Q4 2024 Agree Realty Corp Earnings Call
Sherwood: [music].
Good morning, and welcome to the eight week real cheap fourth quarter 'twenty 'twenty four conference call all participants will be in listen only mode.
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Speaker Change: I would now like turn the conference over to Robyn Friedman Senior director of corporate Finance. Please go ahead Robin.
Speaker Change: Thank you good morning, everyone and thank you for joining us for Asia really is fourth quarter of 2024 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.
Speaker Change: Please note that during this call we will make certain statements that may be considered forward looking under federal Securities law, including statements related to our 2025 guidance. Our actual results may differ significantly from the matters discussed in any forward looking statements for a number of reasons.
Speaker Change: 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.
Speaker Change: 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 our historical non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release website and.
Speaker Change: SEC filings I'll now turn the call over to Joey.
Joey: Thanks drew and thank you all for joining us this morning.
Joey: Very pleased with our performance during 2024, as we maintained our strategic discipline through a year of significant market volatility approximately.
Joey: Approximately 16 months ago, we introduced our do nothing scenario demonstrating that even in the absence of conditions that facilitated external growth, we can deliver meaningful <unk> per share growth we.
Joey: We resisted the temptation to move up the risk curve or deviate from our core investment strategy. Instead, we remain steadfast in our commitment to investing in the strongest retailers with superior risk adjusted returns.
Joey: And focused on our objective of being a valued partner to the largest retailers in the country.
Joey: Quite simply our disciplined paid off as the market shifted and we quickly capitalized on opportunities in proactively strengthened our fortress balance sheet decisively pre appetizing with $1 $1 billion of forward equity during the year, including $423 million in the fourth quarter alone.
Joey: We concluded 2024 with over $2 billion of liquidity, including $920 million outstanding forward equity.
Joey: Paired with no material debt maturities until 2028, our balance sheet management philosophy has put us in a tremendous position to execute.
Joey: As we enter 2025, we find ourselves once again navigating the volatile higher interest rate environment.
Joey: This underscores the importance of our disciplined and prudent approach to both capital allocation and capital raising.
Joey: By proactively fortifying our balance sheet last year, we provided ourselves with ample liquidity to execute on this year's investment guidance without the need for additional equity capital at.
Joey: At yearend leverage stood at just 3.3 times pro forma net debt to recurring EBITDA.
Joey: We can deploy over 1.5 billion this year, while staying within our targeted leverage range of four to five times net debt to EBITDA without raising any additional equity.
Joey: I would note that we've had a very strong January to start the year and remain extremely confident in our ability to invest between one one and $1 3 billion and <unk> five across all three external growth platforms.
Joey: In fact turn out to be conservative, but we are committed to updating the market in regular course, as we gain incremental visibility.
Joey: This outlook supported by a fortress balance sheet and combined with our best in class portfolio gives us conviction in achieving our <unk> per share guidance of $4 26 to.
Joey: To $4 30 for the full year of 2025.
Joey: This represents approximately three 5% year over year growth at the midpoint.
Joey: I would note that given our significant forward equity position. This includes assumptions for dilution via the Treasury stock method. If the stock continues to trade in the 70 plus range.
Joey: I have repeatedly said that I don't care about a penny or two of earnings in any given year due to accounting methodologies, but more importantly value of the balance sheet flexibility enabled by forward equity and other risk mitigation tools piece.
Joey: Peter will provide more details on our guidance momentarily.
Joey: Turning to our three external growth platforms, we set out last year to further enhance and deepen our relationships with our core retailers I am pleased to report this effort led by Craig Ellis, Our Chief growth Officer was was a success.
Joey: Today, our retail partners truly understand the value proposition of partnering with AP Realty we are.
Joey: Our one stop shop for acquisitions development and developer funding solutions.
Joey: This unique value proposition is unmatched in the industry.
Joey: Our private peers don't have liquidity cost or access to capital, while our public peers lack the real estate development and operational capabilities ingrained in our organization.
Joey: For the fourth quarter, we invested approximately $371 million and 127 high quality retail net lease properties across all three platforms.
Joey: This included the acquisition of 98 assets for over $341 million.
Joey: The properties acquired during the quarter leased to leading operators in the auto parts off price farm and rural supply home improvement tire and auto service as well as crafts and novelties sectors.
Joey: The fourth quarter marked the highest volume in house highest quality quarter of year evidenced by the longest weighted average lease term as well as the highest investment grade and ground lease percentage of any quarter in 2024.
Joey: Notable transactions included a Walmart and home depot ground lease as well as the sale leaseback of the top relationship tenants with which we enjoy a very strong relationship.
Joey: The acquired properties at a weighted average cap rate of seven 3% and a weighted average lease term of 12 three years approximately 10, 5% of annualized base rents acquired were derived from ground leased assets, while investment grade retailers accounted for over 73% of annualized base rents acquired.
Joey: For the full year 2024, we invested $951 million and 282 retail net lease properties spanning 45 states and 28 retail sectors approximately $867 million of our investment activity that originated from our acquisition platform.
Joey: The acquisitions were completed at a weighted average cap rate of seven 5%.
Joey: A weighted average lease term of 10 four years with roughly two thirds of rents coming from investment grade retailers.
Joey: As a reminder, we do not impute credit ratings for non rated retailers.
Joey: Switching to our development and DSP platforms, we had a record year with 41 projects either completed or under construction, representing approximately $180 million of committed capital.
Joey: We're continuing to see increased activity across both platforms as we work with our retail partners to help them execute their store growth plans and provide struggling developers with liquidity to fund their pipeline.
Joey: During the fourth quarter, we commenced eight new development and DSP projects with total anticipated costs of approximately $45 million. The new projects are with leading retailers, including all the TJ Maxx and Marshalls hobby lobby boot barn, Sherwin Williams and Starbucks.
Joey: Construction continued during the quarter on 14 projects with anticipated cost totaling approximately $67 million.
Joey: Lastly, we completed construction of nine projects during the quarter with total cost of $31 million.
Joey: On the asset management front, we executed new leases extensions or options on over 530000 square feet of gross leasable area during the fourth quarter.
