Q4 2022 Agree Realty Corp Earnings Call
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Okay.
Good morning, everyone and welcome to the agree Realty fourth quarter and full year 2022 conference call.
All participants will be in a listen only mode should you need assistance. Please they know a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May press Star and then one on a touchtone telephone.
So what's your all your questions you May press star two.
We do ask you please limit yourself to two questions during the call.
And please note today's conference is being recorded.
At this time I'd like to turn the conference call over to Brian Hawthorne Director of corporate Finance.
Please go ahead Brian .
Thank you good morning, everyone and thank you for joining us for our acreage realty's fourth quarter and full year 2022 earnings call before turning the call over to Joanne Peter just to discuss our record results for the year, Let me first run through the cautionary language.
Please note that during this call we will make certain statements that may be considered forward looking under federal Securities law. Our actual results may differ significantly from the matters discussed in any forward looking statements for a number of reasons.
Please see yesterday's earnings release, and our SEC filings, including our latest annual report on Form 10-K for a discussion of various risks and uncertainties underlying our forward looking statements and.
In addition, we discuss non-GAAP financial measures, including core funds from operations or core F. O adjusted funds from operations or <unk> and net debt to recurring EBITDA reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release.
Website, and SEC filings I'll now turn the call over to Joey.
Thank you Brian .
Good morning, everyone. Thank you for joining us today I'm pleased to report that 2022 was another record year for our company.
Notable milestones over the past 12 months included record investment activity over $1 $7 billion, surpassing our record high by 20%. The addition of over 440 high quality net lease properties to our growing portfolio. The commencement of a record 28 development in partner capital solutions projects for <unk>.
Total committed capital of nearly $110 million, the receipt and the upgraded investment grade credit rating, a beatable way one from Moody's investors service.
And positioning our balance sheet to execute in 2023 without the need for additional capital, while raising approximately $1 $7 billion, including $1 $3 billion of equity.
We closed 2022 with approximately $1 $5 billion of liquidity at year end, including more than 550 million of outstanding forward equity available without her election.
Including our Florida equity pro forma net debt to recurring EBITDA was approximately three one times at 12 31.
As demonstrated by our fourth quarter acquisition activity cap rates crept higher but a bid ask spread remains as sellers are slow to adjust to current market dynamics.
As always we will remain disciplined to our investment strategy and refrain from going up the risk or via credit and residual risk to create the appearance of our quickly expanding cap rate environment.
Generally we will not chase cap rates down into levels that failed to create sufficient spreads to drive appropriate returns for our shareholders. Our focus remains on the best retailers in the country with strong balance sheets to allow them to withstand the current macroeconomic environment, regardless of the level of deterioration.
Our team is doing a terrific job navigating this environment, leveraging our strong industry wide relationships and track record, while uncovering opportunities to add to our growing portfolio.
Our pipeline includes both smaller one off transactions and larger sale leasebacks with our leading retail partners.
Given that pipe why am I confident our team will be able to source north of $1 billion of acquisition activity at spreads that are appropriately accretive.
During the fourth quarter, we invested approximately $421 million across 157 properties via our three external growth platforms.
131 of the properties originated through our acquisition platform representing acquisition volume of approximately $405 million.
The properties acquired during the quarter at least the best in class operators in the auto parts tire and auto service home improvement dollar store off price retail convenience store and farm and rural supply sectors among others.
The acquired properties at a weighted average cap rate of six 4% and a weighted average remaining lease term of 10 six years over 73% of the acquired rents are derived from investment grade retail tenants.
For the full year 2020 to nearly 70% of the annualized base rent acquired was derived from leading investment grade retailers, while ground leases represented more than 5% of rents acquired.
Moving on to our development and Pcs platforms, we again had a record year with 31 projects either completed or under construction representing over $118 million of committed capital. This includes 28 project commenced during the year with a total anticipated cost of $110 million.
During the fourth quarter, we commenced six new development and Pcs projects with total anticipated costs of approximately $37 million.
