Agree Realty Corporation Q1 2023 Earnings Call
[music].
Good morning, and.
And welcome to the agree Realty first quarter 2023 conference call.
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I would now like to turn the conference over to Brian Hawthorne Director of corporate Finance. Please go ahead Brian .
Thank you good morning, everyone and thank you for joining us for acreage Realty first quarter 2023 earnings call before turning the call over to Joey and Peter to discuss our results for the quarter. Let me first one through the cautionary language.
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.
In addition, we discuss non-GAAP financial measures, including our core funds from operations or core <unk> adjusted funds from operations or <unk> and 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.
Brian and thank you all for joining us. This morning I'm extremely pleased to report that we're off to a strong start in 2023.
Lack of competition amongst both public and private buyers has provided us with greater access to attractive risk adjusted opportunities than anticipated.
Demonstrated by our first quarter investment activity, even more evident in our pipeline and seller fatigue, that's contributing to a narrowing bid ask spread.
<unk> seen a recent acceleration of seller capitulation is the reality of the new pricing paradigm has begun to set in.
Due to market forces capitalized competition within our targeted sandbox is extremely limited our ability to quickly diligence and certainly certainty to close a very attractive proposition for owners that have been on and off market with private purchasers.
Our pipeline over the last few weeks has been very dynamic with a wide spectrum of opportunities.
And the last several days alone we've executed letters of intent to acquire over 100 million in high quality assets at attractive cap rates.
<unk> diversified portfolio sale leasebacks distress developers and early extensions or among the approximately 100 properties that we currently have under control.
Given our acquisition volume in the first quarter and increased visibility into our pipeline. We are raising our acquisition guidance from at least 1 billion to at least $1 2 billion acquired for the year.
That said the world remains quite volatile and we will not waver from our stringent underwriting criteria.
The investments we have made in technology and our team has provided our company a distinct competitive advantage with our analysts and rotation programs led by our EVP of people and culture, Nicole would have been had given our deep bench of multifaceted and talented future leaders.
Our multi year investments in information technology led by both arc and our ERP system are continuing to bear fruit, enabling us to be Nimbler and review source of X few transactions more efficiently Peter will speak to the G&A leverage we continue to gain in a few minutes.
Our decision to pre IPO ties our balance sheet in advance of this year has proven prudent and we remain in an extremely strong position. We ended the first quarter with approximately $1 2 billion of liquidity significant outstanding forward equity and well below the low end of our targeted leverage range.
On earlier calls I stressed that we would avoid moving up the risk curve are shifting our strategy. We have been very successful leveraging our relationships and core competencies to identify extremely high quality opportunities and economic and geopolitical uncertainties remain.
During the first quarter, we invested over $314 million and 95 high quality retail net lease properties across our three external growth platforms. This includes the acquisition of 66 assets for approximately $302 million in the tire and auto service home improvement grocery auto parts dollar store and farm.
<unk> rural supply sectors, among others, the weighted average cap rate of the acquisitions was six 7% a 30 basis point expansion relative to the fourth quarter and 50 basis points higher than the full year 2022.
75% of the acquisitions are leased to investment grade retailers and our weighted average lease term of over 13 years was a five year high.
We acquired two ground leases during the quarter, representing 19 million approximately 7% of total acquisition volume for the quarter.
The breadth and variety of transactions during the quarter demonstrates our unique value proposition and the strength of our industry wide relationships. We executed several sale leasebacks with our retail partners led by two transactions in the grocery space with national and Super regional operators, both of which carry investment grade credit ratings.
Also completed the acquisition of a diversified portfolio from an institutional seller several blend and extend opportunities as well as the number of developer direct transactions.
Our long term vision that of a full service real estate focused net lease retail Avi and not simply a spread investor has accelerated due to the capital constrained environment and our team's hard work across multiple fronts.