Joey: For the full year 2024, we executed new leases extensions or options on approximately 2 million square feet of gross leasable area. We are very well positioned for 2025, with only 41 leases or 120 basis points of annualized base rents maturing.
Joey: During the year, we opportunistically disposed of 26 properties for total gross proceeds of over $98 million, including eight properties that were sold during the fourth quarter.
Joey: The weighted average cap rate for dispositions in 2024 was six 7%.
Joey: At year end, our best in class portfolio included 2300, 70 properties and spans all 50 states. The portfolio includes 229 ground leases comprising nearly 11% of annualized base rents.
Speaker Change: Our investment grade exposure year end stood at 68, 2% and occupancy remains strong at 99, 6% with that I'll hand, the call over to Peter and then we can open up for questions.
Peter: Thank you Joey.
Peter: With the balance sheet, we had a very active year in the capital markets raising approximately $1 $1 billion of forward equity upsizing, our revolving credit facility to $1 5 billion.
Peter: And completing a $450 million bond offering.
Peter: We also entered into $200 million of forward starting swaps during the year effectively fixing the base rate for contemplated 10 year unsecured debt issuance at approximately three 7%.
Peter: Combined with our outstanding forward equity of $920 million. This provides us with $1 $1 billion of hedged capital to fund investment activity in 2025.
During the fourth quarter, we sold $5 8 million shares of forward equity via our ATM program in an overnight offering in October for anticipated net proceeds of approximately $423 million. We also settled $3 7 million shares of forward equity for proceeds of over $228 million.
Peter: As of year end, we had approximately $12 9 million shares outstanding forward equity, which as mentioned are anticipated to raise net proceeds of $920 million upon settlement.
Peter: We are contractually obligated to settle $12 7 million of those shares in 2025.
Peter: Additionally, as discussed on past calls, we recast and expanded our revolving credit facility in August the facility was increased from 1 billion to $1 5 billion.
Peter: And includes an accordion option that allows us to request additional lender commitments up to a total of $2 billion we.
Peter: We also extended the term of the facility to 2029, including extension options and reduced our borrowing costs by five basis points based on our current credit ratings and leverage ratio.
Peter: As of December 31, we have over $2 billion of liquidity, including $1 $1 billion of availability on our revolving credit facility. The previously mentioned outstanding forward equity and cash on hand.
Peter: Pro forma for the settlement of our outstanding forward equity net debt to recurring EBITDA was approximately three three times, which marks the lowest level in two years, excluding the impact of unsettled forward equity our net debt to recurring EBITDA was four nine times and our total debt to enterprise value was approximately 27%, while our fixed charge coverage ratio.
Peter: Which includes principal amortization and the preferred dividend is very healthy at four four times.
Peter: Our floating rate exposure remains minimal with $158 million outstanding on the revolver at year end and as Joey mentioned, we have no material debt maturities until 2028.
Peter: We are in excellent position to execute our investment guidance this year without having to raise any additional equity capital the.
The strength of our fortress balance sheet was further validated by the credit rating upgrade we received in July.
Peter: <unk> upgraded our issuer rating to triple B plus from Triple B with a stable outlook, which is a testament to the prudent and disciplined manner in which we continue to grow the company.
Peter: Moving to earnings of <unk> <unk> per share was $1 <unk> for the fourth quarter and $4 eight for full year 2024, representing three 5% and three 7% year over year increases respectively.
Peter: <unk> per share was $1 <unk> for the fourth quarter, representing a four 7% year over year increase.
Peter: For the full year <unk> per share was $4 14.
Peter: This reflects the high end of our guidance range and four 6% year over year growth.
Peter: As Joey mentioned, we issued initial <unk> per share guidance of $4 26.
Speaker Change: To $4 30 for full year 2025, representing approximately three 5% year over year growth at the midpoint.
Speaker Change: We provide parameters on several other inputs in our earnings release, including investment and disposition volume general and administrative expenses non reimbursable real estate expenses as well as income tax and other tax expenses.
Speaker Change: In addition to those parameters our earnings guidance for 2025 includes anticipated Treasury stock method dilution related to our outstanding forward equity.
As a reminder, if ADC stock trades above the net price of our outstanding forward equity offerings. The dilutive impact of unsettled shares must be included in our share count in accordance with the Treasury stock method.
Speaker Change: Provided that our stock continues to trade near current levels, we anticipate that treasury stock method dilution will have an impact of roughly one to two pennies on full year 2025 <unk> per share.
Speaker Change: That said the impact could be higher if our stock price moves materially above current levels.
Speaker Change: Our consistent and reliable earnings growth continues to support a growing and well covered dividend during the fourth quarter, we declared monthly cash dividend of $25 three per common share for each of October November and December the monthly dividend equates to an annualized dividend of almost $3 <unk> per share and represents a two 4% year over year.
Speaker Change: Our dividend is very well covered with a payout ratio of 73% of <unk> <unk> per share for the fourth quarter.
Joey: With that I'd like to turn the call back over to Joey.
Speaker Change: Thank you Peter operator at this time, let's open it up for questions.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
Speaker Change: A reminder to please limit yourself to two questions.
Kevin Kim: Our next question comes from Kevin Kim at <unk> Securities. Please go ahead.
Kevin Kim: Thank you and good morning.
Speaker Change: Joey you provided a interesting case study on one of your ground lease renewals in your presentation. I was just curious I'm sure that's not indicative of their whole ground lease portfolio, but.
Speaker Change: Typically when these ground leases come due I guess is it more of a typical lease renewal, where you get a little bit of a bump in that case. It was a more of a one off example, or do you think there are significant mark to market upside.
Kevin Kim: Good morning, Keven, there is definitely significant mark to market.
Speaker Change: Upside there.
Speaker Change: Mr. <unk> you are referring to the tenant had no remaining options initially offered to extend that effectively a five year option at.
Speaker Change: Flat rental rate.
Speaker Change: Had inbounds north of <unk>.
Speaker Change: 180000, starting year one the tenant was about 105, I believe and we told the tenant if you want to stay youre going to have to sign a new 15 year ground lease with options marketing that to market and that's the reference to the upside that youre talking about thats indicative of.
Speaker Change: A naked lease with no options in the ground lease space no that isn't a regular occurrence for us, but it's one of the only one of its an example, I think it's a prime example of the upside if and when we were to retain control of the building.