We completed the development of two projects, while construction continued on another 18 projects.
We continued to call noncore assets from our portfolio with seven properties sold during the prior prior year for gross proceeds of over $45 million. These dispositions were completed at a weighted average cap rate of six 5%.
On the leasing front, we executed new leases extensions or options on approximately 850000 square feet of gross leasable area in 2022, including 198000 square feet during the fourth quarter.
Notable new leases extensions or options included a chase bank ground lease in Stockbridge, Georgia, where we had our first opportunity to recapture a ground lease due to the tenants. The lack of options. We eventually executed a new 15 year lease with chase and we're able to increase the rent by approximately 160%.
NOI lift we were able to generate is emblematic of the embedded value in our ground lease portfolio.
Moving into this year, we are in a very strong position with one 3% of annualized base rents maturing SUS.
Subsequent to year end, we have executed a number of lease extensions, bringing this number down to only 1% for the remainder of the year.
At year end, our portfolio of encompass 1839 properties across all 48, Continental United States, including 206 ground leases, representing 12, 4% of total annualized base rents.
Occupancy remained a very healthy 99, 7% again are investment grade exposure stood at nearly 68% and all of our top 10 tenants carry an investment grade credit rating our best in class portfolio is very well positioned to withstand the current macroeconomic environment with that I'll hand, the call over to Peter.
And then we can open up for any questions.
Thank you Joey.
I'll start by recapping, our balance sheet and capital markets activities. During the year as Joey mentioned, we were highly active in the capital markets raising approximately $1 $7 billion to further bolster our balance sheet and position us for continued growth. Notable activities include $1 $3 billion of gross equity proceeds raised through two.
Overnight offerings, and our aftermarket equity program and a $300 million public bond offering of four 8% senior unsecured notes due 2032 with an effective all in rate of 376% inclusive of prior hedging activity our.
Our capital markets activities during 2022 provided us with approximately $1 $5 billion of liquidity at year end, including $557 million of outstanding forward equity.
$900 million of availability on the revolver and $29 million of cash on hand.
Our existing liquidity plus free cash flow after the dividend of approximately $85 million and any disposition proceeds enable us to opportunistically execute our growth strategy in 2023 without the need for additional capital.
As of December 31 pro forma for the settlement of the $557 million of outstanding forward equity our net debt to recurring EBITDA was approximately three one times <unk>.
Excluding the impact of unsettled forward equity our net debt to recurring EBITDA was four four times.
At year end, our weighted average debt maturity stood at approximately eight years.
With limited variable rate debt and no material debt maturities until 2028, we remain well positioned to withstand interest rate headwinds and capital markets volatility.
Total debt to enterprise value at year end stood at 23%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend remained at a healthy level of five times.
Moving to earnings core <unk> was <unk> 96 per share for the fourth quarter and $3 87 per share for full year 2022, representing three 5% and eight 1% year over year increases respectively.
<unk> per share was <unk> 95 for the fourth quarter and $3 83 for the full year, representing three 9% and nine 2% year over year increases respectively.
As a reminder, treasury stock is included in our diluted share count prior to settlement, if ADC stock trades above the deal price of our outstanding forward equity offerings.
The aggregate dilutive impact related to these offerings was less than half a penny in the fourth quarter and roughly <unk> <unk> for the full year.
Our consistent and reliable earnings growth continues to support a growing and well covered dividend during the fourth quarter. We declared monthly cash dividends of 24 per common share for each of October November and December on an annualized basis. The monthly dividends represent a five 7% increase over the annualized dividend from the fourth quarter of <unk>.
<unk> thousand 21.
For the full year the company declared dividends of just over $2 80 per share a seven 7% increase year over year, and a 16% increase on a two year stack basis.
Our payout ratios for the fourth quarter and full year remained at or below the low end of our targeted range of 75% to 85% of <unk> per share.
After year end, we announced the monthly dividend of <unk> 24 per share for each of January and February the monthly dividend reflects an annualized dividend amount of $2 88 per share or five 7% increase over the annualized dividend amount of approximately $2 72 per share from the first quarter of 2022.
