Q2 2023 Agree Realty Corporation Earnings Call
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Okay.
Good day and welcome to the egg Realty second quarter 2023 conference call.
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I'd now like to turn the conference over to Brian Hawthorne Director of corporate Finance, Brian . Please go ahead.
Thank you good morning, everyone and thank you for joining us for a agree Realty second quarter 2023 earnings call before turning the call over to Joey and Peter to discuss our results for the quarter. 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 yesterdays 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.
Lucky statements. In addition, we discuss non-GAAP financial measures, including core funds from operations or core <unk> 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 web.
Site and SEC filings I'll now turn the call over to Joey.
Thanks, Brian and thank you all for joining us. This morning. This quarter, we celebrated several notable milestones for our company we surpassed the 2000 property Mark in 49 states, adding Alaska to our geographic reach our tremendous team has now doubled the size of our portfolio and less than three years.
Additionally, we have completed and moved into our new state of the art headquarters to support our continued growth. The building includes cutting edge technology, a wellness center locker rooms, and auditorium, a coffee bar bar outdoor spaces and other collaborative meeting areas.
We've incorporated a number of environmentally friendly features and anticipate that the building will achieve LEED certification in the near future.
Lastly, we have continued to invest in information technology and made further enhancements to our proprietary arc database with the rollout of an updated module for development and construction.
These investments are paying significant dividends, they've increased automation and significantly reduced manual entry.
This has created thousands of hours of time savings that have enabled us to strategically reallocate resources to further further bolster our sourcing underwriting and relationship management capabilities in.
In addition, these savings and our continued top line growth are anticipated to bring G&A as a percentage of revenue down at least 50 basis points to 6% or lower this year.
Looking ahead, we have ambitious plans for our it environment and we look forward to sharing more with you in the coming months.
Moving to on to our results I'm very pleased to report that we continued our strong start to the year deploying significant capital across our three external growth platforms, maintaining near full occupancy and further solidifying our balance sheet.
During the quarter, we invested approximately $324 million and 120 high quality retail net lease properties across our three external growth platforms. This includes the acquisition of 92 assets for approximately $305 million.
The properties acquired during the second quarter are leased to leading retailers operating in sectors, including off price retail farm and rural supply dollar stores auto parts and tire and auto service.
Our closed transactions to date and current pipeline include a myriad of different transaction structures sale leasebacks with leading operators blend and extend opportunities new and repeat sellers as well as distressed developers we continue to be the first and last call in a highly fragmented and fatigue market.
Cap rates continue to move in our favor as demonstrated by our second quarter results. The acquired properties had a weighted average cap rate of six 8%, a 10 basis point expansion relative to the first quarter and 60 basis points higher than full year 2022.
A weighted average lease term was close to 10 years and approximately 73% of annualized base rents are derived from investment grade retailers.
We acquired three ground leases during the quarter, representing approximately $26 million or 8% of total acquisition volume for the quarter.
Given our acquisition volume year to date and increased visibility into our growing pipeline. We are raising our acquisition guidance from at least $1 2 billion to at least $1 3 billion for the year.
We anticipate the third quarter to be our largest volume quarter to date this year as our pipeline has grown significantly.
As always we remain disciplined to our underwriting criteria and avoid moving up the risk curve or deviating from our strategy.
Our fortress balance sheet enables us to execute on many exciting opportunities while most of our competition is sidelined as mentioned on prior calls there continues to be a lack of competition within our targeted sandbox and our ability to move quickly and with certainty makes us the buyer of choice in today's market.
A seller fatigue continues to settle in we've been able to execute at an extremely high quality opportunities, while pushing cap rates 60 basis points above last year's average.
Through the first half of this year, we invested $638 million across 189 retail net lease properties spanning 36 states in 22 retail sectors.
Approximately $607 million of our investment activities originated from our acquisition platform.
Close to three quarters of the annualized base rent acquired in the first six months of the year comes from leading investment grade retailers.
These metrics demonstrate our continued ability to execute and opportunities with best in class retailers across multiple different avenues, including one off acquisitions from both individual and institutional Counterparties sale leasebacks with our retail partners diversified portfolios development and our partner capital solutions program.
In light of the increased interest in that program and to more clearly define it for future perspective developers, we renaming the program a developer funding platform where D. S. P.
Increased activity, we're seeing across our development in D. F. P platforms as evidenced by the 31 projects completed or under construction, representing a record capital commitment of approximately $126 million.