And on your forward equity you have about $900 million afford equity out there.
I think when you look at it versus history, and probably a little bit higher than what you've had this I.
Speaker Change: I was just curious high level, how do you balance how much forward equity you have out there because you are paying the dividend on it.
Speaker Change: <unk> expense, but it is still a cash drag.
Speaker Change: Or is it that you see larger acquisition opportunities coming up sooner.
Speaker Change: Although the question of the expense of the forward equity the interest and construct or factor with forward equity is yes, we do pay the dividend historically when rates were at zero or very low you weren't earning any interest today the forward equity with the with rates being higher.
Speaker Change: Effectively the interest nets out the dividend maybe to the tune of net.
Speaker Change: <unk> 10, 15 basis points inclusive of fees. So there's really no cash read before the fed lowered rates in the most recent.
Speaker Change: Most recently on the fed lowered rates there was actually a positive spread to the forward equity. That's the interest expense that were that we are entering versus relative to the dividend that we're paying and so.
Speaker Change: There really is a de minimis, if any expense to carrying that forward equity today, which is very different than historically.
Speaker Change: Now there is the treasury method of dilution, which we've talked about in the prepared remarks, so thats accounting methodology, but not cash.
Speaker Change: And in terms of how much forward equity, it's really a function of sources and uses and then where do we think our macro the macro overlays upon that and so youll see us and you have seen us historically carry ample forward equity to source or to utilize for investment activities.
Speaker Change: Obviously with approximately $920 million in forward equity, we're locked and loaded here.
Speaker Change: We're prepared to execute on our guidance or above for 2025.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks, Kevin.
Speaker Change: Thank you. The next question comes from Smedes Rose Citigroup. Please go ahead.
Smedes Rose: Hi, good morning. Thanks.
Smedes Rose: I just wanted to ask you sort of essentially you can see kind of a continued slight downward bias in your acquisition cap rates.
Speaker Change: Offsetting that we see a continued upward movement in the 10 year, which I think is now at about four six.
Speaker Change: Just looking forward I mean, do you think seller expectations, even for higher quality buckets of assets that you've cited debate is linked to change and maybe can you maybe share what youre seeing thus far in the first quarter.
Smedes Rose: Yes, it's a great question Smedes I think part of the problem. This morning's like today, where you have a 10 basis point spiked. The last time I looked in the 10 year Treasury activity CPI print came out.
Smedes Rose: So we have 45 or 60 days swings.
Smedes Rose: With 10% movement in the base rate for effectively the world. The 10 year U S Treasury, which has become normalized in everybody's minds that.
Smedes Rose: That includes net lease sellers and so the 10 year vacillating between two five and $4 75, I'm just using broad ranges here.
Smedes Rose: Doesn't really seem to impact sellers' expectations of pricing.
Smedes Rose: Now we've been very careful and very prudent in how we will continue to be at how we deploy capital in appropriate spreads.
Smedes Rose: And frankly.
Smedes Rose: How we gauge asset level pricing in this environment that said, we're not going to come out of the gates and below one.
Smedes Rose: $1 billion of acquisitions in the first quarter in this volatile environment will be will be disciplined we will continue to.
Smedes Rose: Manage those uses of capital.
Smedes Rose: But volatility certainly doesn't help reset pricing expectations and such a large fragmented and frankly predominantly individually owned space, but we are seeing as individual cases of distressed usually non asset level of distress in other assets potentially where there were partnerships need proceeds are individuals need pro.
Smedes Rose: <unk> from the sale or disposition of net lease assets.
Smedes Rose: But again the volatility here really doesn't serve anybody to step stabilized pricing.
Speaker Change: Okay. Thank you.
Speaker Change: And then just wanted to ask you had mentioned in the past about continuing to take share within the market.
Speaker Change: It sounds like that's still the case and just wondering I mean, theres a lot of discussion around potentially changing the regulatory banks for for sorry.
Speaker Change: Sorry, the regulatory.
Speaker Change: Virginia, I guess for local and regional banks.
Speaker Change: Is there anything there that might make them more competitive that you have on your on your radar or do you think it is just kind of.
Speaker Change: Youll continue to compete in a similar environment.
Speaker Change: No I don't think see any regulatory issues that may open up capacity for banks to lend, but you have a multi pronged problem as a merchant developer today.
Speaker Change: One obviously.
Speaker Change: The liquidity of construction.
Speaker Change: Construction financing the availability of that financing as youre alluding to.
Speaker Change: The higher the higher construct the rates on construction loans to lower loan to cost side construction loans, and then effectively for merchant builders in our space the ability to have some visibility into where they're going to be able to transact at the end of the day upon completion and so what our developer funding platform continues to do and continues to take share as bridge.
Speaker Change: That gap.
Speaker Change: With $2 billion in liquidity.
Speaker Change: 100, and a $1 25 billion credit facility and the forward equity position, we have we have visibility into our cost of capital.
Speaker Change: We're able to provide solutions for retailers and developers to bring projects to fruition that can still pencil.
Speaker Change: You combine it with rising construction costs and tariffs on aluminum and steel and all these other things that are going to continue to challenge construction costs in this country. It's a tremendous solution and it continues to gain share like you said.
Speaker Change: Okay. Thank you very much.
Speaker Change: <unk>.
Speaker Change: Thank you. The next question comes from Ronald Camden.
Morgan Stanley. Please go ahead.
Speaker Change: Hey, Good morning. This is Danny on for Ron. Thanks for taking my question I think first Ed with six to eight 2% of Iag's panel just apologize like almost reaching all time high how does this compare to your long term expectations like do you anticipate this percentage to increase in the near term based on your acquisition strategy.
Speaker Change: <unk>.
Speaker Change: So we always talk about investment grade percentage being a really a proxy for us or an output of our investment strategy. So 68, 2% as you mentioned is near an all time high at the same time, we're huge fans of unrated retailers again, we don't impute credit ratings, such as hobby lobby Chipotle Publix all.
Speaker Change: <unk>.
Speaker Change: And so if those transactions materialize.
Speaker Change: We will be there if the pricing makes sense.
Speaker Change: And so that investment grade exposure was.
