicated to the office space. We've seen one or two peers talk about disposing of their office portfolio. So I'm interested how you're thinking about it, and what kind of investment opportunities you're seeing in the market right now.

Chris Czarnecki -- Chief Executive Officer

Sure. I think first and foremost, we've been pretty hard on -- on a hard pause with respect to office. We continue to monitor the existing portfolio, which performance-wise has been strong. And we've seen a diversity of utilization among the tenants as they continue to think through their return to work component, and it's a pretty active dialogue with the tenant base there.

And I've said on a couple of different calls before, the term and the credit and the duration of the term we have gives us a lot of opportunity to be patient and thoughtful. So not actively pursuing any new office acquisitions at this moment. It's certainly possible that we could see one in a diversified portfolio or something, so I don't want to draw a completely bright line there for you. For us, there hasn't been at least from a pipeline perspective, a huge amount of new office opportunities that have -- would have fit our traditional box.

But I've certainly followed the spin-off, and I think we're just in a wait and see and continue to engage with our tenant base before making any further pronouncements one way or the other there. And that probably persists for another quarter or so it would be my guess.

Michael Gorman -- BTIG -- Analyst

OK, great. Thanks. That's helpful.

Operator

The next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Ronald Kamdem -- Morgan Stanley -- Analyst

Hey. Just the first one I had was just when you're taking a step back and looking at the -- having the benefit of being involved in different asset classes, where are sort of the best risk-adjusted return for the incremental dollar in your mind today? And maybe how has that changed for versus six to 12 months ago? So said another way, is there a subsector or an industry or anywhere that you really see an opportunity today versus, call it, six to 12 months ago?

Chris Czarnecki -- Chief Executive Officer

Yeah, absolutely. I think the spectrum I walked through to me has some interesting puts and takes to it. So while you might be giving up or having a slightly lower going-in industrial cap rate, you are still able to acquire some assets that are long term and strategic in nature, have a good long-term lease and have good annual bumps associated with them. And just maybe to contrast it on the spectrum, feel good about the investments we're making on the select retail side with a little bit of a higher cap rate and again, a long term, but maybe giving up a little bit on the annual bumps.

So it's just weighing those things against each other and thinking about where we're most effective. So to us, we're honestly balancing each one of those and then against individual tenant financial considerations and how strong of a tenant they are and how -- what's their profile on the background. So I think you've seen the -- or what we're trying to communicate here is that we have the benefit to move among these asset classes as the conditions change. And so we've been doing a little bit of that during the first quarter with healthcare, with a little bit more healthcare and a little bit more select retail, even though the portfolio is -- or excuse me, the pipeline is diversified going into Q2.

We are still continuing to look at healthcare and some of those select retail opportunities because we are seeing a nice complement to what's going on in the industrial side. And to us, that sort of the bigger picture is being able to flex between those situations and be thoughtful on all of them.

Ronald Kamdem -- Morgan Stanley -- Analyst

Great. And if I could just follow up on sort of the healthcare space, given sort of it's an asset class where a lot of your competitors don't have a lot of exposure to. Maybe can you just talk about, when you take a step back and looking at sort of the healthcare opportunity, why do you think that most of your competitors have not looked at it? Is it just you guys are niche? You guys have built the platform? What's the opportunity there that you think others may be missing?

Chris Czarnecki -- Chief Executive Officer

Yeah. No, it's an interesting question. Thank you. I think it's been something that we've been in for, goodness, 15 years now.

It's even before I got to the company. And to me, it's a spot where we have been able to carve out a niche that has been really differentiated, and we have been following it for a long time. For us, I think it's such a significant part of the economy that it only continues to grow and has continued to provide new product. And frankly, the interplay between hospital systems and some of the larger regional physicians groups have also been pretty dynamic, and we've been able to acquire on both of those.

I think it does require some expertise and some getting up the learning curve, and that's a never-ending process for us as we continue to think about growing our team and using our experience there. And frankly, we took a step -- another step forward to continue to expand our views on that by asking Denise to join the board. She has a great background with 30 years in the Henry Ford Health System. And her views on real estate healthcare is -- has been aligned with what we've thought of from the space and fascinating to think about where it could be going as well.

So I think it's been a really good differentiator for us and the triple-net lease model works as well as it does in other components there. So we continue to favor it and want to do more there.

Ronald Kamdem -- Morgan Stanley -- Analyst

Great. That's all my questions. Thank you.

Chris Czarnecki -- Chief Executive Officer

Thank you, Ron.

Operator

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

Chris Czarnecki -- Chief Executive Officer

Thank you all for joining us today. We are, again, continuing to be very grateful for all of your support and are appreciative for all of our investors. We wish you an excellent summer. We're very excited about our pipeline.

And we'll be excited to be back in front of you come August with the Q2 call and to give you the next update along the way. Have a great afternoon.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Mike Caruso -- Senior Vice President of Corporate Finance and Investor Relations

Chris Czarnecki -- Chief Executive Officer

Ryan Albano -- Chief Financial Officer

John Kim -- BMO Capital Markets -- Analyst

Anthony Paolone -- J.P. Morgan -- Analyst

Caitlin Burrows -- Goldman Sachs -- Analyst

Chris Lucas -- Capital One Securities -- Analyst

Michael Gorman -- BTIG -- Analyst

Ronald Kamdem -- Morgan Stanley -- Analyst

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