As of June 30th we incurred approximately $78 million of costs related to the 31 completed or ongoing projects.
During the quarter, we commenced two new projects with total anticipated costs of approximately $10 million construction continued during the quarter on 20 projects, though were $87 million of anticipated total cost.
Six projects were completed during the quarter, including a homegoods and South Elgin, Illinois, a sunbelt rentals in St. Louis, Missouri, and three Gerber collision developments.
Moving on to leasing we executed new leases extensions or options on over 280000 square feet of gross leasable area during the second quarter, including a Walmart in Lansing, Michigan, and our hobby lobby and Mount Dora, Florida through.
Through the first six months of the year, we executed new leases extensions or options on approximately 793000 square feet of gross leasable area.
We are in excellent position for the remainder of the year with just 10 leases are 30 basis points of annualized base rents maturing.
As I mentioned earlier, our best in class portfolio now spans more than 2000 properties across 49 states, including 210 ground leases, representing 11, 9% of total annualized base rents occupancy. This quarter remained very strong at 99, 7% and our investment grade exposure is approaching 68%.
With that I'll hand, the call over to Peter and then we can open it up for questions.
Thanks, Joey starting with earnings core <unk> per share for the second quarter was unchanged compared to the same period last year at 98.
<unk> per share for the second quarter increased one 1% year over year to 98.
In April we increased our monthly cash dividend to $24 <unk> per share representing a one 3% month over month increase.
We subsequently declared monthly cash dividends of $24 <unk> per share for each of May June and July .
The monthly dividend represents an annualized dividend amount of almost $2 92 per share and is three 8% higher than the annualized dividend from the comparable periods in 2022.
Our payout ratio for the second quarter was below our stated range at 74% of <unk> per share or growing dividend continues to be supported by a strong payout ratio and continued earnings growth.
General and administrative expenses totaled $8 $4 million in the second quarter G&A expense was six 1% of revenue adjusted for the noncash amortization of above and below market lease intangibles or six 5% of unadjusted revenue.
As Joey mentioned earlier, we continue to gain G&A leverage for the full year, we still expect G&A to decrease at least 50 basis points as a percentage of adjusted revenue.
Income tax expense was approximately $709000 during the second quarter for the full year. We now expect income tax expense to be between two and a half and $3 $5 million down from the previous range of $3 million to $4 million.
Moving to our capital markets activities, we further fortified our balance sheet during the quarter with commitments for $350 million $5 five year term loan with strong support from our key banking partners.
We closed the term loan on July 31, and drew the full $350 million, which was used to pay down all amounts outstanding on our revolver.
Today, we have no variable rate debt outstanding and no material debt maturities until 2028.
This was a market leading financing and the $5 five year term allowed us to extend the maturity into 2029, which fits nicely into our debt maturity schedule and.
In advance of closing the term loan we entered into a $350 million of forward starting swaps to fixed so for over the five year period.
Including the impact of the swaps the interest rate on the term loan is fixed at 452% based on our current credit ratings.
The term loan also includes an accordion option that allows us to request additional lender commitments up to a total of $500 million.
We settled approximately $3 1 million shares of outstanding forward equity during the second quarter, realizing net proceeds of over $205 million.
As of June 30, we still had approximately $2 9 million shares remaining to be settled under existing forward sale agreements, which are anticipated to raise net proceeds of $202 million upon settlement.
At quarter end, our net debt to recurring EBITDA was approximately four one 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.
Our total debt to enterprise value at quarter end was approximately 25%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend remained at a very healthy position at five one times.
We had total liquidity of over $910 million at quarter end, including nearly $700 million of availability on the revolver over $200 million of outstanding forward equity and more than $12 million of cash on hand.
Pro forma for the recent closing of the $350 million $5 five year term loan total liquidity is bolstered through approximately $1 3 billion.
Lastly, I want to thank our ESG steering committee for issuing our third annual ESG report during the quarter.
The report outlines the significant progress that we've made on ESG initiatives in the past year, including earning gold level of recognition from the Green lease leader program and introducing reporting on our greenhouse gas emissions and.
In addition, the report highlights our new headquarters, which as Joey mentioned earlier is anticipated to received LEED certification with that I'd like to turn the call back over to Joey.
Thank you Peter the opportunity set in front of our company is truly exciting we are uniquely positioned to execute within a distressed environment with a lack of competition at this time, operator, we will open it up for questions.