Speaker Change: I would tell you almost artificially ticked up by by institutions loading up on Walgreens and other credits to check the proverbial box that can go away quickly if youre not prudent with your capital allocation and don't see trends in the consumer and retail sectors, we're going to focus on the biggest and best retailers in the country the vast majority.
Speaker Change: Already have those have investment grade exposure, but there are some sub investment grade exposure that we're big fans of Burlington being one that comes to mind Thats a great relationship for us. So again, that's really an output of our investment strategy focusing on our sandbox retailers of the 30, plus or minus biggest invest in the country.
Speaker Change: That makes sense. Thanks, I think the second I want to ask about that transaction volume.
Speaker Change: Considering the current environment like do you see the transaction volume kind of slowed down in the first quarter or do you see that kind of trending in line with your expectations.
Speaker Change: Upside or downside to your like $1 2 billion of investment pipeline. This year. Thank you.
Speaker Change: First quarter is effectively locked and loaded we've had as I mentioned in the prepared remarks again subject to diligence and closing of a very strong January.
Right now we're sourcing for the second quarter in terms of forward visibility everyday changes every executive order in every piece of data that comes out on the environment and so the most exciting part about this business to me is that any given day any given our new and exciting opportunity.
Speaker Change: They can pop up at <unk>.
Speaker Change: <unk> to our pipeline, but we think first quarter is right, where we want it we're very pleased with it in the second quarter were focused on right now.
Speaker Change: Okay. Thanks, so much thank you.
Speaker Change: Thank you. The next question comes from Michael Goldsmith with UBS. Please go ahead.
Michael Goldsmith: Good morning, Thanks, a lot for taking my question.
Speaker Change: The auto parts category stepped up as a percentage of the portfolio ABR by 70 basis points and we know you are very thoughtful about what enters your portfolio. So what is the thesis for auto parts and why auto parts now.
Speaker Change: So specific to that transaction or a portfolio transaction from an institutional seller of over of over 40 assets leased to Napa genuine.
Speaker Change: That's our first material exposure semi material exposure to Napa genuine.
Speaker Change: Obviously, our exposure to O'reilly and Autozone is more significant and you can see that in our in our top tenants.
Speaker Change: We've talked about auto parts O'reilly had a good print last we've talked about auto parts in the construct of average age of cars on the road at $12 seven years of record the lack of finance ability of cars today, just given the interest rate environment.
Speaker Change: We're going to see now with aluminum and steel being forward came out Bill Ford came out and said that these tariffs could destroy the auto industry.
Speaker Change: Cars today are.
Speaker Change: Are getting older for record every record a record every day and they need more parts and so we continue to love beef.
Speaker Change: Significant fans the auto parts sector. The second pieces, the underlying real estate that only the credit and the business model. These are generally six to 7000 square foot rectangles that are paying $11 to $12 per square foot with vinyl floors are concrete floors, no ti or TIAA are landlords work amortize into the rental rates are multiple.
Speaker Change: <unk> boxes.
Speaker Change: And if that tenant were to ever leave filed bankruptcy and that exercise an option you the highly marketable rectangle below replacement cost.
Speaker Change: And so it fits right within our wheelhouse.
Speaker Change: Top three favorite sector of ours.
Speaker Change: Got it thanks for that Julian and my follow up question is just on the expected transaction cadence for the year last year transaction market was much slower to start the year picked up.
Speaker Change: As we move through 2024.
Speaker Change: You commented that you had a very strong January so does that mean.
Speaker Change: The balance through the year should be.
Speaker Change: Maybe continue to be back half loaded in terms of acquisitions, but should be more balanced this year relative to last year and then also should should help support some of the earnings growth this year.
Speaker Change: I have no idea to be Frank I don't know whats going to happen Tomorrow, let alone third or fourth quarter of this year. We just started building second quarter.
Speaker Change: Our average transaction cycles now down to approximately 66 67 days on the acquisition front.
Speaker Change: We're in a volatile environment I am not going to make predictions. That's why we're in the hedge position with the 10 year swap to three 7% to $920 million of forward equity I really did wanting to do with the capital markets this year to be honest.
Speaker Change: And so that war chest is going to allow us to be decisive.
Speaker Change: At times, where we see there's opportunities, but we can be patient and we think there is volatility in underlying pricing should move.
Speaker Change: But right now honestly all we have is visibility into Q1.
Speaker Change: Thank you very much thank.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Rob Stevenson at Janney Capital. Please go ahead.
Rob Stevenson: Hey, good morning, Joey can you give a update on big lots and how things look to be playing out there I think last quarter, you had a new tenant ready for the Manassas, Virginia location, and where are you with Grand Rapids and the other locations. These days.
Rob Stevenson: Yes, the big last bankruptcy continues to extend on obviously nexis. The original purchaser out of bankruptcy failed. The week they were supposed to close and so now theyre going through another lease auction period. This is a multi month bankruptcy process.
Rob Stevenson: Manassas, we have taken the rent from $8 55 per square foot to $16 per square foot that leases signed the tenant has yet to commence rent.
Rob Stevenson: We are working in Cedar Park, Texas, one of the other ones, where we have a high quality tenant they would like to purchase that lease but needs approvals that would take that rent from $5 per square foot to $8 per square foot.
Rob Stevenson: We have significant interest in the asset use specified here in Michigan, and we're awaiting the results frankly.
Rob Stevenson: These lease auctions, which continued to be delayed based upon just the.
Rob Stevenson: The bankruptcy, which is kind of running circles.
Rob Stevenson: Okay. That's helpful and then where does the sale leaseback market sitting today with either your major tenants and others that you want to do business with are they looking to do stuff. This year is it likely that there's going to be a decrease in volume there how would you sort of view that given your recent conversations.
Rob Stevenson: With current and prospective tenants.
Rob Stevenson: So as I mentioned in the prepared remarks, we closed.
Rob Stevenson: As a sale leaseback with a relationship tenant subject CA and confidentiality that was our third transaction with that tenant.
Rob Stevenson: Closed already in Q1 sale leaseback with another relationship tenants.
Rob Stevenson: As far as the year progresses, it's really going to be.