Sure.
General and administrative expenses in 2022 totaled $30 1 million G&A expenses were 7% of total revenue or six 5%, excluding the noncash amortization of above and below market lease intangibles, we achieved 50 basis points of G&A leverage during 2022 given our.
<unk> systems, including our recently implemented ERP system and further improvements to our proprietary our database, we anticipate achieving similar G&A leverage this year.
Lastly, total income tax expense for 2022 was approximately $2 $9 million, including $723000 of expense during the fourth quarter with that I'd like to turn the call back over to Joey.
Thank you Peter at this time, operator, we will open it up for questions.
Ladies and gentlemen at this time, we will begin the question and answer session. Once again to ask a question you May Press Star and then one using a touchtone telephone.
All your questions you May press star and two.
And as a reminder, we do ask that you please limit yourselves to two questions.
Our first question today comes from Nick Joseph from Citi. Please go ahead with your question.
Thanks, Josh just hoping to get some more color on kind of current cap rate trends, maybe specific to what you're seeing on the merchant builder side and the impact it's having on any.
Any recent deals.
Yes, good morning, Nick well first on the merchant builder side you saw during the <unk>.
During the fourth quarter, we had a number of transactions with merchant builders for dollar General O'reilly.
Dollar tree family dollar, we would take advantage of distressed situations, where they need to clear their inventory I'll tell you, we're still talking to a number of retailers that leverage historically have leveraged their mills merchant builder platform for net new stores since that business is effectively interrupted.
On a time out at this point and so for 2023 year and in 2024, new openings retailers that we're focused on merchant builders are all looking for new solutions, and that's where we think we can potentially play a part.
In terms of cap rates, it's a complicated situation and frankly, I think cap rates I wouldn't call. It bifurcated I would call a trifurcate. It if you want to go up the risk curve, which we will not do here.
That is something that is readily available you can clearly go acquire things that with seven handles in front of them. They are private equity backed operators.
Or second or third tier operators in their respective spaces.
What we see in the <unk> space, there's no shortage of opportunities out there we could acquire over $2 billion. If we wanted to in 2023, it's finding the right opportunities, where we can drive <unk> per share while maintaining our quality.
This portfolio and those qualitative hurdles and so there's a lot of nuances to it much of it is price point driven much of it is credit driven.
But cap rates.
Obviously coming off their lows in 2021 and 2022.
But I think first so everyone understands that this is the bottom like this is a bond like business right.
And net lease are bond like assets and so in the last year, we witnessed the debt financing costs, both short term and long term go up significantly.
We have yet to see cap rate commensurate cap rate expansion in this space and so what we're seeing as a result, as frankly private and public investors net lease space moving up the risk curve to drive the appearance.
<unk> spreads that's something that we won't do we will never sacrifice long term value creation.
For a short term pop and so we will remain disciplined move and we'll see how this year plays out.
Thanks, That's very helpful. And then just maybe on the current pipeline you talked about at least $1 billion of acquisitions, maybe less specificity than normal given the environment.
How are you thinking about the timing of those maybe you can talk about the current pipeline and then there's the opportunity more in the back half of the year to exceed that $1 billion, if if deals start to materialize.
I love, what I hear the opportunities can be back half of the year weighted I don't know if what's going to happen in the back half of the year, let alone Tomorrow I will tell you our current pipeline for Q1.
As I mentioned has has larger scale sale leasebacks with industry leaders as one off transactions were starting just to build our Q2 pipeline where about a fifth of the way through that.
We have nothing for Q3 and Q4, albeit it's not one deal today for Q3 and Q4 I don't know that this is going to be a soft landing or we're going to it's going to be a meteor hitting earth here.
In terms of this economy. So again I think it's most appropriate for us to be flexible, which we are with our balance sheet, we don't need a dollar of equity.
And then be disciplined as we deploy that capital this year materializes and I think everyone has different perspective there.
Thank you.
