So bid-ask spreads have tightened. We think that translates into some more market activity. Last year, we were at 7.7%. For the fourth quarter, I think the full year was 7 — 6%. So we’ve seen a little bit of an uptick. I think right now, we’re targeting deals in the 7s that works for us from a cost of capital standpoint, certainly, we consider the liquidity that we have. And so yes, so I think Europe is maybe a little bit more dynamic. I mentioned that there’s some steeper increases in the debt markets there over the past 12 to 18 months and a reversal of that more recently. I think at this point, we can probably borrow 100 to 150 basis points inside of where we can borrow in U.S. dollars, which you go back a quarter or two and that was at par.
So we’ve certainly seen some tightening of rates in Europe, which allows us to get a little bit more aggressive on cap rates and with seller expectations adjusting, we think that’s going to help bridge that gap and loosen up that markets. Put numbers on it, maybe Europe would be a little bit inside of where we’re targeting in the U.S., but it certainly varies by country. Germany, for instance, is probably on the lower end of a range. And maybe a country like Italy, we can get a little bit more yield even though we’re working with big kind of multinational companies in those markets.
Operator: Our question comes from the line of Mitch Germain with JMP Securities.
Mitch Germain: Jason, you mentioned some additions to — or more emphasis on retail, maybe some additions to the team. Anything that you can share?
Jason Fox: Yes. I mean look, we’ve been diversified for a long time. I think we always explore new growth verticals. And we’re focused on growing our opportunities that retail has always been a big part of the U.S. net lease market. Europe, I think it’s been more consistently something that we’ve been active in. In the U.S., I would say, it’s been more opportunistic when you think about some of the deals we’ve done in Las Vegas and other areas. So yes, so we’ve hired over the last year or so, several dedicated investment officers. They have lots of experience acquiring retail net lease and really deep relationships with tenants in the brokerage community. So given our scale, our reputation, we think we can take some market share.
The market timing seems good. There’s fewer competitors as a result of some of the consolidation that we’ve seen. And in some of the existing players are starting to reach exposure limits to certain segments and even specific tenants. So I think that we’ve heard from conversations with brokers and tenants that we’re a welcome participant helped diversify their capital partners. And so we think it’s a good time to ramp up, and we’re optimistic that’s going to be a contributor going forward to our deal volume.
Mitch Germain: You mentioned Hellweg, I believe you had suggested they ran a little bit high on leverage. And I’m curious if there was any other tenants in your portfolio that have either a similar business model or be a similar balance sheet structure?
Brooks Gordon: Yes. On Hellweg situation, that’s a very tenant specific situation and really was caused by a few combined factors, one of which was a pull forward in demand through COVID for their business, combined with balance sheet and inventory issues. So I view that’s really a tenant specific situation. In the broader portfolio, it’s a huge portfolio and broadly diversified. There’s tenants of every sort. But we think our watch list is really where we see the potential for default risk. And so hard to comment on any specific tenants there, but it’s really a broad range of business models, balance sheets and regions and industries.
Operator: Our next questions come from the line of Greg McGinniss with Scotiabank.
Greg McGinniss : This is Greg from Scotia. Just regarding that large industrial lease that not falling out of guidance, was that an active negotiation and the tenant decided to use elsewhere or are they consolidating? Can you just walk us through kind of the lease negotiation process regarding typical timing — and how close to the end of lease term tenants are typically resigning?
Brooks Gordon: Yes. This one was a very specific situation where they just needed to downsize. It was too big a building for them. So there wasn’t a renewal negotiation. We do feel very good about that situation. It’s an excellent building in the Chicago market. And as Toni mentioned, we’re actively in negotiations there to release that. So we think that would be a good outcome in terms of more generally, we typically are pursuing lease negotiations with tenants anywhere from two to even five years before lease expiration, depending on the situation. And so it really runs the gamut. But this was a unique situation where great feel served them well, but it was just need a different size.
Greg McGinniss : So you were just expecting to have a different tenant moving in there earlier than you are getting one, which is why it had a negative impact on guidance, if you already know the moving out…
Toni Sanzone: Yes, that was not one of the changes that was baked into our initial guidance range. It was really the other credit issues that were not baked in. So that one was contemplated.
Greg McGinniss : And sorry, just to clarify for myself on Hellweg. You’re providing a three month of rent at the old rate and then renegotiating to potentially, $26 million a year going forward?
Brooks Gordon: So to clarify there, we’re — it’s a one quarter rent abatements of Q1 and an ongoing reduction as you described. We’re also extending that lease to 20 years. And I’ll note that, that’s a similar structure that the other stakeholders are doing as well, so other landlords other than us. And so that really, in our view, shores up there their financial position substantially and really putting them on a better footing to pursue a robust turnaround plan. So that’s really the proactive approach there to put them in a position to execute.
Greg McGinniss : And so what was the catalyst to doing this deal and realizing that, hey, their financial position is maybe not as good as we thought. Is that them reaching out to you?
