And we would expect there are a few tenants we’re looking at on our watch list that we would expect to move off that as they complete refinancing transactions. And there are others that, over time, will migrate on to the watch list. But I think what the most important takeaway there is that our watch list has been demonstrably conservative for decades. So the actual default experience out of that watch list is a very small portion of that. So while we want to monitor a subset of the tenants that’s by no means indicative of percentage of ABR where we expect a natural default. In fact, much less than that actually occurs in our experience. So we’re comfortable with the credit quality of the portfolio. It’s something we monitor very closely. Certainly, we’ve talked about a few specific situations.
But broadly speaking, it’s very consistent.
Eric Borden: That’s helpful. And then on the disposition front for this year outside of office and the U-Haul transaction, what types of tenant assets or verticals are you looking to actively recycle today?
Brooks Gordon: Yes. So as you mentioned, the vast majority of our disposition plan for 2024 is in the Office Sale Program and the U-Haul transaction. We have a smaller bucket of what you could call normal course, $150 million to $350 million in that range. Toni mentioned one, which was the last of the operating Marriotts that we intend to sell. As a reminder, there are 3 others, which we’re in the process of working through redevelopment opportunities there. Broadly speaking, I’d say the theme is managing residual risk where appropriate. Vacancy is a smaller part of the puzzle, a little under 10% of our total disposition, but it’s a few of the buildings in that normal course bucket. So not broad thematic trends there outside of the office exit, which certainly is the major story there from a thematic part of the disposition plan.
Eric Borden: Okay. And then last one for me, just for the model. Toni, could you just provide an update on your income tax expense guidance for 2024? I think it was $38 million to $42 million you talked about last quarter.
Toni Sanzone: Yes, that’s right. And we’re holding that consistent. I think we’re just about $10 million for the first quarter, and that seems really on par with what we would expect for the remainder of the year.
Operator: And our next question comes from Nick Joseph with Citi.
Nicholas Joseph: Just as you think about resetting rents for some of these restructured tenants, right? You did Hellweg recently. How do you think about setting coverage levels to make sure that both you and the tenant are comfortable with the rent levels going forward and it won’t reoccur as an issue?
Brooks Gordon: Yes. I mean that’s a good question. It’s certainly a balancing act. We want to preserve economics certainly. But at the same time, we want to put the company in question. In this case, Hellweg, on a better footing. We think they’re making good progress on their turnaround plan, both on the cost-containment front as well as improving sales efficiency. And we do expect they will grow back into that coverage. But, as we discussed, it’s not – it’s suboptimal. So we’re watching it closely. They’ll remain on our watch list. But look, they’ve got the support of their landlords as well as their lenders. They’re taking the right actions, but we want to see that be a sustained recovery process. So there’s not a magic number that in terms of a rule of thumb of where we would reset a rent from a coverage perspective.
It’s really a balance between what we perceive to be appropriate for the company to navigate a challenging period of time while preserving as much of the economics as we can.
Nicholas Joseph: Then how do you think about lease escalators and term given the range of outcomes with the tenant that has struggled before?
Brooks Gordon: From an existing tenant perspective, we think term in many situations, not all, is extremely valuable for us. In this situation, we very much did think extending that lease was the right outcome. As Jason has mentioned numerous times, rent growth is a core tenet of our business model. And so that’s very important. We retain that rent growth in these leases.
Jason Fox: And the only thing I’ll add there is with these longer lease terms, especially as you have perhaps M&A activity that could happen, whether it’s someone like Hellweg or other tenants, you can get meaningful credit upgrades there. Brooks mentioned that about half of our investment-grade ABR is from upgrades over time. Some of that is business model is improving. Others is M&A transactions where the acquirer has an investment-grade rating. So when you add term to even something like Hellweg where the credit behind it is maybe weaker than we would like at this point in time. There is the potential for some real upside to the extent there’s consolidation.
Operator: [Operator Instructions]. Our next question comes from Brendan Lynch with Barclays.
Brendan Lynch: If I heard you correctly, the Samsung lease has 6% escalators. Maybe you could just provide some detail around the large escalator and any other considerations like the initial rate compared to market that would allow you to dictate such terms?
Brooks Gordon: Just to clarify, I’m not sure where the 6%. It’s 3.5% bumps there.
Brendan Lynch: Okay. All right. That makes more sense. And then — maybe you could just provide some details on the buyers of the office assets? Were these primarily occupiers or office REITs or other net lease companies?
Brooks Gordon: It’s really been a mix. Each building is very specific. I mean the bulk of what has projected in Q1 was the sale back to the tenant in the Spanish portfolio. But it’s really been a mix. We’ve seen virtually all types of buyers. I would say we haven’t seen public REIT buyers, is primarily private capital and/or the tenant.
Operator: Our next question comes from Harsh Hemnani with Green Street.
Harsh Hemnani: Just thinking about the cap rate seems to have moved down a little bit quarter-over-quarter, and it seems that it’s going to stabilize there in the mid-7s for the rest of the year. Coupled with that acquisition, volume has been a bit slow to start off for the year and your cost of equity hasn’t been what it used to be. Given that backdrop, have you evaluated returning some of the capital in the form of a special dividend or a share buyback that you’re getting back through these dispositions instead of deploying them and maybe an uncertain capital market environment?
