Hello, and welcome to Broadstone Net Lease's third quarter 2022 earnings conference call. My name is Drew, and I'll be coordinating your call today. Please note that today's call is also being recorded. I will now turn the call over to Michael Caruso, Senior Vice President of Corporate Finance and Investor Relations at Broadstone. Please go ahead.
Thank you, operator, and thank you everyone for joining us today for Broadstone Net Lease's third quarter 2022 earnings call. On today's call, you will hear from our Chief Executive Officer, Chris Czarnecki, our Chief Financial Officer, Ryan Albano, and our Chief Operating Officer, John Moragne, will be available for Q&A. Before we begin, I would like to remind everyone that the following presentation contains 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 31, 2021, 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 Chief Executive Officer, Chris Czarnecki.
Thank you, Mike, and good morning, everyone. During the third quarter, we continued to carefully navigate the current economic backdrop and dynamic capital markets environment with a keen focus on prudent capital allocation and disciplined selectivity. As we announced in our business update following the completion of the quarter, the BNL portfolio continues to perform well, with 100% of base rents collected during Q3 and minimal vacancies. In addition, we continued to source opportunities to accretively invest capital during the quarter, despite a challenging market backdrop. Proactive execution in the capital markets during the first three quarters of the year has positioned us to close out 2022 on a strong footing, delivering another year of consistent same-store portfolio performance and accretive external growth, both of which have translated into strong earnings growth.
Given heightened levels of economic uncertainty as we approach a new calendar year, we remain focused on prudent capital allocation during this period of public and private net lease market dislocation. Conservative balance sheet management, disciplined underwriting, and proactive portfolio management are core BNL competencies, and they will continue to serve as key pillars to our success as we navigate current and future economic uncertainty. As of September 30, 2022, all but three of our 790 properties were subject to a lease, and our properties were occupied by 218 different commercial tenants across 56 industries, with no single tenant accounting for more than 2.4% of ABR. As of quarter end, the portfolio's weighted average annual rent escalation sits at 2%, and the weighted average remaining lease term was 10.7 years.
As I've mentioned many times in the past, diversification serves as a defensive hedge against any singular tenant credit event. With some of the lowest levels of tenant concentrations in the net lease space, our highly diversified operating model provides us the flexibility to patiently work through any one-off tenant matters as we look to preserve and protect long-term shareholder value. For example, following the completion of the third quarter, we successfully re-leased a healthcare property located in Arizona to an experienced hospital operator under a new 21-year lease with an effective GAAP yield of 7.5% over the course of the term. At only 1.2% of ABR, we were afforded the ability to patiently pursue a positive long-term solution without feeling pressured to backfill the asset as quickly as possible.
We appreciate that net lease investing is not a zero-loss business, and when occasionally taking calculated risks, situations can arise that require a carefully crafted solution. Our industry-leading diversification continues to provide risk-mitigating benefits and allows us to patiently pursue the best outcome for our shareholders during these one-off situations. On an external growth front, we invested approximately $205 million in 28 properties at a weighted average initial cash GAAP rate of 6.5% during the third quarter. The leases for new acquisitions include a strong weighted average lease term of approximately 21 years and solid 2% annual rent escalations, translating into a weighted average GAAP cap rate of 7.9%.
These investments were predominantly weighted towards industrial opportunities at 86% of the quarter's volume, with the remaining investment activity spanning restaurants at 6%, healthcare at 5%, and retail at 3%. Proactive capital markets execution year to date has allowed us to lock in the cost of capital that supports accretive spread investing in the current environment. We remain focused on selectively deploying our dry powder on accretive investment opportunities in our pipeline. Since quarter end, we've closed an additional $283 million of transactions and currently have $22 million of acquisitions under control, which we define as having an executed contract or letter of intent.
With approximately $902 million of acquisitions either closed or under control year to date, we are reaffirming our 2022 full year acquisition guidance range of $900 million-$1 billion, which we previously revised upward in our business update in early October. This revised acquisition guidance range reflects our cautious external growth outlook for the remainder of the fourth quarter, given the volatility in the capital markets and resulting pressure on investment spreads given prevailing market cap rates. While we recognize that the current capital market environment requires us to be highly selective in the near term, I'm proud of all that we've accomplished thus far in 2022 and where we are tracking to end the year from an external growth perspective.
