Darrell Crate: Yes. I’d say the quick headlines are, we continue to be exploring plenty of opportunities. We’ve got a robust pipeline. We did buy our one building in Anaheim, California, that is basically adjudicated workers’ compensation claims and it’s in a terrific place. And when you look at what is going to be developed in that area by the time the lease terminates, we’re very excited about it. We continue to work across states and every week are going through a whole series of opportunities. And I think that will be a real contributor to our earnings certainly, in 2025, maybe we’ll see a little bit of some accretive deals in ’24 that will be happening probably later. So, we won’t – that won’t probably affect this year’s guidance.
But it’s a really significant total addressable market. And we should be able to find some terrific long-term opportunities in this space. Likewise, just to take the opportunity, we’ve also talked about government adjacencies. This is a place particularly where we have an opportunity to develop buildings for very high credit corporates that are building buildings today, because we’re onshoring so new activities in the United States. And in doing so, we’re building buildings that are just the buildings that we have for many of our U.S. government agencies. And it’s far easier, for folks who have a government contract and may not have worked, with government for a significant period of time, to come to somebody like us and understand that, the building and the facility that will be built, will be one that will enable them to meet their obligations, under their government contract in a way that is uninhibited.
Harvey Poppel: One would think that there’s got to be pockets in some of the states of small property owners, whether they’re structured as REITs or others that might be acquirable in certain states. Have you seen any opportunities to just acquire a business that might hold several properties in the states?
Darrell Crate: Well, I think, yes. So we call those in portfolios, and we certainly see plenty of portfolios because in the federal space for the last decade, we’ve been working with folks who have material portfolios. We attract each one of them. We understand which buildings we’d be most excited about and we work and cultivate relationships with those folks that sometimes are fruitful in six to nine months and sometimes it’s three, four, five years. So you’re on to something, which is we’re getting to know the folks who develop those buildings or have created a portfolio learning about the dynamics, and really spending a lot of time going to school on how they get there, what happened, how they work. And so, that we can find kind of the right match for us.
We don’t want to be hasty and moving to this space. But we know that it’s a strong opportunity, not only because we can find very high-quality buildings that satisfy a state’s mission, but these leases also have escalators. So my friend, Allison here, will not get such a hard time for same-store sales. As we start looking to 2026, ’27, ’28, we can – it would be really nice for us to start the year knowing that we’re growing over one – to somewhere in the range of 1% to 2% when we turn the lights on. And one of the challenges that we found, is that when we exercised a lot of discipline. It was the right thing to do when the market changed abruptly, we found ourselves in a place where we weren’t growing. And the equity markets don’t like that.
And so we sort of called it early. I think probably three or four months, we stopped buying before other office sort of REITs, which we get bunched with. We’re talking about it and I think you’re finding us today maybe being a harbinger of good news for some of those folks, because we’re sorting through lots of opportunities. If we’re picky about it, we can find things that are accretive and that’s our job. And as we look forward to the end of the year, beginning of the year, I think we’re going to be in a healthy space, to announce acquisitions as part of our guidance again, and doing all of those things. So, we’re meeting with lots of folks who own portfolios. If you know of any, send them our way. And we’re executing on each of these three lanes of opportunity, and I very much hope in the next 36 months, almost one-third of the company is comprised both of adjacent properties, 15% adjacent properties, 15% state and local.
Harvey Poppel: Thank you very much.
Darrell Crate: Thank you.
Operator: Our next question is from [Travis Turpin] of Seeking Alpha. Please proceed with your question.
Unidentified Analyst: Yes, good morning. I know you guys have talked about the dividend a little bit. But my question was, I know the payout ratio was kind of high right now. Did you guys have a target range that you would target in and a time frame for it?
Darrell Crate: Yes. No, great question, because we obviously look at the dividend each and every day, Travis. And we look out and clearly our dividend below that 100% payout ratio, which is always our goal and even a little bit lower is where we want to get to. We maybe just to be very clear about it, we are not interested in cutting our dividend, because even though that may create some other pennies of growth in the future. The plans that we have more than offset it, and we’re on a path to in the next 24 to 36 months to be in a place where we’re covering our dividend. I hope it’s sooner than that. And we’ve had periods like this, where we’ve had a high payout ratio relative to what the strategy is delivering. But we believe, given the stability of our cash flows, delivering that consistent dividend is something we’re capable of doing.
So as we look out the next two to three years, we should get that solved hopefully sooner, and getting a payout ratio of below 100%, certainly is the goal.
Unidentified Analyst: Okay. Thank you. And my next question is, since you talked about in the next 24 to 36 months with the payout ratio below 100%. I know you guys have talked about buybacks before. Is that something else, you’re looking at once you get the payout ratio solved and making accretive acquisitions and things like that?
Darrell Crate: Yes, I think that’s right. I mean, we really try and take a corporate finance perspective to what we’re doing. And given where the stock price is relative to our opportunities, we see some real opportunity. We imagine that that’s going to – it takes a little time for that to get recognized by investors. But if it isn’t, we should be certainly in a mode of generating some capital, even some longer-term capital that could buy back stocks at attractive prices.
Unidentified Analyst: Thank you. That’s all I have.
Darrell Crate: Thank you.
Operator: Our next question is from Michael Lewis of Truist Securities. Please proceed with your question.
Michael Lewis: Yes. Thank you. You mentioned the 18% rent spreads. You talked a lot about the importance of the work that’s happening in your buildings, and the way the government is complementing you on that. And you just mentioned escalators and leases. What’s the portfolio occupancy and the same-store NOI and the specific rent spreads. And I think as you talk, about some of the organic growth potential, I think reporting that now might be helpful, to help us track where you are and how you’re doing on that goals – on those goals?