Thanks, Nick.
Our next question comes from Rob Stevenson from Janney. Please go ahead with your question.
Hi, Good morning, guys. Joey can you talk about your future pipeline of development and partner capital projects. How aggressive are you being with new projects today and you see the current dollar volume of that pipeline growing stable shrinking over the course of 'twenty three as projects go in and come out.
Yes, Rob it's very similar to my last answer in terms of acquisitions, we're not going to chase yield down given the potential I'll call. It rise.
And cap rates throughout the course of this year, obviously, when you enter into any development transaction or Pcs transaction theres duration to it. So some of those transactions take six months some of them take 12 to 18 months and so you have to be you have to be appropriately compensated in terms of the return on cost.
We announced a number of projects in the fourth quarter, we have some in our pipeline. Obviously today. There that are that are unannounced still but the most important thing is we're getting that appropriate premium for that duration risk, it's not going to be credit risk is not going to be the residual risk, but it will be the duration risk and so if we're going to if we have the ability.
To buy something with a similar product credit profile or for mill third party from our retail partners.
And it's not and it's well inside of or close to I should say, where we could develop or enter into a Pcs transaction.
We'd much prefer to have visibility into that 70 day closing period for us.
It's possible.
And then.
You're talking to your.
Core tenants, where is retailer expansion demand today versus where it's been over the last few years and how does that sort of match up with your.
Understanding of merchant developers the ability to get capital to start new projects to do.
Fund that sort of development it is a <unk>.
Great question. It is extremely topical we're having literally weekly conversations with our retail partners the biggest retailers in the world.
The vast majority of them arent afraid of the overall macro environment because they know they would benefit from the trade down effect large format C stores, we have two entering metro Detroit, both sheets and come and go we've had various levels of discussion with the dollar stores, obviously trade down effect.
Deep discount grocery or discount groceries, all do you want to continue to grow throughout throughout this country dollar general and the dollar general market format dollar general with pop shelf.
Five below and now five beyond the.
The auto parts operators average, obviously with the cars on the road eclipsing 12 years, and still not able to get a car because the chip shortage. The auto parts operators Autozone O'reilly Napa want to continue to grow the tire and service operators in this country, the national tire and battery Bridgestone Firestone Goodyear want to continue to grow.
The challenge for these retailers as they historically don't have the self development platform <unk> don't have the stomach to keep them on balance sheet, and then load offload them via sale leaseback or permanently keep them on balance sheet as the merchant builder business is that.
And so our conversations with these retailers revolve around which three of our external growth capabilities acquisition development and partner capital solutions could potentially be a solution for them and so these are conversations that are ongoing.
And they're producing some into interesting dialogue, we'll see if any of them strike.
Okay.
The way you can add to that with Sam's club for the first time in what 12 years announced 30 net new stores and so you see that these discount oriented retailers these value oriented retailers want to grow irregardless of the storm clouds on the horizon.
Frankly, the ability to grow as their challenge.
Alright Thats helpful. Thank you.
Thanks, Rob.
Our next question comes from RJ Milligan from Raymond James. Please go ahead with your question.
Hey, good morning, guys, Joe your comments that there's plenty to buy if you were willing to sort of hit the pricing expectations.
But obviously being a little bit more prudent here I'm just curious what do you think has to happen for sellers to adjust those pricing expectations.
Okay.
It's a great question I think first of all.
We see.
We see the sentiment swings in shifts daily with new data and the fed speakers rambling on leg Tony Romo during the football game Nobody knows if this is going to be a soft landing a hard landing. This economy is going to float up there like the Chinese spy balloon for a while we have no certainty to this market's still hopeful.
Lucid of real estate sellers that the fed is going to cut rates at the end of this year, maybe that got washed away yesterday.
And so I think the.
The current status quo results in a bid ask spread now we have more data this morning with consumer sentiment Arkansas.
Our consumer spending.
So the challenge here is that nobody has visibility into how this economy is going to evolve here.
And hence unless you're a middle market or a private equity sponsored retailer who needs capital today.