Thank you we will now begin the question and answer session.
To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
What's driving your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question today comes from Joshua <unk> of Bank of America. Please proceed with your question.
Hi, This is now granted on behalf of Josh.
Dan Your line and.
I just had a quick question about.
If you can make a comment on your choice of issuing the term loan and do you view your cost of capital.
Maybe how much.
Conspiring, especially with you correctly.
Yeah.
Sure. Thanks for the question. This is Peter first I want to thank our bank group for their continued support and participation in the term loan in terms of our process. We evaluated all options prior to them moving forward with the term loan and considered the turbo market pricing to be most attractive and.
In addition, we were able to issue a five and a half year term loan and there have not been many if any five and a half year deals in the REIT market recently, which allowed us to push the maturity.
Into 2020, nine, where we had a window and our debt maturity schedule.
This accomplish our goal of issuing attractively priced fixed rate debt that fits well into a well lettered debt maturity schedule and allowed us to maintain no material debt maturities.
Till 2028 in terms of our cost of capital today as you mentioned, we have the $350 million term loan at four 5% that we just closed.
We have $200 million of outstanding Florida equity in the high fives and our cost of equity today is in a fairly similar range and when you take those inputs and combine them that puts our weighted average cost of capital roughly in the mid fives today.
Great. Thank you so much.
Thank you. Our next question will come from Eric Wolfe from Citi. Please proceed with your question.
Hey, good morning.
In the past you've talked about the merchant developers that haven't really made any progress on the development we need to find liquidity. Eventually just curious how much of that inventory has been worked through at this point and then as you look forward for.
For dollar general and others that merchant development was a big part of the store openings.
How are they satisfy their need to open stores what solutions are they looking for.
Hey, good morning, Eric It's Joey that's very topical will continue to have <unk>.
Conversations and constructive conversations with retailers that have historically relied upon ipod and merchant builders to deliver net new stores frankly, the development market and developers in particular are significant.
Significant faced significant challenges and headwinds today, not only are obviously rates and cap rates gapped out, but with the regional banking crisis in the lending constraints that they're seeing from primarily the regional lenders that.
Local and regional lenders that supported.
Those developers through construction loans and facilities have really pulled back. So we're in conversations with developers we're in conversations with retailers, we heard tractor supplies commentary I believe it was last week in their earnings call, how they anticipate moving to a more of a.
Really either a fee or on balance sheet program. This is going to be a topic of conversation for the next couple of years, where and when we can provide solutions, whether they're whether through our developer funding platform organic development.
<unk> sale leasebacks, where we're looking at all of those opportunities, but it's a significant point of disparate distress. So I'll tell you during the second quarter, specifically our acquisition volume did not have.
The abundance of merchant developer program, we say.
Merchant developer transactions, we're really more focused in the second quarter had some unique opportunities from third party sellers and stabilized assets.
Understood and then just I guess, it's probably different for every single tenant but like in terms of.
The sort of percentage if you will of the stores that they typically source you. This would be sure I understand is it 20% was it <unk>.
60% and then looking forward I mean, I assume that that pipeline has gone to zero, maybe on maybe I'm wrong, because I'm trying to understand I think you would need at least.
North of an eight yield.
Developed to date.
Curious on your thoughts there as well.
I didn't get the first part of it we broke ground on two projects during the quarter, we will break ground on additional projects. This year, we're going to continue to be selective you mentioned that eight yield I think that's probably appropriate obviously given term credit underlying real estate here.
But again duration equals risk.
We're not going to be take a speculative risk of course, but we're also not going to take duration risk without the appropriate risk adjusted returns through either or develop and funding platform or true organic development, but I think but we're going to see more and more challenges I fueled a number of phone calls personally from large developers that are out there looking to fill that.
Major gap in their capital stack, and we're going to continue to see retailers change their operating strategies for new store growth.
Alright, that's helpful. Thank you.
Thanks, Sir.
Our next question comes from Brad Heffern with RBC. Please proceed with your question.
Hey, good morning, everybody. John can you talk about your expectations for cap rates and if they've largely settled out or if the acquisitions in the pipeline have some additional upward pressure.
Yeah, we talked about in the fall heading back all the way to NAREIT that we thought it would be an incremental increase in cap rates that they weren't going to exponentially gap out and at the same time, we were going to be prudent and disciplined given the volatility in the market and the <unk> of our balance sheet without moving up the risk curve and I think you've seen that one.