Changes in cost of capital for all public REITs without a commensurate adjustment in private asset values has forced many to take a more measured approach in the near term. We, like many of our peers, will continue to focus on prudent capital allocation during this period of public and private market dislocation. However, we believe our broadly diversified buybox provides us the unique opportunity to allocate capital to property types where cap rates have or will continue to expand at a more accelerated pace due to sector-specific supply and demand characteristics. I'm encouraged by the cap rate expansion we are currently seeing in our pipeline, and expect to see further movement in the near term as seller pricing expectations reset in the wake of changes in buyer cost of capital.
Before passing the call to Ryan, I want to take a few moments to provide additional detail on several transactions completed during and subsequent to the third quarter. During Q3, we acquired 19 industrial properties in 3 separate transactions for $175 million. The leases include weighted average annual rent escalations of 2.1% and a weighted average 22-year lease term. In addition, we invested revenue generating CapEx in 1 existing industrial property during the quarter at an initial yield of 8.1%. The largest acquisition completed during Q3 was an 11-property sale and leaseback transaction with a well-established tenant in the food production and distribution space. We continue to remain bullish on the space given its resiliency during challenging economic environments, and we're pleased to grow our exposure with the acquisition of this high-quality portfolio.
In addition, following the completion of the quarter, we successfully closed the largest sale and leaseback transaction in BNL's history. We acquired seven assets as part of a directly sourced transaction with a food manufacturer that has a very strong operating history. We continue to see compelling opportunities in the industrial space as many levered buyers remain on the sideline in light of rising debt costs. Finally, during the quarter, we continued to acquire granular investments across both non-discretionary retail and restaurant spaces. These transactions account for approximately $19.4 million, with an average asset size of $2.8 million. We continue to view these smaller, often one-off investments as an effective complement to our larger sourcing efforts. With that, I'll now turn the call over to Ryan.
Thank you, Chris, and good morning, everyone. I am pleased to report another solid quarter of earnings and provide additional details with regard to our capital markets execution during the quarter and balance sheet positioning as we approach year-end. As Chris stated in his opening remarks, inflation, rising interest rates, and resulting capital markets volatility has placed pressure on cost of capital for all publicly traded REITs. Year to date, we have taken an opportunistic approach to raising both debt and equity via many of the capital markets tools available to us. This approach has allowed us to proactively lock in an attractive cost of capital that complements our evolving pipeline of acquisition opportunities.
As we highlighted during our call last quarter, we entered into two new unsecured bank term loans in August, including a $200 million five-year term loan that matures in 2027, and a $300 million seven-year term loan that matures in 2029. We currently have no major debt maturities until 2026. Given the current conditions in the investment-grade bond market, I am pleased with the decision to extend our maturity profile at attractive relative pricing we were able to achieve during the summer. In addition, we entered into interest rate swaps with a total notional value of $260 million to fix the SOFR component of the borrowing rate at a weighted average fixed interest rate of 2.59% until August of 2029.
With the addition of these interest rate swaps, our unsecured bank term loans remain entirely hedged. During the third quarter, we opportunistically raised net proceeds of $20.3 million on our ATM at a weighted average sale price of $21.44. There was approximately $145.4 million of capacity remaining on our ATM as of quarter end. In addition, we completed a forward settled public offering of 13 million shares of common stock at a price of $21.35 per share in August. As of September 30, 2022, we anticipate that the forward sale agreement will provide net proceeds of approximately $270.7 million, resulting in a pro forma net debt to annualized adjusted EBITDAre of 4.8 times.
We have not settled any part of the forward sale agreement as of quarter end. This opportunistic approach to capital raise has provided the dry powder to fuel accretive acquisitions during the second half of the year and positions us for disciplined growth in the near term. We remain committed to maintaining a conservative leverage profile with ample liquidity, especially given the current macroeconomic uncertainty. As of quarter end, we had approximately $1.1 billion of liquidity, which includes $76 million of cash on hand, $780 million of availability on our revolver, and approximately $271 million of outstanding forward equity. Now turning to our financial results.