Sale leaseback, where banks have pulled back and lenders have pulled back on ltvs rates are obviously extremely elevated.
You can find a lender of last resort in terms of a sale leaseback, who will be there as a secured creditor with your real estate.
To help you with your growth the challenge on the third party market, specifically is that there's still too much hope out there.
And until that.
That clears up I think we're still going to have a bid ask spread now what we're doing is scouring the market through all of our contacts with all of our different distribution groups all of our different.
All of our different stakeholders and partners out there and looking for the capitulation.
And we're finding it the question is how much will we find as the economy evolves and that I just don't have any idea because I don't know how the economy is notable.
That makes sense and I guess a question for Peter I'm, just curious what youre seeing on the debt market side. Obviously, the market has opened up a little bit for the rights here and I'm. Just curious what are you hearing in terms of banks' appetite for debt.
What pricing might look like today.
Yes, I think first RJ in terms of the unsecured market I think we could probably price 10 year unsecured debt today in the mid fives and this is down from call. It. The six as we discussed on last quarter's call, but frankly still isn't overly attractive today, given we view our cost of equity equity to be in.
Similar range.
In terms of the bank debt market and the term loan market, assuming we enter into swaps to fix the rate I think we could probably price a five year term loan today in the high fours and I view, a five year term loan to be more attractive today than a 10 year bond, giving given the current pricing all that being said the good news is we have as Joey mentioned $1 five of liquidity.
More than $550 million of outstanding forward equity and so we don't need the capital today, either debt capital or equity capital and we can continue to monitor options and be opportunistic in terms of any future capital raises.
That's helpful. Thanks, guys.
Thanks RJ.
Our next question comes from Keybanc Kim from <unk>. Please go ahead with your question.
Thanks, Good morning.
So within the IAG realm that you guys invest and I'm just curious how the triple net financing option compares to their tiered tenants alternative financing options and how that spread might have now may have migrated over the past.
A few months.
Well first of all keeping its great to hear and operators say your name correctly on an earnings call.
Apologies for the last one so when you see the financing options are you talking about a seller's potential financing options relative to sale.
No I mean for financing I mean, they can tap the unsecured bond market. They can go to a bank market.
For your tenants I'm just curious how are you.
Couple of that financing compares to those type of traditional debt financing options.
As Peter mentioned, we think the term loan market as a possible Avenue for us each quarter, where we think the 10 year market unsecured market is today, we will continue to be an unsecured borrower, we think thats the most efficient way for us to continue.
To borrow capital budget Keven, sorry, Im asking for your tenants are retailers yet for the region.
That's a very addressing bifurcation today. So some of the transactions that we have in our pipeline today are with sophisticated retailers S&P 500 companies that recognize where they are relative cost of capital or where they can issue 10 year paper and say you know what a sale leaseback make sense and what is similar.
And what I referenced prior.
Now when we compare just to take a step back I G versus non energy first what's reframe. This is high quality retailers versus other retailers because.
I continue to remind people I love Chipotle, I Love Hobby, I Love Publix I Love all the these are not investment grade retailers. They are privately held closely held companies that don't have a rating.
The high quality retailers have options.
The low quality private equity sponsored retailer has very limited options today, one of those options and the largest option is a sale leaseback on the real estate and so we will not be the lender of last resort.
One of the largest creditors to a car wash startup and urgent care. There are four car washes literally expanding in metro Detroit as we speak that are all private equity sponsored with REIT capital behind them they own none of their real estate I can't figure out where all of these new cars that need to be washed or from and how many monthly memberships are required.
By Metro Detroiters, So I think.
In reality, we're back to the pre Covid days here, we're back to days, where the high quality retailers are going to thrive and have the liquidity the balance sheets.
The low quality retailers are now faced with a stressed economic environment they need what other capital they can to shore up their balance sheet.
Or frankly offload their real estate.
And in terms of your balance sheet strategy. Your leverage is at 404 four times.
How should we think about this as the year progresses.