Brooks Gordon: No. We get financial disclosure from all of our tenants. And when we saw late last year, their second half had deteriorated quite quickly that’s when we really took that proactive approach. And again, I think that was a combination of factors that aligned. And Again, that’s really a demand pull forward, which then dropped off quite quickly after COVID. A broader slowdown potential consumer spending and then an inventory mismatch. And so what we saw there was a risk that they could have a constrained liquidity position in 2024. And when they need to be buying inventory and really being aggressive. So we wanted to manage that situation as there are other landlords and lenders and working with the company itself.
So all stakeholders have come to the table and put the company in a better place. From a status perspective, we’re actively working on it. The deal is largely be and we’re in kind of documentation mode. And so we expect we’ll get that completed over the coming month or so.
Greg McGinniss : And last one for me. I saw you did a deal with Morrisons grocery store in the U.K. Curious if that’s kind of open the door for you to be doing more business with them? We saw that they’re doing other sale leasebacks? What’s your comfort level with the financials there? There’s just been some news that not quite operating to the level they once were? And then if you could just — if you’re able to disclose your level of exposure to private equity-backed tenants as well.
Jason Fox: Yes. So the deal with Morrisons, that was a relatively small deal. I kind of look at that more as a one-off opportunity. It was pretty opportunistic in nature and that we purchased it from a fund that had redemption pressures and had some liquidity needs. So we think it was a good opportunity to buy into. What we view as a very good location, solid unit level economics, and we think that helps mitigate any — I’d say, the higher leverage that they’re operating at. Could there be future deals there? Potentially, I don’t think there’s anything we’re working on right now. It was not a — So I wouldn’t say there’s a direct relationship there that could lead imminently to any new deals. But we’ve been active in grocery in Europe for quite some time, and I wouldn’t necessarily rule it out.
Operator: Our next questions come from the line of Spenser Allaway with Green Street.
Spenser Allaway: Maybe just following up on the theme of pent-up seller demand you cited in both the U.S. and in Europe. Can you just elaborate on whether the trends either by property type or tenant industry?
Jason Fox: Yes. I mean I would say it’s more of a broader theme and probably correlates a lot with sale leasebacks in terms of being a source of relatively cheap capital compared to many of the other options. We talked about wanting to ramp up retail. So we’re hoping that we’re seeing more opportunities there. I think that the theme is probably most relevant to industrial transactions that tend to correlate maybe most with sale leasebacks. So I don’t think there’s any broader themes than that right now.
Spenser Allaway: And then lastly, on the office front, and thank you for the commentary thus far. But has anything changed in terms of the conversations you’re having with the ongoing asset sales in terms of buyer expectations since you initiated the process a few months ago?
Brooks Gordon: No. I’d say over this period of time, our expectations have remained very firmly in place. Timing has moved around a little bit on the final piece of this. But again, I think that’s to be expected to a point, pricing is held in about where we thought. And so we’re confident we can get that done and making good progress on the balance. And as I said, the large majority of that is already closed.
Operator: Our next questions come from the line of RJ Milligan with Raymond James.
RJ Milligan: Just a couple of follow-ups. Toni, I think you mentioned in the original guidance, what was contemplated for credit loss for ’24? And how much of that has been stuff, just some of the known credit issues?
Toni Sanzone: Yes. I mentioned in my remarks that we’re starting the year with an estimate of about 70 basis points of ABR for overall rent-related contingency. That did not — as I mentioned, that’s separate from the two tenant issues that I discussed that we quantified as having roughly a spent impact. So we did not have the $0.07 in our initial guidance, but the 70 basis points is more normal course for us, and that would be in the range of what we had assumed back in November.
RJ Milligan: So does guidance still assume 70 additional basis points or…
Toni Sanzone: Yes, the 70 basis points outside of the — and that’s really just kind of where we start the year. I mean I think there’s tenant disruptions from time to time, we generally are relatively conservative and keeping tenants on a cash basis if they’re disputing any kind of rent. So that’s meant to cover all kinds of broad issues over the course of the year. There’s nothing really specific eating into that right now outside and less separate from the Hellweg and the bankruptcy issue that Brook mentioned.
RJ Milligan: And then my second question is, obviously, a lot of questions on the watch list, but I just want to go back more towards the lease expirations. And so it looks like there’s about $60 million of ABR expiring this year, and I realize some of that is U-Haul. But I’m just curious, as your discussions have gone with some of these expirations, are there any other material or major non-renewals expected for 2024?
Brooks Gordon: Yes. As you mentioned, U-Haul has been by far the biggest piece of our 2024 expirations and making good progress on a lot of the others. In any given year, we have a couple of renewals here or there, not sizable ones. I think it’s potentially for non-renewals, a little under 50 basis points with ABR and actively working on those. So certainly, nothing material or the size of the warehouse we’re working on re-tenanting right now.