Again from US this quarter with our activity against 73% investment grade, 8% ground leases not reliant upon walgreens or a car washes or retailers that are in decline or have balance sheets that are that are frankly on the weaker Ed and so look I will tell you.
Q3, our pipeline is large it will be emblematic of 2022, the differences, it's going to be about 70 basis points higher in 2022. So 2022 Q3 was approximately $360 million I anticipate our Q3 acquisitions have surpassed that and again be about 70 basis.
Higher year over year, and so we continue to see more migration.
More frankly capitulation on sellers and realization that the new normal.
<unk> is here and it's here to stay and it's here to stay for who knows how long, but it's going to be here for a while.
Okay. Thanks for that.
And then have you been surprised that we haven't seen more credit issues that resulted in lost rent so far across the industry and do you think that that's something that we'll continue to see going forward did you see a change in that.
No we've talked about before I think we're back to a pre COVID-19 world, where retailers thrive and then retailers have challenges there are a number of retailers out there today Joanne at home you can keep going down that list that are having challenges, we're going to see additional bankruptcies across the retail space, but again that was.
That's normal it happens in every industry just didn't really happened during COVID-19 when everybody got either had a stay or deferred rent or we're able to access cheap capital. So we're going to continue to see that.
The retailers with the balance sheets and liquidity to invest in fulfillment options in labor and in price thrive and those that don't have that liquidity. There is a great piece and I believe it was the Wall Street Journal.
Last week talking about the demise of bed Bath and beyond and how.
<unk> work there in her commentary, but I think we're going to continue to see those retailers that don't have that liquidity and balance sheet to invest in those three years their business continue to degrade until frankly, they can no longer survive and can't get inventory.
I appreciate it thank you.
Our next question comes from the Handel St. Joseph Missouri Vo. Please proceed with your question.
Hey, Jerry just wanted to follow up on that last question in your remarks, you talked about the lack of competition and also that your pipeline had some sale leasebacks and that youre in discussions with.
Some distress developers. So I was curious if you could talk a bit more about the range of opportunities Youre looking at today.
Within the pipeline does it include any portfolio of any new sectors.
Out of the brains of yield compared to your recent activity here in the high sixes.
Yeah. Thanks I appreciate the question. It is as I mentioned in the prepared remarks, it is a wide range of opportunities.
Frankly, ive never seen such a wide range of opportunities in my career, all the way from retailers trying to figure out how to get new stores in the ground for 2024, and 2025 openings two sale leasebacks, which will ramp year for us in Q3, we have a number a couple of our sale leasebacks that are.
There was significant here in Q3, so it's a very very wide range of opportunities. The key for us is selecting those opportunities that make sense not only quantitatively, but qualitatively within our portfolio again, we're just not going to go up the risk curve here, we're seeing yield incrementally come our our way again printing of $6.
This quarter of $6 seven last quarter, and I anticipate printing higher than the six eight next quarter.
Where that migration in terms of yield or expansion ends up is anybody's guess at this time.
And so I think we're going to we're going to continue to be selective, but I'll tell you. We've never seen the diverse set of opportunities that we've seen the lack of competition in the market is frankly stunning it's us and sellers' expectations.
So the private 10, 31 buyer has vanished, except the infrequent ones. The high net worth individuals you don't hear about them too much the non traded Reits of course aren't playing in this space anymore, and then the Levered private purchasers can't get the leverage.
So we really have our choice here and it's an interesting paradigm to be in and as I mentioned in the prepared remarks, I've never seen an opportunity so ripe and fruitful with that wide ranging spectrum of opportunities.
That's really interesting helpful are you seeing any new capital trying to nibble or rental space at all.
Absolutely zero.
We are seeing a paralysis on this market.
And every day, we get a seller or a developer who will who crosses the line into the 2023, new normal and says what raises the white flag and that's our that is what we're seeing daily. It is accelerated into Q3, we have limited visibility into Q4 as I said Q3 will be larger.
Last year's Q3, it'll be fairly are significantly larger than Q2 or Q1. This year, but this market continues to have fatigue.
Again, I'll reiterate where that goes in terms of pricing beyond Q3, and anybody's guess I don't see a contraction there happening anytime in the near future, but it's opportunities to go lower it just questions the strike price and where frankly, we're sellers finally give in and where they realize that 2023.
It's a different world.
That's helpful. Thank you and one quick one on 711 now they're a top 10.