During the quarter, we generated AFFO of $63.4 million or $0.35 per share, which represents approximately 6.1% growth over per share results from the same period last year. AFFO per share was flat quarter-over-quarter when compared to Q2, which is largely driven by revenue generated from Q2 acquisitions, offset by a full quarter share count weighting for equity raised during late Q2. Although 92.5% of our total debt outstanding is fixed, rising rates have caused pressure in the form of increased interest expense on our revolving line of credit. During the quarter, SOFR increased 136 basis points. We expect late Q3 and early Q4 acquisitions will serve as a tailwind to earnings in the final quarter of the year.
We incurred $9.9 million of total general and administrative expenses during Q3, which includes $8.4 million of cash expenses, keeping us on track to fall within our cash G&A guidance range. For fiscal year 2022, we are reaffirming our AFFO guidance range of $1.38-$1.40 per diluted share, which represents an implied growth rate of 6.1% at the midpoint over our 2021 results of $1.31 per share. This guidance range is based on the following key assumptions, which remain unchanged since our October 4 press release. Acquisition volume between $900 million and $1 billion. Disposition volume between $50 million and $75 million. Total cash G&A between $31 million and $33 million.
As a reminder, 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, at our board meeting held on October 27, our directors declared a $0.275 dividend per common share and OP Unit. This represents a 1.9% increase over the October dividend. We will continue to evaluate additional future increases to our dividend with our board on a quarterly basis. With that, I'll turn it back over to Chris for closing remarks.
Thank you, Ryan. The team at BNL is immensely proud of all that has been accomplished this year on behalf of our shareholders. We continue to believe that our portfolio is purposely constructed, highly diversified, and comprised of tenants that are positioned to perform during difficult economic conditions. We remain thoughtful in capital allocation decisions during this period of dislocation between private and public market valuations, and seek to position ourselves favorably as cap rates continue to evolve in the coming quarters. Operator, we can now open the line for questions.
Thank you. We will now start today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question today is from Ki Bin Kim from Truist. Please go ahead.
Thanks. Good morning. Could you talk about the new operator for the Santa Cruz Hospital? Maybe some color on the economics of the deal versus what it was previously. Is there any type of mechanism where this new operator might need a loan from you guys? I'm not sure what kind of cash reserve they have coming in to operate this hospital. Thank you.
Sure, Ki Bin. Happy to talk about the new operator. The operator is a group and a management team that has had deep experience in hospital turnarounds and reboots. They've had 40-50 years in the space collectively together, and is one that we're obviously very excited about and think that they're going to do some really great things with the property. They currently are operating one hospital out of California. We expect they'll have another one in their portfolio by the end of the year and a view towards adding several more in the coming years as well. They're not private equity backed. They're private capital and private investors who have been through this before.
They were very excited about being able to step into Santa Cruz and be able to take the property and begin to deliver services to the community again. That's their general background. They are based in the Arizona area. That's also another key positive and one that is a positive for us as well. Ryan, do you want to talk about the economics associated with the lease? I should be clear. The lease did not have any TI associated with it from us or anything along those lines, and they're actually actively looking at potentially reconfiguring the facility to get more capacity out of it and thinking about that through their own dollars, not through ours. Go ahead, Ryan.
Sure. Hi, Ki Bin. In terms of the new lease and some specifics around it, you know, to your last question, we don't expect to provide any loan to them in terms of ramp-up time. We were very careful and thoughtful in our structuring of the new lease, and you'll see that as I sort of lay out the specifics. The new lease is a 21-year lease with an effective GAAP yield of 7.5% over the lease term. From a specifics perspective, we have a period of free rent that's variable in duration that's built into the lease. The timing of that is dependent on the new entity's ability to re-license the hospital and achieve Medicare enrollment.
That period could be up to a year or through August of next year or shorter, just depending on that timeframe. After that period, there is a period of scaling rent as they begin to scale operations. Assume that they use that full rent period. It would run from September of 2023 through the end of 2024, and the rent would scale and increase three times over that period. Eventually achieving what we consider to be stabilized rent beginning January 2025, which would represent a 6.7% yield on our initial investment or 90% of the prior rent.