I am curious if you would let the leverage kind of drift up here or keep it this way.
I'll, let leverages definitely going to drift up we ended pro forma for the settlement of the $552 million in equity at $12 31.
Effectively three one times levered leverages going to drift up to the 4% to five times targeted leverage range. We are not interested in the equity markets were not coming back to the equity markets via a regular way or E or the ATM anytime soon we have the capital and the flexibility to execute on our on our strategy.
For this upcoming year.
And we're going to obviously drift leverage higher ear to what we think is appropriate that four to five times.
Okay. Thank you.
Thanks, Kevin.
And our next question comes from Tayo Okusanya from Credit Suisse. Please go ahead with your question.
Hi, Yes, good morning, everyone.
Just wanted to follow up on my Buddy argues question.
Again part of your response to his question was newsworthy economy going no one has a crystal ball.
No one can call them is clear so to speak but I'm just curious.
Economic scenario, how do you see how do you kind of thing.
Yourself.
Battery the economy continues to kind of do well.
Starts to improve or if the economy goes south and east distressed opportunities is that with time the pounds. Just curious how you're kind of thinking about different economic scenarios and how we would do it.
Each one.
Okay. I appreciate the question, obviously with the caveat. The good news is bad news with economic debt today look I think we're in a very unique position we.
We have a defensive portfolio the most offensive or defensive balance sheet arguably the most offensive and we're able to play offense and so we can play both sides of the ball here, so whether we see a significant deterioration in the underlying environment. This portfolio.
Is going to perform the best now if all of a sudden what theres a soft landing.
Everything takes off again, we have the cost of capital the balance sheet and the liquidity to execute and so we are aware of.
Very unique position, it's hard nearly impossible to poke a hole in this company through any single aspect today and that was that was strategic coming into this year given all of those unknown factors that are out of our control and so.
At that time, and I've said this repeatedly and I apologize, it's not time to slam on the gas and it is not time for us to hold up the stock side right now, we're going to be disciplined and prudent but if one of those two things happen, we'll pivot and we will.
Pivot very quickly just like we did during Covid just like we did when we launched the acquisition platform.
I think in both environments.
We are going to grow <unk>, we are going to grow our dividend and this portfolio and balance sheet is going to be a fortress.
Okay. That's helpful and then.
Peter could you talk a little bit about how you're again I know you guys don't give guidance, but in terms of just kind of credit and credit provisioning and how you kind of think about the impact.
That's a 23 versus 2018 could you just kind of walk us through that and granted you guys. A massively IAG have you seen any credit issues. In fact, I don't think you've seen any but just kind of curious how youre thinking about that.
Sure I guess just to recap 2022 first we recorded about $400000 of bad debt expense in 2022, that's call. It roughly 10 basis points of revenue and that's slightly below our longer term average, which is probably closer to call. It 20 or 25 basis points of revenue.
As you mentioned, we specifically identified tenants or instances of bad debt and so predicting bad debt on a go forward basis can be difficult with.
With the current macroeconomic environment, where it is I think that obviously presents some challenges for retailers, but we certainly feel with our portfolio and 68% of rents coming from investment grade tenants that is very well positioned to withstand the current environment and wouldn't really anticipate any significant deviation from what we've seen historically.
Great. Thank you.
Thank you.
Our next question comes from Josh <unk> from Bank of America. Please go ahead with your question.
Yes, thanks, everyone.
Joe just kind of curious how you think about dispositions as a potential source of capital in today's environment.
Yeah, we didn't give distribution guidance this year, because frankly entering into the world of dispositions outside of a seller who are sorry fire excuse me who is pre screen is an all cash buyer.
Frankly, an inefficient use of our time.
We went through the 10 31 gyrations. So this portfolio is nearly in pristine position if anyone wants to buy a couple of Amc's. Please tell them to call, but it's effectively a near pristine.
Pristine position here and so I'm just hesitant to waste our time out there in the 10 31 market. We've got 77 ish team members here that are extremely busy.