Moving on to our development and Pcs platforms, we commenced five new projects with total anticipated costs of over $19 million construction continued during the quarter on 21 projects with anticipated cost totaling nearly 1980 $6 million three projects in Florida, and California, we're wrapped up during the quarter for group.
The equation.
The aggregate, we had 29 projects completed or under construction during the quarter with anticipated total cost of $115 million inclusive of the $59 million of costs incurred as of March 31.
On the leasing front, we executed new leases extensions or options on approximately 510000 square feet of gross leasable area. During the first quarter notable extension options or new leases, including two Sam's clubs located in Lansing, Michigan and Brooklyn, Ohio, We were in a very strong position for the remainder of the year with just two.
16 leases or 80 basis points of annualized base rents maturing.
At quarter end, our growing retail portfolio surpassed 1900 properties across all 48, Continentally, United States, including 200 need ground leases representing over 12% of total annualized base rents.
Occupancy remained very strong at 99, 7% and our investment grade exposure stood at 68% our portfolios portfolio continues to be the preeminent retail portfolio in the country remains extremely well positioned to withstand any macroeconomic headwinds with that I'll hand, the call over to Peter and then we can open up for questions.
Thank you Joey starting with earnings core <unk> for the first quarter was <unk> 98 per share representing a <unk>, 6% year over year increase.
<unk> per share for the first quarter increased one 5% year over year to 98 says.
We received over $1 $2 million or percentage rent during the quarter, which contributed more than a penny of earnings to core <unk> and <unk> per share respectively. This should largely dissipate for the remainder of the year as most tenants are obligated to pay during the first quarter.
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 half a penny in the first quarter.
Our consistent and reliable earnings growth continues to support a growing and well covered dividend.
During the first quarter, we declared monthly cash dividends of 24 per common share for each of January February and March on an annualized basis. The monthly dividends represent a five 7% increase over the annualized dividend from the first quarter of 2022 at 73% our payout ratio for the first quarter was below the low end of our.
Targeted range of 75% to 85% of <unk> per share.
Subsequent to quarter end, we announced the monthly dividend of $24 <unk> per share for April the monthly dividend equates to an annualized dividend of nearly $2 92 per share, which represents a three 8% year over year increase and a two year stacked increase of 11, 7%.
General and administrative expenses totaled $8 $8 million in the first quarter G&A expense was six 5% of revenue adjusted for the noncash amortization of above and below market lease intangibles or 7% of unadjusted revenue.
For the full year, we expect G&A to decline a minimum of 50 basis points as a percentage of adjusted revenue as our IC investments that Joe referenced earlier and process improvements have enabled us to scale very efficiently. This would represent a two year stack decrease of at least 100 basis points.
Total income tax expense for the first quarter was approximately $783000 for the full year 2023, we expect income tax expense to be between three and $4 million.
Moving onto our capital markets activities, we settled approximately $2 9 million shares of outstanding forward equity during the first quarter. Realizing net proceeds of $195 million at quarter end, we still had approximately five 3 million shares remaining to be settled under existing forward sale agreements, which are anticipated to raise net proceeds.
These are $362 million upon settlement.
As of March 31, our net debt to recurring EBITDA was approximately three seven times pro forma for the settlement of our outstanding forward equity excluding the impact of unsettled forward equity our net debt to recurring EBITDA was approximately four five times.
Total debt to enterprise value at quarter end was approximately 24%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend remained at a very healthy level of five one times.
We ended the quarter with total liquidity of $1 2 billion.
Including approximately $804 million of availability on the revolver $362 million of outstanding forward equity and $13 million of cash on hand in summary, we continue to maintain a fortress like balance sheet that affords us tremendous flexibility to take advantage of the lack of competition in the market and execute on high quality opportunities.
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.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys into a draw a question. Please press Star then two.
Again, we ask that you please limit yourself to two questions for today's call.
At this time, we will take our first question, which will come from Josh <unk> with Bank of America. Please go ahead with your question.