Tenant of yours can you discuss the availability and pricing youre seeing in these stores and that'll be our area of focus going forward as well. Thank you.
Yeah. It will be logo C stores, specifically large format C stores are a major area of focus for us across all three platforms.
The largest transaction of the quarter as you mentioned with the 711 portfolio with third party sellers 10 stores nine out of 10 are in the Charlotte MSA transaction was just over $32 million. It was a repeat seller for us the disposition during the quarter was tied to that acquisition. It was actually a 711 that we acquired from that cell.
And so somewhat of a horse trade there.
We are seeing significant activity across the C store space. There are two C stores, both sheets and come and go which would be acquired by Maverick entering our backyard as we speak we are working on the sale leaseback front, we're working out with developers, who frankly have gapped out there cap rates 100 to 150 basis points on a one off.
And then looking at some institutional level platforms.
That could potentially make sense for us there is a major expansion plans.
With most of the regional C store operators in this country, whether it's wawa, where sheets or kwik trip or coming go Maverick now.
Are a lot of C stores in the works in the planning phases Theres not a lot of capital to fund them.
So it could present, even more interesting opportunities and we're in active discussions today.
Can you give us a sense of the yields just real broadly.
Sorry, I know we'd be that.
Can you give us a sense of the yields you are seeing there broadly.
It's across the board I'll be I'll be honest, it's one off transactions or what but frankly it depends on the level of desperation and certainty required by the developer I'll tell you that we are in sale leaseback discussions and have some in our pipeline that are that are wider the institutional sellers or frankly, the corporates them.
Cells that want to recycle and redeploy that capital into that business and so theres a range I would tell you from six to seven.
We're able to strike on those transactions.
Okay.
Perfect. Thank you.
Thanks, Adam.
Our next question comes from Rob Stevenson with Janney. Please proceed with your question.
Good morning, Joey what is the ground lease market look like today is that look any different from the changes you've seen in the fee simple market over the last year or so.
No Rob it's really the same I mean, they're really parallel markets similar sellers often similar types of transactions. It's just the lease structure during the quarter as I mentioned, we acquired three ground leases I believe it was the largest was a lowe's ground lease in Rhode Island for just over $15 million, we're seeing a number of opportunities.
The ground lease front.
Q3 for us will have a significant ground lease exposure, but really really no change there in terms of differentiation from the traditional turnkey market.
Okay, so not harder there to get to the right price on those assets today versus a fee simple asset.
It's all seller specific irregardless of the lease structure.
Okay, and then you just talked about the one small asset that you sold year to date, how are you thinking about that over the back half of 'twenty three not only from a portfolio pruning perspective, but also as a source of equity capital versus a low to mid 60 stock price.
So we've talked about it heading into Q4 of last year. The 10 31 market I continue to believe is an unproductive use of this team's time, we have the portfolio and a position that we really like frankly, where we're fond of unless somebody wants to buy one of our couple of movie theaters and I'll mentioned Regal affirmed our lease.
<unk>, which we had no concern over in New Jersey, our sole Regal Everything's for sale. The problem is frankly the execution.
The human capital time and resources. So we pruned the portfolio actively for years. It was a at least at the very least the nominal source of recycling every assets for sale in the portfolio just show us the money in the bank and we're happy to look at some real offers but we're not going to go place we're not going to play go fish with 10 31.
Buyers today, and frankly have the inefficiency of time and resources. This team as I mentioned in the prepared remarks is really been recalibrated, given the automation and lack of manual entry through our it investments to be the tip of the spear.
And today transacting at a 10 31 market is a difficult proposition.
Okay. Thanks, guys I appreciate the time.
Thanks, Rob.
Our next question comes from key been Kim with Truest. Please proceed with your question.
Thanks, Good morning.
Joe you just wanted to go back to the topic of the improved acquisition environment. I was wondering if you can help kind of.
Paint the picture a little bit more I'm not sure if it's possible to answer it this way, but if you can try to quantify that.
For example, if you were seeing a couple of billion dollars' worth of deals to close $300 million.
Maybe six months ago is it.
$2 5 billion that youre seeing that $3 billion to trying to see.
Get a better understanding of how much it's improved.
Keep it I don't have Ark opened in front of me I could pull that data really quickly if we had arc.
As I mentioned in the prepared remarks, we're looking at doing something to demonstrate enhanced it.
It capabilities and infrastructure that we're now we've achieved I'll tell you.