Rob Stevenson: With the C suite with the CFO, how they want to capitalize their balance sheet. Generally these are unsecured issuers, who are looking at the unsecured market, where they can issue. They are looking at sale leaseback market, where they can price. We've had a number of discussions on sale leasebacks at different structured partnerships for retailers.
Rob Stevenson: Or is that or developing new real estate on their balance sheet, there's a lot of interesting conversations happening.
Rob Stevenson: I'll leave it at that we will see where they transpire this morning's print probably with the CPI.
Rob Stevenson: At 3% program could change that frankly or make it more frankly, the market more active and so.
Rob Stevenson: They're always comparing cost of capital like worker and comparing our cost of capital to a transaction.
Rob Stevenson: Would expect additional sale leaseback activity this year, though.
Rob Stevenson: Okay. Thank you.
Rob Stevenson: Yes, Rob.
Speaker Change: Thank you. The next question comes from Spenser <unk> at Green Street. Please go ahead.
Spenser: Thank you and maybe just one on your development segment, just curious if theres been any change in regards to retailers' demand to build new stores, just given the macro and political backdrop and then.
Spenser: As it relates to that has there been any talks about fears around labor shortages and how topical it is that right now in your discussion as it relates to the development space.
Spenser: Our discussions that I've been with.
Speaker Change: I'm going to say, 5%.
Speaker Change: Plus retailers myself in the past 60 days, they've all revolves around retailers and these are the largest retailers in the country wanting to get new stores built and how they do it.
Speaker Change: Whether thats, Walmart or Lowe's or tractor supply O'reilly Auto zone 711 Speedway. These tenants all want to grow but given the constraints I talked about earlier in the Q&A. There are challenges for their growth are three pronged platform and our multi level capabilities plus our balance sheet.
Speaker Change: Can be a solution and so as I just mentioned on the previous answer there's a lot of different solutions being discussed.
Speaker Change:
I think we have unique opportunities here given our capabilities in the organic development front, plus our cost to capital and balance sheet to bridge the gap that's out there today and potentially be that solution.
Speaker Change: But it's all subject to enable individual transaction level.
Speaker Change: And then Spencer the one common theme that we hear from large retailers today.
Speaker Change: As opposed to 10 years ago, when brick and mortar is dead today. The store is the hub.
Speaker Change: Not one piece of an Omnichannel solution. It is the hub of the Omnichannel solution.
Speaker Change: All retailers today have realized if E. Commerce is a significant part of their omnichannel platform. That's basically all of them outside of off price that they cannot send goods people to their home for free and have them return for free 40% via Etfs are Fedex.
Speaker Change: That model doesn't work and so driving traffic to the store and if you don't have a store in that MSA is critical. So this is the greatest desire to expand that I've seen for retailers since before the great financial crisis the challenges how they do so in this liquidity constrained.
Speaker Change: Elevated construction cost environment, and Thats, where I think again, our unique capabilities can come into play and retailers as I mentioned in the prepared remarks fully appreciate that today.
Speaker Change: There's no public company in our space with our development capabilities and there is no private company in our space with the costs or cost of capital and liquidity and balance sheet that we have so it's us and us alone that can provide some of these solutions.
Speaker Change: Okay, Great Yeah, no your comments on the financing alternatives and retailer appetite to grow that certainly makes sense, but.
Speaker Change: Labor and labor shortages and immigration policy, obviously, thats kind of most peoples hands. So just curious if that has been coming up at all in discussions and if thats going to potentially deter or delay.
Speaker Change: At least as you see it in our pipeline right now.
Speaker Change: It has not come up yet.
Speaker Change: Yet could come up if we see some mass deportations.
Speaker Change: But the biggest challenge again is just construct ability and construction costs.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thanks Spencer.
Speaker Change: Thank you. The next question comes from John Keller Celski at Wells Fargo. Please go ahead.
Speaker Change: Hi, This is <unk> on behalf of John.
Speaker Change: I just want to understand what themes are concerned happened just in terms of growth.
Speaker Change: Plans for some osha attendance.
Speaker Change: In the light of like recent bankruptcies and store closures.
Speaker Change: Any of your tenants waiting to capitalize on these opportunities given the weekend.
Speaker Change: It is.
Speaker Change: Certainties for lack of it's the lack of space Thats available we seeded in the party city auction, where dollar tree and five below what I think about 33% of the leases.
Speaker Change: And so retailers and we've talked to them and frankly educated some of them is if you want new stores acquiring lethal leases and bankruptcies and effective and efficient means to do so.
Speaker Change: Now, we're going to put ourselves at a sandwich position they are buying a lease hold in sub leasing thats not what we want to do at the end of the day.
Speaker Change: But ultimately retailers have to be creative with their growth given the constraints in the environment today.
Speaker Change: That makes sense.
Speaker Change: Just one quick follow up on your comment that private payers don't have liquidity or access to capital can you discuss instances if you've seen any private players exit the market.
Speaker Change: Are you seeing any opportunities arising from.
Speaker Change: Private capital.
Speaker Change: Being able to participate.
Speaker Change: Participate in acquisitions. Thank you.
Speaker Change: Across all three platforms right the lack of $10 31 in the capital in this space due to the transaction slowdown across commercial real estate, the lack of private capital due to elevated rates at both at the individual and institutional level again, I can't stress enough a fortress balance sheet with a locked in cost of capital is a massive advantage today.
Speaker Change: Thank you so much.
Speaker Change: Thank you. The next question comes from Paul <unk> at Keybanc Capital markets. Please go ahead.
Speaker Change: Great. Thanks for taking my question.
Speaker Change: Could you guys remind us how much bad debt was embedded into guidance in 'twenty four and how much came to realization last year and then how much is embedded this year.
Speaker Change: Sure.
Speaker Change: This is Peter in terms of our guide for 2025 that includes an assumption for 50 basis points of credit loss.
Speaker Change: And that compares to the roughly 35 basis points.
Speaker Change: Credit loss that we incurred in 2024, which is slightly above our longer term average in 2024. Our guide also included an assumption for.
Speaker Change: For 50 basis points of credit loss I would say that.
Speaker Change: This year, the 50 basis points allows for a worst case scenario, if you will with big lots.
Speaker Change: And in addition to that includes an allowance for other potential credit issues that may arise during the year.