There is just so many stops and starts in that space today and given the nature of this portfolio.
We need to execute any significant amount of dispositions this year.
Okay I appreciate that.
Okay.
Has the competitive landscape for acquisitions.
Aerospace is has it shifted at all are you seeing less competition or remainder of the certain asset classes people are really gravitating towards.
Yes, no I appreciate the question we've seen less competition.
We see less competition for the assets that fit within the context of our portfolio 10, 31 buyers continue to wane as transactions grind slower in this in the country overall and so we see less competition. If you talk to brokers transactional volume is down 60% in this space right now.
In the month of January they are effectively down 60%, where my most recent conversations where that will go.
Nobody knows.
And so there was less downwards of 10 31 buyers, obviously remove leverage out of the equation or leverage the frankly doesn't do much for you negative leverage almost.
The equation at will.
Inhibits some buyers from entering the space and so.
We're seeing tons of opportunities, we just won't pay up for them. So we're not going to take we're not going to take a dollar and break it into four quarters at the end of the day, we're not a change machine, we want to earn money on our capital just in that cycle and so west competition.
We're counting capitulation and we hope that continues to accelerate.
Okay.
Josh we lose you.
Oh, yes.
Thanks Jerry.
Thank you.
Our next question comes from <unk> St. Juste from Mizuho. Please go ahead with your question.
Hi, Good morning. This is ravi behavior on the lines of the Hondo Sanchez Hope you guys are doing well.
Just wanted to follow up here.
Given that theres less competition for the assets that you're that you are targeting are you able to secure better terms, maybe better annual escalators.
Well again.
Historically, the minority of what we've done is third party acquisitions. So we're not negotiating a lease with escalators. So I'll tell you in the sale leaseback transactions of the development arena retailers are more comfortable today and more amenable to increasing acquisitions, increasing excuse me increasing those increases.
Is that are scheduled for every five years.
Got it that's helpful. Just one more here are you expecting any impact to the portfolio from the Kroger Albertsons merger.
Absolutely not Cobra is one of our largest partners we have full kroger guarantees. The recent speculation has two a 250 store divestiture, we will see how that materializes with a 2024.
Potential closing as they've telegraphed, we'll see how that how that materializes through the FTC.
But we expect to absolutely no we have no albertsons in the portfolio as you mentioned.
Got it thank you.
Thanks.
Our next question comes from Linda Tsai from Jefferies. Please go ahead with your question.
Hi, can you remind us what percentage of your acquisitions have been from the 10 31 market versus sale leasebacks historically.
Peter I'm going to try to throw that one to you I don't have that number on hand, I will tell you approximately last year, 7% does that sound right with sale leasebacks, Yes sub 10% I think in 2022 sub 10%, we anticipate that number being elevated in Q1.
I can't give you a historic when you say 10 31 market don't forget these are sellers and so there may be 10 to 31 buyers competing with us.
They do with the proceeds whether they enter into a down like they have the ability to do a new purchase agreement or they just pay a capital gains tax is it always we're not always previously with frankly window, we're not privy to it.
Got it and then.
Just earlier you were talking about the ground lease situation with Chase Bank in Georgia, you noted a lack of options that resulted in a higher recapture rate was that more of a one off situation or something you think happens more in the current environment.
Well I appreciate the question. It was a very unique situation was the first time in the history of the company, we had ever had a ground lease expire with no options remaining.
We had another tenant at the table, who is ready to take the property.
At that over 170, $70000, a year, which was the 60% plus lift.
Chase came around and signed a new 15 year lease at that 60% lift with 10% bumps every five and so I think that demonstrates the embedded value in the ground lease portfolio. When a building reverts for free again. This was the first instance, I look forward to future instances of it but when you get a bill.
<unk> back for free and then all of a sudden somebody has to pay rent on it youre going to see NOI go up and again I'll remind everybody. We have a fee simple ownership of the land. This isn't a leasehold split fee simple leasehold split and the tenant paid for the construction of that building. In this instance, it was a it was a predecessor to chase that was on a ground we've paid for the building.