From there, it would escalate annually at 2%, and that results in the overall effective yield over the life of the lease of 7.5% that I referenced earlier.
Okay, great. When you look at your tenant list, are there any other operators that might have a similar situation or what's on your watch list in general?
Sure. The heightened credit watch list today, Ki Bin Kim, is comprised of a handful of names. I'd say none of them are thematic. They're individual tenant names. Within that, the Santa Cruz facility, which we obviously keep on the watch list and continue to monitor as they go through their ramp period, makes up the bulk of it. You know, most of the other tenant matters are simply bespoke to things that have been on the watch list for a long time and don't have any specifics tied to your reference to Santa Cruz.
Those tenants on the watch list, do they rise up to the point of, you know, let's say being over 1% of rent, or are you kind of smaller situations?
They're all very small situations of 0.2, 0.3, kind of. Again, a handful of tenants, so relatively small and, you know, they've continued to pay rent and we continue to monitor them for the long term.
Okay. Thank you.
Yep.
Our next question comes from Chris Lucas from Capital One Securities. Your line is now open.
Hey, good morning, guys. Just, Chris, just a couple follow-ups on the hospital situation. Did it contribute anything to third quarter in terms of cash rent?
We had, when we went and structured this, Chris, we had placed a letter of credit in part of the initial transaction. When we thought about the risk profile of this relative to a more traditional hospital system, it was one of the key components that we thought about from a structuring perspective. We ended up having a one-year letter of credit that was put in place at the time of the transaction. When the tenant hit some stumbles in the first quarter, we switched them to cash-based accounting and ultimately wrote off the accrued rental income.
Towards the end of the second quarter, we drew on the letter of credit, and then we had the third quarter coming through as the three quarters were covered by the letter of credit, and then the remainder is ours to keep and will ultimately come through as other income during the fourth quarter. The lease remained in place for the entire time, which is a key component, especially because the new operator wanted to acquire the entity to be able to effectuate and obtain the medical records, the FF&E and all of the equipment in the facility. The lease maintained through that time period. Then ultimately, the new lease kicked in just after the quarter was over.
Okay. I guess one of the follow-up questions is just as it relates to different lines of business, one of the sort of painful processes that still remains is the inability for any, you know, many businesses to find workers and wage inflation. How is that impacting your perspective on underwriting various lines of business?
Yeah. You know, that's a great question, Chris. I think that was obviously a pain point for Santa Cruz, to be perfectly honest. That was one of the things that was a struggle for them over the winter months, was having the right level of staffing. I think to your question, it probably impacts tenants that operate in lower margin spaces more than anything. We haven't done as much over the last two quarters in the restaurant retail space. There's obviously been a little bit of a lower margin business there. I think that's certainly something that if we were to do future acquisitions in the coming quarters, one that we'd be paying close attention to and trying to think through the cost and impact of labor on an individual tenant's margins there.
You know, for us on the industrial side, it's a question that comes up during most investment committees as well, relative to labor sourcing, labor availability, for some of those specific tenants that we're underwriting. Their margins are a little bit wider, and they've been able to absorb more of cost associated with higher labor. It's fundamental in every component in every transaction we're looking at. I think it probably shows through most in those lower margin businesses such as the restaurant and retail space.
Okay. Just, you mentioned industrial. I think when we met back in June at NAREIT, you had talked about the fact that industrial cap rates were, what, you know, gapping out as it related to single tenant, you know, longer duration leases. You guys executed on that in the third quarter, second quarter and third quarter. Have you seen the cap rate gap out further, or has it stalled at sort of, you know, sort of, you know, the levels that you've been executing on, you know, here over the last several months?
Sure. I'll let John do it, but I'd continue on your theme that we've executed on in the fourth quarter as well with the food processing facilities we've done as well. John, take that and jump in.
Sure. Hey, Chris. You're exactly right. That's the place where we've seen the most cap rate expansion. It certainly hasn't stalled. I don't know if it's moving at the same momentum as it was when things first started to move, but you certainly are seeing that reflected in the focus of our acquisitions in Q2, Q3, and as Chris indicated, in Q4 as well, which I think really goes to highlight the benefit of our strategy, where we do have a broader aperture than most, you know, a multi-class diversified acquisition strategy that allows us to pivot very quickly in markets like this to focus on the place where we see the best opportunity on a risk-adjusted basis. That's been industrial for us since Q1, and that will continue to be the focus.