And it will pull that for you after the call I'll tell you from my perspective.
While with the of the inbounds that we're now seeing real sellers, who need to really transact and want certainty most of them have been on the market either had a 10 31 fish on the hook that dropped maybe even a second one and finally our sanger.
It's time to move.
And so we're seeing more realistic pricing the bid ask gap is closing on more assets quarter over quarter, we're within striking distance and I'll tell you our reputation and the team's work here is second to none and so we'll continue to get those first in west calls, we're not getting as many of the calls.
They're still asking for four handles or five handles because I think the market has come to the realization that those just.
Frankly.
Don't fit in today's world. So from a quality perspective. It is noticeable we'll get you some.
We'll get you some actual statistics pulled from mark after the call.
Okay, great and your leverage on a spot basis was four five times in the first quarter and the same in the second quarter.
Just high level going to 'twenty 'twenty, four where do you think average leverage will settle out at.
We have no problem running leverage obviously from here is Peter did a tremendous job and his team on the term loan we have no debt maturities as Peter mentioned until 2028, our stated leverage range of four to five times was from Covid historically before that I believe we're at five to six times migrating to five or above five is no challenge here.
We have again no near term debt maturities no floating rate exposure. So the balance sheet is going to remain four to five but operating the balance sheet at five times or five for up to five five times. It doesn't doesn't scare me in the lease we've always run the balance sheet in a conservative obviously with a conservative approach we pioneered forward equity in this.
Space will continue to monitor all sources of capital and when when advantageous to execute on it but by no means do we feel the need that it leverage has to run in the low fours. If you look at the composition of our portfolio our balance sheet.
The maturity schedule of that balance sheet, and then the duration of the leases and quality of those leases and the underlying assets Theres, absolutely no challenge running leverage higher and you won't see us issuing equity.
$64 50, or wherever we closed yesterday that's for sure.
Okay. Thank you.
Thanks Steven.
Our next question comes from Wes Golladay with RBC capital markets. Please proceed with your question.
I think you guys have my old dial in a program. That's a bird now just a quick question on the DSP program. It sounds like Thats going to be just the lending on it but maybe can you talk about the mix of how you are going to help the developers are the retailers.
Do you have any sense of the mix of actual lending that is going to do versus the other products you offer to the actual development yourself.
So, let's just just for clarity purposes, we will not lend if we don't owned fee simple, we're not going to have a mortgage platform here and we don't have that in place today, we're not carrying any notes payable.
On the balance sheet today.
But that's the chasm I mean, you've hit it on the head. It's the second question hit it on the head is what do retailers do relevant to merchant builders for net new store growth.
And it's about a $30 40 per se, it's about a 30% 40% gap if they can even obtain financing.
Today, and we're exploring different opportunities. The key question is what is the exit pricing.
When that asset comes online whether it be in 2020 for early 2025.
So that is that the crux of the question here, but were developers are seeing credit being extended today. It is frankly, it does not provide the capital stack to execute on their pipeline.
Got it and then just I mean, this is kind of a big shock what's happened the last year.
These pop take a long time to change their mindset and it sounds like youre doing it a little bit.
Last year, you just dropped a bunch of gerber collision and I imagine you have in the background a wider array of people you're talking to so I'm just kind of curious how big is the shadow pipeline of retailers that you're working with now.
So subject to how you are defending you're defining shadow pipeline I will tell you we've never had as many conversations with both.
Significant developers and with retailers trying to find solutions at the asset or the programmatic level.
Those solutions can be challenging.
We see retailers changing their platforms for doing fee development doing it on balance sheet.
Holding returns some are expanding returns for developers, but none of that resolve the underlying problem here.
So those conversations are daily there are ongoing we're seeing one off we're seeing multiple <unk> of the portfolio and pipelines have developers that are short anywhere between five and $250 million for their pipeline.
Question is where to strike and we're just not willing to take speculative risk that's our wine.
Got it thanks for the time everyone.
Thanks West.
As a reminder, if you would ask a question. Please press Star then one.
Our next question comes from Ronald Camden from Morgan Stanley . Please proceed with your question.
Hey, just two quick ones. So wanted to go back to the cost of capital calculation.
In the mid Fives, and I think we're sort of.
Getting into similar numbers, so where were on the on the App I think you've talked about not doing equity here, but where where is the right level and how do you guys sort of think about it.
Arms of where it makes sense, where it makes sense suppressed.
I won't declare a spot price if they get subject to the pipeline, but I think.