And then chase had taken that lease and hence why there was no options remaining and so we were obviously able to negotiate a very favorable outcome. There we actually bought that ground lease with two years remaining ando options.
Thanks for that and then how do you feel about the overall retail environment Wrinkle Party City Tuesday morning bed Bath Theyre not issues for you, but do you think this is a limited situation or indicative of more distressed forthcoming.
Oh I know I think it is whats coming I think we are on the pre COVID-19 train so.
<unk>.
There will be no time outs call like Covid, where everyone's just try to call a time out and flood the system with capital and cheap cheap debt.
Obviously, you mentioned we saw another bankruptcy just recently with Tuesday morning.
Bankruptcies will occur we can probably say.
<unk> bankruptcy to at home and office supply operator, pet supply stores sporting goods operators, we saw.
Tom's capital large Burger King franchisee, who we dispose of all of their assets in years. Prior if you look at our disposition, we developed for them in the Chicago MSA filing bankruptcy there will be more.
Carwash childcare space the urgent care space. The quick lube oil change operators. The experiential entertainment operators, there will be private equity backed companies that have to again, either had fixed or variable rate short term debt, where their ltvs and their rates are going to go way up those both those loans don't last longer than five years.
As we all know and then again, we're going to see retailer attrition.
<unk> to the pre Covid days as we make as we March toward this omni channel World, where 25% e-commerce penetration either through online delivery. Both this click and collect it's coming and so it's just a matter of time so.
I am very confident that we are now on the pre COVID-19 trained for rationalization of retailers.
Great.
Okay.
Thanks Linda.
And our next question comes from Wes Golladay from Baird. Please go ahead with your question.
Hey, good morning, guys.
We're seeing a lot of opportunity for the multi tenant tcs openings looking at.
The earnings release, you had a few and I think Brenham, Texas, and then on Alaska, Wisconsin, It almost almost like a shop visit at first glance. So what is going on there.
Yes, the TGF multi tenant effectively development, we're doing a number looking at a number of opportunities with both of them off price retailers TJ Maxx, Burlington Ross of the World Hobby lobby again, those retailers that are looking to expand there where historically working with developers and merchant builders that can know.
Longer finance these projects and make them work and so that's an area where we can.
We can continue we think to invest capital and continue to seek out opportunities.
Got it and then.
Maybe two quarters ago, there seemed to be a bid ask spread between what you wanted to do these transactions at the retailers thought they were what the pricing should be has that narrowed at all.
Debt markets have calmed down a bit I think you mentioned your debt, perhaps a desk down about 100 basis points over the last few months.
No I think Peter Peter referenced about 20 basis points over the last few months 10 years, specifically right 10 year came down from maybe call. It low sixes to what's mid fives today relative to what we discussed on the last call, but less than a 100 basis points for us.
Okay.
I think everybody is looking at the relative cost of capital I think for the merchant builders perspective, specifically they are looking at not only the relative cost of capital they're looking at.
There are construction loans the availability of construction loans the interest rate on the construction loans.
Labor shortage, we have in this country, leading to the inflationary pressures you know construction costs in this country haven't gone down from $19 four year over year and so now you combine that with an exit cap rate that's unknown to put a shovel in the ground as the private developer and build a TGF combo store with a Burlington Ross together.
You got to be pretty boldly and so we think those are the types of asymmetrical opportunities, where we can step in with our diverging capabilities and create value in Korea, the appropriate spread for shareholders, while not going up the risk curve into assets that we don't think are appropriate.
Got it thanks guys.
Thanks Wes.
And ladies and gentlemen, with that and showing no additional questions I'd like to turn the floor back over to the management team for any closing remarks.
Well. Thank you operator, and thank you everyone for joining us today, and we look forward to seeing you in coming weeks at the upcoming conferences.
Thank you.
And ladies and gentlemen, with that we'll conclude today's question and answer session as well as today's presentation. We thank you for joining you may now disconnect your lines.