Speaker Change: Okay, Great that was helpful. And then the other guidance question was dispositions this year could be a little less than last year. What are your thoughts there and what kind of types of tenants or industries are you targeting for dispositions this year.
Speaker Change: Yes, if we roll back the clock approximately call. It 14 to 16 months 15 months, we were talking about a do nothing scenario. When we came out in January with a leveraged neutral $500 million scenario, which included approximately $100 million in dispositions, which we hit which was effectively driven by capital recycling for low yield asset.
Speaker Change: In Florida.
Speaker Change: We saw some sort of odd ball transactions in Florida capital flowing into Florida, paying aggressive cap rates and we took the opportunity to recycle assets there.
Speaker Change: Throughout the year this year not dispositions will really focus on noncore assets or frankly, if someone values. The property more than we do they are all for sale of 2400 of them for the right price.
Speaker Change: But it's certainly not in as a necessary source of capital given the $2 billion in liquidity that we entered we entered the year with.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thank you. The next question comes from Linda Tsai with Jefferies. Please go ahead.
Linda Tsai: Hi, when you look across the landscape of retailers, who are you seeing rent coverage is improving or deteriorating on the margin versus a year ago.
Linda Tsai: Well good morning, Linda we don't get rent coverage for most of our tenants at the EBITDA store level, that's not something that at Walmart or O'reilly or <unk> is going to provide at the store level Thats generally situated in a small middle market sale leaseback transaction.
Linda Tsai: But I think we can look across sectors today, and see experiential retail car washes restaurants and this isn't.
Linda Tsai: Obviously.
Linda Tsai: It really.
Linda Tsai: Is that relevant to our portfolio, but we can see the rent coverages, they're having challenges given the highly levered balance sheets in the topline degradation.
Linda Tsai: Sure.
Linda Tsai: Operators like top golf that report publicly to Callaway.
Linda Tsai: And then what Matt metrics are aspects pushed you to a triple B and how far are you from another rating upgrade.
Linda Tsai: So triple B, plus we got upgraded to.
Linda Tsai: Last year.
Speaker Change: It's just size the rating agencies frankly are fairly slow S&P. My opinion was two to three years too late to upgrade us to triple B plus.
Linda Tsai: Today, we sit at <unk> Triple B plus.
Linda Tsai: I think this is the best balance sheet frankly, probably at all of retail if not its top three we have no material debt maturities until 2028 with a war chest.
Linda Tsai: You're compliant.
Linda Tsai: Bind that with our portfolio or the diversity from a geographic tenant and sector perspective, the size of our assets and the cash flows related to them.
Linda Tsai: And then just the nature of the recession resistance of <unk>.
Linda Tsai: Our portfolio and it's pretty difficult to argue against an a minus credit rating. So it will come in due course, we don't control the timing with either the rating agencies.
Linda Tsai: But it's really just size at this point and they continue to move that parameter used to be $5 billion $10 billion in there.
Linda Tsai: Continue to move that debt.
Linda Tsai: That threshold around.
Linda Tsai: Thanks.
Linda Tsai: Thanks Linda.
Speaker Change: Thank you. The next question comes from Wes Golladay at Baird. Please go ahead.
Speaker Change: Hey, Good morning, guys can you talk about how the sandbox is evolving and maybe that you can that you no longer do business with but then Conversely, you are now a one stop shops.
Speaker Change: Interest with you and you did do a new deal with Napa.
Speaker Change: Yes.
Speaker Change: We're always looking at the sandbox, there's nothing static or following retailers consumer trends sectoral trends.
Speaker Change: All of those relevant data points, the evolution of the sandbox frankly to get in or out a pretty slow I mean, where we're dealing with the biggest retailers here in the world, but there are retailers such as I mentioned in the prepared remarks boot.
Speaker Change: Boot barn, which we're a big fan of which we were.
Speaker Change: We are actively doing a project with.
Speaker Change: But the evolution of the sandbox is.
Speaker Change: It is slow right I mean, we are methodically watching the credit profile consumer trends.
Speaker Change: And all of those relevant data points.
Speaker Change: It's either enter or <unk> exit the sandbox. The second driver of that is just our exposure overall in the portfolio.
Speaker Change: Have a well balanced portfolio, we don't think its appropriate to take tenants up to 10% or 9% absent, maybe walmart or somebody of that.
Speaker Change: Elk.
Speaker Change: We want to have a well balanced portfolio from a tenant perspective, a sector perspective as well as geographic.
Speaker Change: Okay, and then a quick question on G&A and one of the big parts of the story as its been the scale on the G&A. The last few years. This year sort of Flatlining, what is driving that increase and how much is due to the cash versus noncash.
Speaker Change: I'll, let Peter speak to the cash versus noncash obviously, we started last year with the do nothing scenario, we made significant investments once we activated during the second half of last year, both to finalize the year in terms of people and systems and then in preparation for 2025.
Speaker Change: We've on boarded a number of new team members here.
Speaker Change: That will be here for full year 2025, a few positions that were hiring for steel in 2025, I think youll see ultimately that number that number scale would be driven down our initial guidance, obviously as you mentioned.
Speaker Change: As in line there.
Speaker Change: In terms of the cash versus noncash Peter I'll take that.
Speaker Change: Just to clarify we guide to total G&A as a percent of adjusted revenue and that includes noncash G&A.
Speaker Change: To the point of your question, we've seen greater growth in our noncash G&A expense relative to cash G&A over the last couple of years and so when thinking about the impact to <unk>, we're continuing to see cash G&A.
Speaker Change: Gail as a percent of adjusted revenue and as we continue to scale. The business. We would anticipate that that trend continues I would note that the <unk>. The noncash G&A is really the driver of that is the function of going from a five year restricted time based stock to a three year, which we thought in terms of talent.
Speaker Change: Management purposes was critical we made that change Peter in 2000 22023, a couple of years 2023 that we didn't think that the team members fully valued the five year vesting period and three years was more in line with industry standards and frankly with just with just mobility today in terms of jobs and.
Speaker Change: And we wanted obviously to retain top.
Speaker Change: Our team here.
Speaker Change: Got it thanks, everyone.
Speaker Change: Thanks Ross.