Meghan Baivier: I think, Mike, the points taken from a same-store perspective. And I think, as we continue to pull in our goals around sort of cost realignment, that’s a nice opportunity. I think we’ve historically given the structure of our leases, right, we’ve always talked about how over the arc of time, same-store NOI growth sitting in that sort of 50 to 100 basis point range. But as that had the potential to step out in that range. The communication to the market of how that is driving outcomes, is something we can give or shine further light on.
Darrell Crate: Yes. I mean maybe stepping back, Michael, gives just a little more little perspective on it, which is I think we’re not comfortable nailing down a number right now, because it might be some false precision. I think for folks who may not be as familiar with the story, our leases are flat until they renew. I think, have done a reasonably good job of staggering out the maturities of leases. So, if you were to draw a line through the company for five years, six years, seven years, as we look forward, I think we can feel good about same-store NOI that would be a couple of points. But – and it should match inflation. That’s how it should work. The problem is there can be specific circumstances where one building renews at a terrific experience.
I mean we sometimes have 30%, 40% up. And sometimes, we end up staying flat. And when those happen, it creates this kind of volatility in same-store growth. And so, as we looked at that at the end of last year and said, this is something that’s hard for us to explain to the market, and the market is kind of you’re as good as your last renewal. It only makes sense for us, to get some leases into the portfolio that, do have some escalators in it. So that maybe it’s disappointing to say that we’re going to same-store NOI growth of 0.5% to 1%, or it’s going to be 2% to 3%, but it’s always going to be positive. And we’re in a place, where I think that’s something we believe equity markets, are going to better understand. Some of it, as I shared on our Analyst Day is when we began this, the private equity business back in 2010.
The overall concept was we were going to get a premium in the market, for the high credit rating we have. And that proved to be almost true, but we’ve never been able to take on the leverage and even the rating agency, I think we could take on given the stability of our cash flows, because Green Street and others, and we look like an extreme outlier on the leverage front. So, we’re in this place where we have leverage that’s in the band of REITs, but we’re delivering a much higher stability and creditworthy cash flow. So that’s why moving to a place where that cash flow begins to look more like other REITs, and we’re doing what we have a competitive advantage in, which is being a great partner to government and making governments facilities that enhance mission.
And if we can find that spot on the Venn [ph] diagram and the third sort of leg of that being that it’s accretive. We think we’re – it’s a reason for getting up every morning. So, I know that’s a lot, but that’s as we think about things for sales, that’s where we want to go.
Michael Lewis: No, that’s good. You talked a lot about fighting this perception battle. And whether it’s trailing four quarters or trailing eight quarters even something to kind of show proof of concept, I think would be helpful at this point. And so that has asked about the same-store NOI. I understand with the flat leases, and they only mark on exploration and all of that?
Darrell Crate: Yes. Totally agree. And I think we’re working very hard to. Again, we will – we’re going to illustrate a proof-of-concept here. We’re linking together a bunch of quarters. And we also know that, if we can show some more growth. And I think by expanding our total addressable market that, becomes much easier in an accretive way. And we’ll still be the best credit tenancy of any readout there. But we’ll be able to have a cash flow profile that, is better understood by folks who are looking at the sector broadly and maybe don’t take the time to see our buildings, or spend time with us because – it’s not lost on us that our market cap relative to the whole market cap of all REITs is super tiny. And given that, that’s the case, we’re not the first folks who people look to that we just need, to be looking a little bit more like the crowd, continue to not lose what differentiates us.
And I think that – those take a high integrity action that’s all based on substance to bring that forward, but make sure we’re not getting the form wrong. So that when people look at us and see us, it’s easy to understand the story of what we’re bringing forward. But in addition, the numbers don’t require a lot of explaining, relative to other opportunities that folks have to invest in the real estate sector.
Michael Lewis: So kind of one internal growth. I have one external growth question. It relates to the – you’ve already been asked about your cost of capital. The cost of equity specifically, right? So you just feel that a question about potential buyback. I think you said earlier, you’ll probably do deals, roughly 50% equity and 50% debt. You’ve been able to use the forwards that, you entered into a while back. Can you execute your plan, right now, the stock is trading below $11.50 a share. Can you execute your plan and make accretive acquisitions, if your stock price is stuck here at the 10-year is $4.75?
Darrell Crate: Yes. The answer is yes. It’s obviously harder. And that’s why developing in the eights. And I mean and we mean in the eights, not like 8.01 is very good for us and very accretive at these levels. Sad part is it takes 24 months to build the building. So, we feel very good about that medium-term view. You look at something like ICE Dallas, that’s accretive. And we’ll find other similar opportunities like that, and I’m very hopeful that as those get executed. My friend Allison here will take your guidance up a little bit. And we’ll be sort of on that path. And to your point, we’ll be showing proof-of-concept, which is hopefully, we have a conference call where we’re saying, well, in November, we changed our TAM. Here’s the research we did.
This is what we’ve delivered and here’s what we’re looking to 2025. And I think that’s when we’re going to start being able to show our results, and we don’t want to just blurt it all out right now. So if we had a $13 stock price, this would be a no-brainer. And I mean, which is a marginal amount relative to where we are, but that that kind of motion. One of the things, we basically have to make the make the case to folks is that we deserve having a $13 or $14 stock price. And with that, we’ll show you the kinds of buildings that we can buy, and we can show you how we’re going to grow. And we’re fundamentally building the foundation for that story right now. And that’s where we’re executing on every day, and it’s frustrating that the world doesn’t move faster, but it is – all we can do is trying to be transparent and have people follow along and at some point, we think we’re going to be rewarded for what we’re building and doing.
Michael Lewis: Is it fair to say you would issue equity at $11.50 to for – if you match it up with an acquisition with an 8.5%?