Yeah, Good morning, Joey Peter.
Oh Boy I Wonder if that's where your comment on seller just everything that's gone on you're accelerating your ship to England.
Real estate provider for your carrier partners is what what's shifting what's accelerated and whats to come.
Good morning, Josh I. Appreciate the question I think this is this has been a long term vision for US building out all three platforms all three external growth platforms.
As well as the remainder of the team. So it's a it's really a function of being able to deliver on multiple different avenues for growth whether that sale leasebacks with our retail partners all the way to organic development and anything in between the personnel changes we've had here the team that's developed through again as I am.
Mentioned the analysts in the rotation programs, we are actually celebrating the 10 year anniversary of our first analysts today.
At lunchtime it it's really it's really provided us the opportunity.
Deliver multiple platforms at the same time retailers today, given the capital constrained environment I think appreciate our ability to to really <unk>.
To accelerate their growth and the step into challenging situations given the availability of capital we have it and then those multiple levers and options that we provide.
And then let me know.
Just on the cap rate side.
It feels like probably close to stopping.
Stopping a interest rate increases from here just kind of curious here what are you seeing on the on the private side, let's just don't feel like there's adjustments to call them on the cap rate side or where is there further kind of uplift in cap rates.
Well, it's tough to predict the future in this in this world we live in today, what we see as I mentioned during the prepared remarks, as we see frankly more seller fatigue and capitulation.
That's accelerated in the.
In the past few weeks as I mentioned, but we see sellers frankly meeting the market.
And we are the purchaser of choice there and so what happens on a go forward base will be difficult to obviously, we have visibility into Q3, I anticipate cap rates could potentially tick up nominally as well sorry, Q2 could tick up nominally as well seeing beyond 70 days is very difficult and I remind everybody.
This is a large and fragmented space.
And we're looking for opportunities within it and so I'm not sure it's necessarily emblematic of the broader cap rate environment.
Thank you.
Thanks, Josh.
And our next question will come from Eric Wolfe with Citi. Please go ahead with your question.
Thanks, Good morning, I'm looking at your revised acquisition guidance and announced a nearly 5% of your current enterprise value I'm. Just curious whether you have any sort of internal rule as to how much cash flow grow should be created from this level of activity.
Every 10% growth in EV should equate to 4% to 5% growth in cash flow.
Basically the internal rules that you have around rewarding capital providers.
Well.
I'd tell you there's no internal hard and fast rule, there, obviously enterprise value enterprise growth should result in a F. F O an increased dividend to shareholders. We're very cognizant of investing capital to make sure that we're doing it on an accretive basis at the same time qualitatively I would tell you is just important as you can see during this quarter.
Probably with the highest quality quarter of acquisitions potentially we've ever had outside of maybe the depth of COVID-19, you're looking at 75% investment grade assets over 13 years of term to some of the best retailers in the country. So at the same time, we want to deliver obviously accretion to our shareholders, we want to improve the portfolio.
So as we've talked about for a couple of quarters here and as well as the prepared remarks, we're just not going to go up to the risk up the risk curve there.
Create larger spreads while sacrificing on real estate and credit quality, that's not something we're willing to do and so I think the most important thing that investors and listeners can take away from this call is we've been able to maintain our discipline, we haven't undertaken any strategic shifts.
And we're able to execute through all the different levers that we have in terms of growth.
Got it and is there any sort of I guess spread.
You know make you go out hire on the risk curve I mean, if you were able to get a nine cap rate for instance versus let's say call. It six seven because I'm just trying to figure out you know if there's a certain level of loss that's embedded in your view of.
Non investment grade tenants versus investment grade.
That's sort of would help explain if there's a certain spread that might get more or less attractive.
It's a great question, it's case specific for us I'll remind everyone. We will target investment grade that is not a bogey for us we're a huge fans of operators like Publix and Chick Fil, a and hobby lobby at all D, which don't carry an investment grade credit rating just the predominance of.