Speaker Change: Thank you. The next question comes from Eric Gordon at BMO Capital markets. Please go ahead.
Eric Gordon: Hey, good morning, just on the 2025 lease explorations of the 41 leases set to expire. This year are there any known move outs or are the are any of the <unk> 41 on the disposition target list today.
Speaker Change: Really no known material move outs most of them will exercise contractual options those are rolling in honestly as we.
Eric Gordon: Weekly if not daily.
Eric Gordon: And so no known material move outs potentially if there was we would have some we're excited about it we'll see if they exercise their option that's in Provo, Utah and <unk> piece of real estate since subsequent to reporting we've had some exercise of options exercised including the Walmart Rancho Cordova.
Eric Gordon: A five year option exercised.
Eric Gordon: That's a ground lease so that list continues to dwindle.
Eric Gordon: Subsequent to 12 31.
Eric Gordon: Eric I would just add in terms of.
Eric Gordon: I agree with Joe there's nothing material in terms of lease role there but.
Eric Gordon: We've identified anything that would be captured within our credit loss guide for the year as well.
Speaker Change: Okay. That's helpful. And then just on capital allocation I know that liquidity is full and that you don't need to access the equity markets to acquire any of the 2025 potential acquisitions, but as you look to replenish the war chest for 2026 and beyond how are you thinking about.
Speaker Change: The capital mix I think Peter you had mentioned a potential long term debt issuance.
Speaker Change: But any color on that would be appreciated.
Speaker Change: With the 10 year swap to the tune of 300 or $200 million excuse me a three 7%.
Speaker Change: For any future issuance this year and the unsecured debt markets.
Speaker Change: But in reality, we don't need the dollar as we mentioned in the prepared remarks, we can stay sub five times by investing $1 $5 billion. This year without any of the incremental dispositions.
Speaker Change: So this is a pre advertised balance sheet that doesn't need a dollar that has a swap in place to access the unsecured market.
Speaker Change: 10 year Treasury market is highly volatile.
Speaker Change: Alright, Thank you very much.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Sara granted that Bank of America. Please go ahead.
Sara: Good morning, Thanks for taking my question I was wondering if you could make a few comments on how you are thinking about the health of the consumer specifically, the lower and how that may impact the retail that youre exposed to.
Sara: We continue to see pressure on the low income cohort undoubtedly with deflation in eggs, obviously back in the news.
Sara: With goods and services that are necessity based the high end consumer with the looking at their 401K's and looking at their portfolio still feels well and then trade down in the let's call. It. The 150 median household income to Walmart.
Sara: And Walmart continuing to take share and so that will continue to evolve throughout the year, obviously subject to inflation subject to macroeconomic factors, but we see a bifurcated if not trifurcate it consumer today.
Speaker Change: Thank you and also in terms of competition in the market are you seeing any shifts.
Sara: Going forward compared to last few quarters.
Speaker Change: Our competition continues to dwindle.
Speaker Change: Again at the end of.
Speaker Change: Interest rates Super cycle, with 10 31 transactions.
Speaker Change: <unk>, obviously with the transactional market cut by 45% over the past couple of years from historic averages, we're seeing less and less institutional competition individual competition tax motivated competition DST motivated competition. The competition today is with sellers expectations themselves and where.
Speaker Change: <unk> think pricing should be in this new world order of 2025 that we're in and so we encourage brokers all the time sellers all the time to wake up to February of 2025 and stop pretending it's 2023.
Speaker Change: Okay. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from Rich Hightower at Barclays. Please go ahead.
Rich Hightower: Hey, good morning, guys. Thanks for taking the question here.
Rich Hightower: I guess, Joe you've spent a lot of time this morning talking about DSP and how it's kind of a unique solution in the marketplace.
For retailer store growth.
Rich Hightower: What are the gating factors to that becoming.
Rich Hightower: Within the size of your business multiples of what it what it is today, it's simply demand on the retailer side is the concentration issue in terms of.
Rich Hightower: The company allocates capital maybe spend a little time on that if you don't mind.
Rich Hightower: Sure.
Rich Hightower: One thing returns as well as they fit into our sandbox.
Rich Hightower: We are not going to deploy capital into developing flooding platform or development returns that we can that we can execute and 67 days in the acquisition space.
Rich Hightower: Danielle <unk>, our general counsel here as did a tremendous job in 2024 compressing our days to close.
Down to that 66 67.
Rich Hightower: And her team.
Rich Hightower: But again duration equals risk and we need the premium based upon that risk and duration and so as we've talked about if we could churn and burn take a building that.
Rich Hightower: Existing structure get in there add onto it.
Rich Hightower: Innovation improve site improvements and expansion in the tenant is going to be paying rent and 120 days rather than 67 days that can be a tighter spread call. It 50 basis points to where we can acquire a like kind asset if we're going to go through a 12 to 18 months entitlement permitting and construction process.
That spread is going to be wider and so thats. The true gating factor here for us as developers returns on costs, where they have projects retailers' expectations for return on cost.
Rich Hightower: And we sort through hundreds if not thousands of projects annually to decide which ones. We think makes sense given the given the given the kind of those brackets.
Rich Hightower: Okay, that's very helpful.
Rich Hightower: Can I ask another question, which I think has been asked in different ways, but as we think as we start to think about 2026 funding.
Rich Hightower: Sources and uses and I appreciate that it's hard to make predictions, especially about the future but.
Rich Hightower: Just given given the choppiness of the last few months for pretty obvious reasons.
Rich Hightower: Yeah.
Rich Hightower: What are the chances in your mind that 2026 to be a do nothing scenario all over again.
Rich Hightower: Wow, you really asked me hey, guys.
Speaker Change: Hi, Joe.
Speaker Change: Look I don't think it's going to be a do nothing scenario in 2026, I think we are sitting in the pole position right now I'm not concerned about again as I have said in the prepared remarks, the penny here or a penny there I will take potential treasury method dilution.
Speaker Change: Versus a pre funded war chest in the 10 year swap to $3 710 out of 10 times for potential dilution of a penny or two for accounting methodologies.
Speaker Change: We're sitting on in terms of this portfolio this balance sheet inclusive of its maturity schedule.