This is my last question. Are you seeing any other lines of business that you have, you know, underwritten or invested in, show comparable or are starting to show that kind of cap rate adjustment that you saw so quickly with the industrial stuff?
Certainly in sort of non-IG retail and some casual dining restaurants, not really in QSR. Not enough in terms of the overall volume that we would shift away from the focus that we've had on industrial at this point. That being said, they have to move. At this point, you know, as we think about the overall macro environment, you know, when you're facing down impaired cost of capitals for a whole host of people, we're starting to hear of a slowing in the 1031 market, although not at the level that you would see a full drop off in that space. Continuing rising interest rates, you know, looming fears of recession and everything else, you're just at a point where cap rates have to move.
Our disciplined, prudent approach to allocating capital allows us to focus on those places where we see the best opportunities, which right now is industrial. As those things begin to move, since they're going to have to, given everything that's happening, we'll evaluate them apace and on a case-by-case basis and move to allocate to those spaces, as they catch up to what's happening elsewhere.
Great. Thank you. That's what I had. That's all I had this morning.
Thanks, Chris.
Our next question comes from Ronald Kamdem from Morgan Stanley. Please go ahead.
Hey, just hit on the hospital just to make sure I understand. It sounds like the rent is 90% of previous, no capital dollars are going into it from your end, and, you know, the operator sort of goes into it, which makes sense. Then you said something's coming through in 4Q on the other income line. Can you just clarify what that was? Sorry.
Oh, sure. We had a year's letter of credit run, and the sum of the portion of it during the third quarter and June, I believe, was applied to rents while we were negotiating the transaction and the new operator. The residual of that, the rest of it, is now treated as other income and will be backed out of AFFO next quarter 'cause it's non-recurring.
Okay. Got it. Okay. Makes sense.
Yep.
All right. Just moving on, just want to talk a little bit about sort of funding. You know, I think number one, you know, there's the $500 million of unsecured term loans. You know, I see the $260 million that was swapped. Is the other sort of, I guess, $240 also swapped? Or I guess I'm trying to understand when you said it's entirely hedged, which, what am I missing there?
Yep. No, we'll let Ryan jump in there.
Sure. We're entirely swapped out on all of our unsecured term loans at this point. We think about it as a pool of swaps and a pool of unsecured debt. As we refinance some of that debt, there are already existing swaps in place. The incremental amount we added was for incremental debt needs that weren't already swapped out. Upon the completion of that, our unsecured term loans were entirely swapped out.
Got it. Where does that put you on a fixed rate, just ballpark with those swaps factored in?
Yep. At quarter end, our fixed rate debt was 92.5% of total debt.
Got it. Okay, that's helpful. Obviously the forward is, I mean, it seems like you guys do a lot of really good transactions and locked in really good rates, which should fund, you know, most of 2022. As you're sort of thinking about 2023, right, and the stock is, you know, below $17, you did the forward to 2023. Should we just expect you guys to stay on the sidelines in 2023 until the stock comes back? How are you guys thinking about funding that business, just given, you know, obviously really good transactions for 2022, but, you know, incremental transaction may be a little bit more tricky, right?
Sure. Yeah. You know, as we think about 2023, we're very pleased with the proactive execution on the capital markets front over the last, you know, quarter and frankly, the year as a whole. It really set us up to be able to continue to invest capital. As we think about moving through the fourth quarter, we have $20-ish million under contract right now. We're moderating a bit as we watch this very dynamic market change with our expectation that cap rates expand. We're sitting with a decent amount of dry powder to be able to work our way into 2023. As I think about it at the quarter end, our pro forma leverage with the forward equity agreement brings us to a 4.8x.
That certainly gives us some runway at this point to make our way into 2023 and continue to assess the situation.
Would you, I mean, issue equity here in 2023, I guess is what I'm trying to figure out?