The best retailers in this country, obviously carry an investment grade credit rating in terms of going up the risk curve and spreads. It's a function of credit, but also a function of just residual.
We're not interested in single purpose boxes here.
That is something that we we avoid we're not interested in car washes or top golfs in just naming a few obviously that we can't get to the residual I've always talked about.
A good net lease investor.
As opposed to a fixed income investor is is it doesn't have a.
Repayment of principal on the exploration of that term the art of net lease investing is understanding what that residual real estate is and what the demand for that is so single purpose boxes to us our biggest challenge from a credit perspective, obviously, we're able to underwrite those but again single purpose boxes do.
Drive less demand and unfavorable outcomes when it comes to releasing in the event of a lease exploration or a bankruptcy and rejection.
Got it thank you.
Thank you.
And our next question will come from Rob Stevenson with Janney. Please go ahead with your question.
Hi, good morning, Joey Theres, a slew of Gerber collision to the development pipeline and the ones you referenced that were recently completed I think it's like 21, including the three completed once these are all completed by year end, where does that take the $1 seven of ABR I know a lot depends on what else you acquire elsewhere, but where does that exposure sort of stabilized does that.
2% exposure tenant when all of a sudden done 3% how do you envision that.
No I think I think you're dead I think that's most likely a 2% to 3% exposure we've talked at length at length about gerber collision and probably at the lower end, frankly that 2% to 3%, but we've talked at length about gerber collision there relative space in the relative position in their collision space again, Theres three large op.
Operators in this country Gerber as the only non private equity owned publicly owned by Boyd Group, you can look and see their balance sheet their financials on the Toronto stock exchange there are tremendous operator, they're a great partner for us. It is a extremely interesting space given the depth and complexity.
Of just the collisions in the repairs that occurred today I think I talked about it.
You tap your bumper on a light on a light pole today, it's two cameras in our sensor and so <unk> got a very unique proposition and they are really aligned with the third party payers the auto insurers in this country in.
In terms of targeting net new store opportunities and so we're a big fan of Gerber and we think that they are the preeminent operator in the <unk> space, but I think your 2% to 3% on the low end of that 2% is probably appropriate.
And do they continue to be a disproportionate amount of the starts over the next two.
12 months or are there other or is that sort of wind down now and replaced by other people in that development pipeline.
We will see.
I would tell you, we obviously have a significant pipeline to wrap up with Gerber. We we completed three projects in Florida and in California, but we're always looking at opportunities with Gerber, but then also other retailers that can change on a dime.
And then second question how are you thinking about dispositions today, given the current market environment, you've been buying but is today also the right time to sell assets other than theaters or are you better off holding assets without near term tenant issues until interest rates settle down how are you thinking about that.
I think we're really first of all we're really comfortable with where the portfolio stands today.
We have been active especially on a relative basis historically on the disposition front or whether it was reducing walgreens exposure franchise restaurant exposure health and fitness exposure Luckily we didn't make.
Too many missteps along the way since launching the acquisition platform in 2010, I think the biggest challenge with disposition activity. Today is is just it's a cost benefit analysis frankly of time.
And this team, which works they're bought off here.
Rolling through 2031 potential purchasers.
Three different three different purchase agreements and dropping them is just frankly, an inefficient use of our time for minimal proceeds. So if there are everything in our portfolio of 1900 assets are for sale at the right place at the right price, but we arent going to be inefficient and waste our time with buyers that are necessarily capable of executing and so.
We'll continue to vet opportunities at the same time, we don't need to be and recycle capital mode to try to generate those spreads given the position of our balance sheet.
Okay. Thanks I appreciate the time this morning. Thanks.
Thanks, Rob.
And our next question will come from Hendel St Juste with Mizuho. Please go ahead with your question.
Hi, Good morning. This is Ravi busy on the line for <unk> I Hope you guys are doing well.