Speaker Change: Is truly unprecedented I think in this space and I think it is going to continue to a nerve value.
Speaker Change: In 2026, I wouldn't anticipate will be a do nothing scenario, but it's only February 2025, So we'll see what executive orders are signed today and throughout the year.
Speaker Change: Got it thanks for the comments.
Speaker Change: Thank you.
Speaker Change: Thank you and the last question comes from Hendel St. Just at Mizuho. Please go ahead.
Speaker Change: Hey, guys. Thanks for squeezing me in.
Speaker Change: Two quick ones from me. So first I wanted to follow up on the earlier comments on the 50 basis points of credit Reserve I was hoping you could add some color or ballpark on ballpark exposure to not just big lots, but also to Joanne.
Speaker Change: Party City family dollar I guess I'm trying to get a better sense of the categories and tenants specifically in our portfolio are watching a bit more closely here.
Speaker Change: It's really it's really the big lots scenario as this continues to play out we have two party Cds in the portfolio that will be thrilled to get back one is that a target acreage shopping center in Davenport, Iowa, and one is in Texas and Port Arthur.
Speaker Change: We'd be thrilled to get those back and have tenants lined up and waiting we don't own any joanne.
Speaker Change: Not sure frankly, why why anyone would in today's environment, a net lease structure, probably the worst retail bankruptcy of all time, all the stores were making money in nine months later, we file again wed reject one lease we expect them to effectively liquidate at this point just unheard of highly lobby who is our favorite.
Speaker Change: But that's I mean, that's really at the couple of movie theaters were always watching.
Speaker Change: The Oscars come out I don't know one of the best titles. So that always concerns me and one of the best films didn't see any of them besides that.
Speaker Change: We're in a great place.
Speaker Change: Got it got it I appreciate that I also wanted to ask about.
Speaker Change: What you might be hearing about the potential impact of tariffs for some of your tenants I was looking at some of your tenant categories like home improvement Autoparts farm supply I was curious if you think that there could be more at risk because none of them have items that are produced assembled in Mexico, Canada, China, and so curious how that might be impacting your thinking and maybe youre underwriting some of these categories.
Speaker Change: No.
Speaker Change: The non stop tariff talk which doesn't appear to be going anywhere is going to affect that effectively all consumer categories and retail categories today, and ultimately flow down to the consumer.
Speaker Change: That's the bottom line, so whether it's bill forward talking about cars or any other components that are manufactured or imported into this country. The good news is is that most retailers that national retailers due to the first Trump presidency and the tariffs.
Speaker Change: They really diversify their source right, they're sourcing and so coming from but now it seems like only Australia won't have tariffs. So I'm looking at looking across their global procurement efforts T. J X for example, which would be a beneficiary beneficiary from these tariffs because I think youll see trade down has.
Speaker Change: I believe it's 16 global purchasing offices in 16 countries around the globe.
Speaker Change: Those efforts that came from the 2000 22016 administration and those tariffs.
Speaker Change: Hopefully and I think did.
Speaker Change: Good frankly retailers.
Speaker Change: The opportunity to diversify their procurement sources and their purchasing.
Speaker Change: That said ultimately tariffs flow down to the consumer unless retailers want to EBIT margin.
Speaker Change: The biggest retailers in the country in our portfolio for a reason they have the liquidity of the balance sheet to invest in labor to invest in price, which directly could be related to tariffs.
Speaker Change: Walmart can choose T. J X can choose not to move price and it take share now if I'm.
Speaker Change: Small middle market retailer I'm subject to those tariffs and I don't have a multibillion dollar balance sheet.
Speaker Change: I'm going to have to pass that through somehow or find some some.
Speaker Change: Some savings in SG&A.
Speaker Change: And so it's the tariffs will continue to be in the news the impact of them, we're going to see what those are as they as they.
Speaker Change: It worked through.
Speaker Change: They get resolved.
Speaker Change: But it will it will be it will be the small middle market retailers that suffer the greatest consequences from any from any tariff for any any tariffs here.
Speaker Change: Appreciate the thoughts thanks, guys.
Speaker Change: Okay.
Thank you and the last question now is from Ohio and Investor. Please go ahead.
Speaker Change: Yes.
Speaker Change: Hello.
Speaker Change: Yeah, Hey, this is Sam on for Tayo I just wanted to ask you guys. If you can give us an update on some of the retail categories experienced headwinds specifically talking about dollar stores and pharmacies.
Speaker Change: What we saw Cvs as print this morning, which beat guidance and a strong outlook for 2025, that's just Cvs specifically the pharmacy sector. Obviously I mean, if you look year over year pharmacy for us is down 10% almost.
Speaker Change: But this is without any material dispositions year over year.
Speaker Change: And so those sectors that were in the news will continue to experience some of those headwinds absent obviously some macroeconomic changes.
Speaker Change: We will continue to invest in what we think are the best retailers in a recession resistant and environment same sticking to our sandbox. So you won't see us move into experiential you won't see us ramp our dollar store exposure Thats just going down every single day, you won't see us increase our pharmacy exposure.
Speaker Change: We're focused on the best and brightest categories, our opinion, whether that's off price general merchandise Walmart tire and auto service auto parts like we talked about earlier dominant grocers in this countries such as Kroger, all the Wegmans HEB Publix.
Speaker Change: We focus on the best of the best here and we're going to let this we're going to let the.
Speaker Change: Really everything else shake out.
Speaker Change: Alright that makes sense and I guess the last question I hope it I missed it but are you guys seeing anything changed from your watch list credits.
Speaker Change: Alright, great perspective.
Speaker Change: Now as then because I mentioned earlier, we're just continuing to navigate and watch, but really can't do much through this big lots bankruptcy with the few big lots that we have with.
Speaker Change: With the next lease auction. They continue just to go through different hands.
Speaker Change: But our portfolio, we feel like is in great shape.
Speaker Change: Alright, that's all I got thanks, guys I appreciate the time thank.
Speaker Change: Thank you.
Speaker Change: Thank you we have no further questions I will turn the call back over for closing comments.
Speaker Change: Well. Thank you all for joining us. This morning, we look forward to seeing you at upcoming conferences and we appreciate everybody's time. Thanks again.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.
Speaker Change: Yes.