We came into the year, saying, we don't need equity, we don't need equity to hit the one three and stay within our current stated leverage range and so we'll continue to evaluate all all of those markets and then.
Importantly, the relative cost of capital in all.
And each and every single one of them so Peter.
Peter and his team will continue to evaluate it we'll be opportunistic we don't anticipate a preferred coming back in for the quarter anytime soon that's for sure. The 10 year market doesn't look overly attractive hence the term loan this quarter. The good news is is we don't need any capital. So that's the best news is we don't need any capital that was the plan coming into this year we.
Strong lender support.
From obviously, the turmoil or the five and a half year term loan and we can continue to remain.
Opportunistic.
Got it and then you guys always has sort of the lowest bad debt versus peers. Just can you remind us how much how much is budgeted at how much you've gone through year to date maybe.
Maybe I think you hit on the Regal, maybe hit on the bed Bath and party city and what Youre thinking.
What's it looking like there.
I'll hit the second question and turn it over to Peter Regal in Seoul, New Jersey was a firm bed Bath, we had three bed Bath total entering the bankruptcy one was purchased by Burlington, which is out there.
The ecosystem already the second one is newer resolution, where we anticipate we will execute a new lease shortly tenant approved with a significant NOI and then we're working through the third one in terms of party city, all leases were affirmed except one which we recaptured and have entered into are about to enter it.
To a lease with a far vastly improved our tenant there on our new term with a significant NOI lift as well.
And Ron in terms of bad debt expense, we don't guide to a specific number year to date, we recorded bad debt expense of approximately $275000. That's roughly 10 basis points of revenue and roughly in line with the bad debt expense that we recorded last year as a percentage of revenue looking back historically, that's slightly below.
Though our longer term average we've been closer to 20 or 25 basis points, but as Joey mentioned the portfolio is in great shape, and we don't expect any material deviation from those levels.
Helpful. Thanks, so much.
Thanks, Ron.
Our next question comes from Linda Tsai from Jefferies. Please proceed with your question.
Hi, do you feel like the group of retailers that can do development on balance sheet is limited.
Generally the ones doing this now have had previous experience.
It's a great question, Linda it's not easy to transition to self development. If you have historically relied upon merchant builders. So retailers I'll tell you I'll focus on the retailers that are in our sandbox the large national operators generally a large superregional operators.
Transitioning to an internal model, while it sounds like an easy solution. If they have the balance sheet and liquidity to do it is very difficult not only do you need to have the entitlement development to construction expertise the permitting expertise. It is a it's a major overhaul and so what we're.
Seeing as retailers, who had some let's call. It a fractional portion of their net new store development that were on balance sheet, increasing that hence tractor supply a wildly I believe has signaled the same Walmart home depot with their net new store growth inclusive of Sam's club will do it on balance sheet.
The real challenges for retailers, who historically didn't have that self development experience on balance sheet, how they move that needle forward with net new store growth.
That is that's a real challenge that's a gaping hole in this market I haven't heard a solution yet for it but we continue to listen and frankly proposed solutions that that it will hopefully get their pipelines ramped back up but it's it's.
As I mentioned earlier.
It's a daily conversation very topical.
Thanks for that color and then it seems like Youre seeing more of an inflection point in cap rate expansion given the distress youre seeing today, what do you expect the spread between acquisition cap rates in your cost of capital to increase as you look forward to next year.
Well I hope so.
I hope our cost of capital goes down and that whole cap rates gap out I can only tell you what we're seeing in at about that 70 day period, and that's why I've been very clear about Q3, we're just starting to build Q4 right now again, we see more sellers institutions retailers one off developers you.
Name it come across the wide and say all right. We're ready to do something here heading into 2024, I wish I had a I wish I had my crystal ball and I could make those predictions.
But look this is this is a volatile environment, but what we've seen year to date is 67 to 68.
And what I've telegraphed already in Q3 is a larger volume number at a higher yield Q4.
Ask me in about 60 days and we'll have full clarity.
Great. Thank you.
Thanks Linda.
Okay.
That concludes our question and answer session I would now like to turn the conference over to Joey agree for any closing remarks.
Well. Thank you everybody for joining us I hope you enjoy the rest of your summer and we look forward to seeing everybody in the upcoming conference season. Thanks again.
Okay.
The conference has now concluded. Thank you everybody for attending today's presentation you may now disconnect.
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Yes.
Sure.
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