I wanted to ask you about you know larger portfolio deals can you discuss the pricing of the larger deals within what you acquired this quarter and are you still seeing large portfolios come to market should we still expect portfolio discounts in this current environment.
Hum.
Okay.
It's a moving target Ravi I think the portfolio transaction. We did was a diversified portfolio of approximately eight to 10 assets. There were some unique nature in terms of short term leases and there were no early extensions.
I think the portfolio discount depends on who is out there in the market and want to deploy capital at that time, and so a lot of it is time and place.
Tell you is certainly there is less bidders out there.
As I mentioned in our prepared remarks, there the competition is infrequent.
Slim or none today and so it's really based upon the timing of that potential sale as well as the composition of it and then the select purchaser of potential purchases that are out there they are frankly.
Needs at the time, Inc.
Got it just one more here can you discuss your funding needs to execute on your revised acquisition target and what would you let your leverage tick up from the four and a half that it is today before where issuing equity.
I'll, let Peter talk about it in detail, but our funding needs are frankly are not and we were very clear coming into the year pre appetizing the balance sheet that we could execute while staying within our targeted leverage range, but I'll hand that over to Peter yes.
Yes, Ravi we ended the quarter in a great position with pro forma net debt to recurring EBITDA of three seven times total liquidity of $1, two including $360 million of outstanding forward equity and so as Joey mentioned, we have plenty of capital today to execute on our acquisition guidance and we don't have a need for additional equity this year and we.
Can stay within our targeted leverage range, while executing on that guidance and so.
We're in an excellent position today.
Got it. Thank you I appreciate the color guys.
Thanks.
And our next question will come from Linda Tsai with Jefferies. Please go ahead with your question.
Hi, Good morning can you provide color on the profile of the sellers, who are capitulating on pricing and with rates potentially stabilizing now you know what do you think the impact and how long would it take to show up in pricing in the transaction market.
Hey, good morning, Linda it's a wide breadth.
And range of.
Sellers that are meeting the market well I'll tell you we've seen an acceleration.
In merchant builders private owners, specifically, none that are overly notable but there were holding the line and hoping for 2021 and the first two thirds of 2022 pricing and then and then have effectively capitulated to pricing that we think we think made sense in prior calls.
As I mentioned, we haven't seen old riley's or tractor supplies or any of those types of credit correct call at 615 on full term assets.
That's no longer the case and so the rates may be stabilizing here spreads are still wide the cost of capital the inputs for <unk>.
Private owners today, whether it's construction loans.
Or more permanent debt.
It's still obviously extremely.
Disparate from where it was just a just a year ago and so we're going to continue to see hopefully more sellers meet that market and frankly get off of their five handles I mean that was the real problem is that sellers were holding onto those those five handle transactions that frankly really werent transaction absent the law.
10 31 buyer.
And then on the merchant developers facing the need to sell that you've been talking about the past few quarters, how how deep is this cool and you know how many more quarters do you think you could.
Opportunistically.
Buy from them.
Well it's interesting.
I would tell you that the conversations have now transitioned to our retail partners, who are now looking at their 2024 pipelines in the merchant build programs and how they can effectively backfill of those programs that can range from its creating self development programs doing more on balance sheet converting their merchant builders to fee programs.
<unk> with somebody like us to either develop or be the capital source I'll tell you those are weekly conversations that we have.
The merchant builder stuff will will continue to flow. The question is how high do we frankly want to take some of these exposures where merchant build programs, where effectively the driver of growth for some of these retailers.
But the conversations right now that we're having are about solving for 2024 needs and beyond and they involve both the merchant builders, but also the ultimate resolution is going to be driven by the retailer and how they can change their platforms to execute on their store and strategy in this in this new pricing paradigm that we're in today.
Thank you and just one last question.
In terms of portfolio allocation, how comfortable are you with.
Exposure I guess your grocery exposure ticked up a little bit close to 11% nowadays.