Well, luckily, I don't have to make that decision today given the runway that we have. You know, I think where we sit today, that's sort of looking at one variable, right? There are a few variables, and John highlighted some of it before with cap rates moving and the expectation that they continue to move. It's really a matter of looking at our pipeline of opportunities. Do we think that they are priced appropriately in the market and want to execute on them versus where our share price is? Other levers that we think about is our existing portfolio and positive capital recycling. We have, you know, a handful of properties that I think we've certainly given a good look at that make more sense than raising the incremental equity dollar today.
However, again, happy we don't need to make that decision right now.
Got it. Helpful. Thanks so much.
Our next question comes from Michael Gorman from BTIG. Your line is now open.
Yeah, thanks. Good morning. Chris, I was wondering if you could just go back, and I'm sorry if I missed it, but as you talked about the potential for cap rates moving in the market and kind of where you're seeing things trend. I was wondering if you could talk across your different sourcing channels. You know, we've heard some discussions that maybe those cracks are starting to appear first on the merchant builder side of things. But just wondering, with the lending market tightening up, are you starting to see current owners start to move their pricing expectations as well? Or are you seeing different movements across where the sellers are coming from?
Sure. I'll start, and then John can also jump in too, since he's on the ground with this. You know, I'd say where we are seeing cap rate movement first is probably more on the sophisticated owner side, as you sort of alluded to. Folks that recognize that the debt markets for individual transactions are probably not very attractive relative to other options. There might even be negative leverage on certain property types today relative to that. Then also an appreciation that the public markets certainly adjusted much faster than the private markets do. When I always think about the lag in cap rates, it's funny, this quarter results includes a transaction that we talked about on the call that we picked up in March.
We closed in July, and here we are talking about it in November, and it's in that 6.5% blended yield for the quarter. There is a slower recognition that cap rates do take a while to flow through. We've been pretty pleased by the movement we've seen as of late. I would say again, the more sophisticated folks have been the ones who have accepted the new reality and understand it probably more than individual more individualized owners. On the builder front, I don't know, maybe John has some specific thoughts there that might be helpful.
Well, the only other thing I'd add, I think, would be one of the benefits of a market like this is all the effort that we put into proactive tenant relationship strategies leading up to it. Where, you know, as our tenants are thinking about funding sources, they are increasingly coming to us to talk. In a low interest rate environment, that sometimes can be more difficult. Now we're in a situation where our tenants are trying to think more creatively. They're not liking the terms that they're seeing on potential financing opportunities as they're looking to continue to expand. That presents us with something that we get really excited about, and we've seen a real uptick in it.
In terms of where people are taking advantage of sort of the dislocation in some of the rates that we're seeing out there, as well as where they're more open to cap rate expansion. You know, those existing relationships with our tenants, those direct deals, that's reflective in, you know, the large majority of the deals that we closed at the end of Q3, beginning of Q4, as well as a growing pipeline of development opportunities with our existing tenants.
Great. That's helpful. Maybe just taking one branch off of your discussion about the lease restructure or the new lease at Santa Cruz. Chris, you mentioned kind of right at the top that the new tenant isn't private equity backed. I'm just curious if you could speak to, within the existing portfolio, kind of what's the percentage of your tenant base that is private equity backed? You know, in the market right now, assuming you could get there on pricing, would you be comfortable doing more private equity backed deals? Is that more of a concern with the potential economic slowdown in 2023?
Sure. The answer to your first question is it's about a third that are PE backed in the portfolio, which has been relatively consistent, you know, over time, at least in the last couple of years. I think the answer to your question about more or less PE deals. Again, as Ryan sort of alluded to, it's a lot of variables go into it. One is certainly and more importantly is the business line, what business they're in, how does that stack up relative to the other defensive opportunities we have in our portfolio. Some of the food processing transactions we've mentioned today, one of them has a sponsor behind it.
Given the defensive nature of what they do, especially in this economic environment, you know, gives us a lot of comfort that the business is going to be very successful during what is theoretically a more difficult time. If you think about it from there, it's the quality of the management team that's in place. Obviously capital structure and where any of the tenants have a pending debt maturity profile. I think we talked about last time, Mike, a heavy focus on where do we see their capital structure break from a downside perspective. You know, where does the fixed charge coverage get into trouble?