Extremely comfortable were not going up the risk curve, obviously kroger jumped.
This quarter, we're not buying small grocers IV grocery transaction, we did during the quarter because with an investment grade operator, including the two sale leasebacks, we acquired our first whole foods.
This quarter or this past quarter as well. So I think if you look at if you look into that exposure, we're acquiring the best grocers in the country here.
We have very good relationships with.
Thank you.
Thanks Linda.
And our next question here will come from Brad Heffern with RBC capital markets. Please go ahead with your question.
Yes, thanks, good morning, everyone.
Curious how much of the seller capitulation is just a final recognition that the world has changed and how much of it is more attributable to just the recent turmoil in the bank and financing markets.
Yes, I don't think any of it as necessarily I mean that is obviously recent news here in terms of the recent turmoil in the bank market.
I think it is seller finally, realizing that holding out for the 10 31 or private purchaser with that size handle just isn't working obviously comps are.
Trailing data I think they are starting to see more realistic comps I think theyre talking to brokers here that are saying this is going to be sitting on marketed slim to none that this actually trades in the mid fives or low fives and I think we're just seeing frankly seller fatigue.
This is an across the board by any means these aircrafts, we were guiding to $1 2 billion at least this year. This is at a wholesale change, but we are seeing an acceleration, especially in the past few weeks have sellers waving the flag.
Okay. I mean do you think that there will eventually be maybe more on the cap rate side that emerges from this bank's stuff I'm just thinking that the market you guys compete in 10 31, so a small boxes like presumably a lot of people will go to a bank to finance things like that so do you think eventually it create some sort of pressure it serve.
Can't hurt.
It certainly can't hurt I think.
We've seen the 10 31 market dwindled to a fractional piece of what it was.
Many of those purchasers if they weren't all cash as you mentioned relied upon the regional bank market.
For leverage and so it certainly can't hurt I would tell you that it does put wind at the back of a potential expansion of cap rates here, but again it really it really comes down to individual owners here and their willingness <unk> decision to took officially.
Okay got it and then Peter going back to kind of the financing commentary from earlier in the capital markets commentary you mentioned no need for equity for the rest of the year.
For the incremental debt I mean is the expectation that that just goes on the credit line or would you think about doing some sort of unsecured offering our term loan and locking and where rates are now.
Yes, I think that will ultimately depend Brad on the markets and what we see from a pricing perspective as you mentioned there is no near term need for capital today, our revolver has just under $200 million on it as of the end of the quarter and so we have plenty of capacity there as well as a $360 million outstanding forward equity and so in terms of accessing.
The capital markets for the remainder of the year, we will continue to monitor them and be opportunistic in terms of how and when we access.
Okay. Thanks.
Our next question will come from Wes Golladay with Baird. Please go ahead with your question.
Hey, good morning, guys, how big can you get this development at Tcs program. This year and then can you give us an update on bed Bath and beyond can you start any redevelopment there. This year, if you get any back.
Yes, good morning.
To the second question to bed Bath, we have the three bed bath paying an average of $950 to $940 a foot in the portfolio. We're extremely excited to get those back we think we will see a significant NOI.
NOI lift from those opportunities and have tenants effectively ready to go it really depends on when bad that turns those stores over.
Whether or not our Cds would be this year I would anticipate most likely most likely next year as bed Bath continues to wind down to their liquidation process.
I would also add those leases could be acquired alright, those leases could be acquired through the bankruptcy process and then you'd have on the flip side absolutely no gap in terms of rent. So we'll see how those how those play out but there are three.
Really great pieces of real estate with significant interest in predominantly off price players.
Your first question what was the worst.
Yes.
I think you started five projects in the first quarter, how big could that get this year for starts.
It's going to get as big as it can get as large and as deep as opportunities make sense in today's environment again duration equals risk development has longer duration and so it has to be appropriate spreads that we think we're going to be renewing right.
Appropriately and so we will be selective.
And what we enter into from a development or partner capital solutions platform, just because of that duration risk and the unknown macro with cap rate interest rate environment that we're in.
We're seeing a lot of projects, we're seeing a lot of opportunities on both fronts. We are working with a number of retailers on organic fronts.
But we want to make sure we don't get caught behind the eight ball here. If we continue to see cap rate expansion and have shovels in the ground that are delivering 12 to 18 months from now.
Got it and then just my final question.
<unk> talked in the past about the cost of debt being maybe higher than the cost of equity, especially on the short term is there a point where software gets too where you're just settled the forward early without acquisitions lined up it just pay down the line of credit.
Yes. This is Peter I think we continue to view the revolver as an effective tool for shorter term borrowings and will continue to utilize it throughout the year, where appropriate as you mentioned, we have $360 million of forward equity.
And fully Backstopped, our current outstanding balance on the revolver and so we will continue to monitor what makes the most sense in the context of revolver pricing, our pipeline and other capital markets opportunities available to us.
Great. Thanks, everyone.
Thanks Wes.
And our next question will come from Keybanc Kim with Truest. Please go ahead with your question.
Thanks, Good morning, So Joey given that your portfolio has a significant E press.
Present, what kind of cost.
Capital pressures are they feeling and does that open up additional opportunities for you guys and secondly, do you try to price.
Cap rates.
Somewhat in lockstep, if you see a rise in cost of capital for your tenants.
Good morning, keeping its a great question, you can see sale leaseback transactions that trade.
Extremely disparate or more in lockstep with the unsecured paper of their respective retailers and Thats an interesting question that.
That Peter frankly, often brings up when we look at potential transactions or transactions relative to the space I'll tell you. We are seeing an increased opportunities we executed on a number of sale leasebacks in the first quarter. Obviously these retailers are very cognizant of where their cost of capital specifically their cost of debt is.
There is a number of transactions in the pipeline, we will execute in Q2 and Q3 early in Q3 already.
And so it is it is an opportunity for us that I think will be disproportionate in terms of volume in the overall volume for the year as everything goes as if everything goes as anticipated, which is probably a big astrosphere, but we're seeing an increased flow from our retail partners that are coming to us and saying.
Where does this makes sense to do a sale leaseback and obviously, they're comparing that at the CFO level to where that where they can issue unsecured paper.
And what does the cap rates look like for the acquisitions that you have in the pipeline for <unk> and.
And second.
At what price can you raise debt at longer term debt.
I'll take the first part I'll, let Peter answer the debt question Q2, as it stands right now will either be not will be either be nominally higher similar composition in terms of credit profile are nominally higher cap rates or equal really depending on the timing of some closings here.
But I think our Q2 pipeline obviously is strong that's why we increased guidance here.
It's accelerated as I mentioned in the prepared remarks.
Quite drastically in the last week and keeping in terms of our cost of debt today, we could price 10 year debt and roughly the mid fives, which is relatively in line with what we discussed I believe on last quarter's call, but again today, we don't have a near term need for that debt capital.
And if I can cheat here and ask a third question.
So you did a deal with Kroger, obviously, if you have a joint venture with Ocado to build out there.
See the automated grocery distribution centers.
Is that at all an opportunity youre looking at.
No.
We're going to stick to retail.
Obviously, they've actually pared back the openings with Kroger ocado, but we're going to stick to single tenant retail here with the dominant operator, so the nine kroeber's added during the quarter I believe was nine where all freestanding grocery stores.
Okay. Thank you.
Thanks Steven.
And our next question will come from Ronald Camden with Morgan Stanley . Please go ahead with your question.
Hey, just a couple quick ones on just on the ground leases I appreciate the commentary on telecom situation on the acquisitions, but maybe can you talk specifically to the ground leases out what youre seeing there in terms of cap rate movement and opportunities.
Yeah, I think if anything people had been more.