How much of a sales decline would they need or margin compression would they need to, you know, see before they really got into financing type issues. Finally, it's the quality of the real estate we're acquiring as well. I know you weren't implying this as binary as PE yes or no, but I think those are all the things that we look at when assessing not only any tenant, but another private equity backed investment.
Okay, great. Thanks for the time, guys.
Thanks, Mike.
Our next question comes from John P. Kim from BMO Capital Markets. Please go ahead.
Thanks. Good morning. You've already been very active in acquisitions this quarter. But Chris, you've noted the disconnect between transaction market and the capital markets. What's a good pace going forward as far as quarterly investment activity?
I think that's, you know, it's a good question, John. I think it's always one that will be variable, and we're gonna take it quarter by quarter. You can see a lot of the activity we've closed to date in the fourth quarter, we closed in October and, you know, or through yesterday even. For us, from that perspective, relative to what's under control at just the $20 million is reflective of a little bit of the moderation we're seeing in thinking that through. For us, we're gonna continue that thoughtful, disciplined pace going into next year. I don't know that it's, you know, completely to put a number on is exactly the way I'd go today.
We certainly have capacity, as Ryan outlined, to continue to grow. We're liking the opportunities we're seeing in the market north of the 7 cap today. That's dynamic, but it's gonna be a little bit of a wait and see, and we'll continue to, you know, provide more information in February on that front, but would not expect that we're going to be out of the transaction market or anything of that nature.
Can you remind us if there's typically seasonality in your acquisition activity? I haven't noticed it this year, but just looking back at it.
When you said seasonality, John, is that? I just wanna make sure I heard you.
Yeah. That's right.
Yes and no. I'd say this year we've been far more consistent, and as we've continued to grow the team and continue to use our diversified strategy, we've done a much more consistent job of having the similar levels of transaction activity each quarter. I'd say historically, fourth quarter is a busier time when there was certain tax motivated sellers and year-end transactions get closed. I think from our view, we're far more consistent quarter over quarter, but there can be certain spikes in Q4 that we see.
On the industrial acquisitions this quarter, I think you mentioned the annual escalators at 2.1%. I was wondering if there were any discussions with the tenant of increasing those annual rent increases, just given the inflationary environment.
Sure. I'll let John jump in there.
Yeah. I mean, we certainly talk about that on every one of the deals that we look at. I think one of the places to focus in terms of the 2% sort of weighted average for the portfolio and in the industrial space is, for me, thinking back about 12 months ago, when in the industrial space, you know, we were starting to look at new acquisitions in that 1.5% range. They were getting squeezed really quickly, and they moved very quickly, almost in line with how we've been thinking about the movement in cap rates over the last 12 months in the industrial space. We feel very comfortable where we are.
Our tenants continue to focus on overall occupancy costs over the course of a 15 or 20 year lease, and so looking at, you know, higher than 2% bumps over a 15 or 20 year period on a compounded basis starts to be a little difficult from an overall occupancy place. We feel very comfortable overall in terms of the return that we're receiving on these deals, that 2% is a good number.
Okay. Just one follow-up on Santa Cruz. Thank you for all the details that you provided. For next year, what will the AFFO impact be? You do have the free rents that you mentioned, but also the letter of credit from the current operator. I'm just wondering if that letter of credit extends till next year as the transition occurs.
I'll let Ryan give you that.
Sure. The impact on AFFO next year will really come down to how much of the free period rent is exercised versus not, which is, you know, dependent on the relicensing and Medicare approval of the hospital. That, that'll really drive what it will be. In terms of the second piece of that question with the letter of credit, that will all flush through this year.
The letter of credit and the original lease were tied together, and now that there's a new lease in place, the rest, just as Ryan said, flushes through as other income, but won't have an AFFO impact.
Got it. Thank you.
Thanks, John.
There are no further questions at this time, so I'll now hand you back over to Chris Czarnecki for closing remarks.
Excellent. Thank you all for your thoughtful questions today. Again, I'd reiterate how proud the team is of all that we've accomplished this year on behalf of our shareholders, and look forward to seeing everybody at Nareit in just a week or so. We'll talk to you all soon again. Bye.
This concludes Broadstone Net Lease, Inc. Q3 2022 earnings conference call. You may now disconnect.