Cognizant of ground leases I've talked on previous calls probably due to some of our fault and then face recognition.
And in the sell side recognition there is more attention paid to them. We acquired two during the quarter. There is a number of them in our pipeline.
But I think people are becoming generally speaking more aware of the embedded value in the ground lease space.
We were very fortunate to take advantage of it for a while but we continue to find those select opportunities whether they be blend and extends but a really interesting one and in California. This quarter with the with this.
A former seller.
But we will continue to source those opportunities, but I do think there is more recognition of the embedded value in that space now.
Got it and then the second question was just.
So you know obviously the acquisition guidance ticked up.
<unk> this quarter.
You talked about sort of more salary capitulation I think we can sort of appreciate that comment.
When do you think sort of like what needs to happen for acquisitions to get back to you know.
10% of EV right is it right that the macro.
So what are we sort of waiting for to get this engine back.
Given that you guys are sort of in an advantaged position.
At this point.
Well at $1 2 billion were more than 10% of EV for the year right. I think we're still at call. It 12 to 12 ish percent of enterprise value I think what needs to happen is we need to see spreads adjust appropriately whether the cost of debt comes in or cap rates rise or or or any of the cost of capital inputs give us some more favorable.
<unk> spread.
And so again the year is still fairly young and can change any day here.
Don't have visibility outside of the first couple of weeks frankly, right now of Q3 with an average transaction taking 71 days.
R R.
Our commitment has always been as we see the pipeline materialize, we're going to keep market participants' current and so that increasing guidance specifically reflects our Q2 pipeline and the beginning of Q3.
Got it makes sense. Thanks, so much.
Right.
And again, if you have a question you May press star one to enter the queue.
Our next question here will come from Tayo Okusanya with credit Suisse. Please go ahead with your question.
Hi, Yes, good morning, everyone.
Joey.
You guys are clearly Iga, but.
But I think you can get a lot of it is also time to do a lot of stuff in the non <unk> middle market.
Side by side of the equation I'm curious.
Surprised you haven't.
Issues on that side.
Of the.
Of the tenant base.
It just seems interesting that with everyone kind of talking about credit being hot now.
In order to get bigger.
I'm not talking about potential slowdown in consumer demand all these kind of things.
That credit across the board both on the <unk>.
<unk> side has been so stellar.
Well.
I wouldn't tell you I am surprised I think we're seeing cracks that are are publically available so whether that bed bath to be on party city Tuesday morning filing bankruptcy as public entities, whether it's the Burger King franchisees, we've seen that have made the news.
I think a lot of the lapped a lot of the challenges of the lack of transparency in this space relative to individual asset credit and portfolio concentrations.
And so.
I would tell you. The first step is always a rent concession or deferral.
The second step is.
Is generally something more overt that's available to investors to see if at all which shows up in obviously occupancy first.
But I would tell you we're very early on in this cycle I continue to believe that we are seeing.
Our post Covid retail world that is rationalizing back to the pre Covid world, which will involve more bankruptcies more store rationalizations in the cream rising to the top.
Now a lot of that is subject obviously the macroeconomic outlook, we don't have a crystal ball the strength of the consumer but we're starting to see we're starting to see cracks in the casual dining space, you'll see lots of those assets currently flooding the market with some named everybody's familiar with I think the red lobster challenges have been obviously better than.
<unk> with their parent company.
So I think we're going to continue to see this and it's not going to be a falling knife unless something dramatic happens in the economy continues to demonstrate itself and reveal itself in cracks now how you read through those cracks and what you think the potential outcomes are relative to the macroeconomic outlook I think that is up to everybody.
Individuals serving.
Fair enough. Thank you for the commentary.
I appreciate it.
And that concludes our question and answer session.
Like to turn the conference back over to management for any closing remarks.
Thank you everybody for joining us today, and we look forward to see you at the upcoming conferences and we appreciate everybody's time.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.