Q1 2025 Agree Realty Corp Earnings Call

Speaker Change: Good morning and welcome to the Agree Realty first quarter 2025 conference call. All participants will be in a listen only mode. Shooting new assistance please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions.

Speaker Change: To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star then two.

Speaker Change: Please limit yourself to two questions during this call. Note that this event is being recorded. I would now like to turn the conference over to Reuben Treatman, Senior Director of Corporate Finance. Please go ahead, Reuben.

Reuben Treatman: Thank you, good morning everyone, and thank you for joining us for Agree Realty's first quarter 2025 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

Reuben Treatman: 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 updated 2025 guidance. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons.

Reuben Treatman: Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10Q for discussion of various risks and uncertainties underlying our forward-looking statements.

Reuben Treatman: In addition, we discussed non-GAAP financial measures, including core funds from operations, or core FFO, adjusted funds from operations, or FFO, and net debt to recurring eva'ta

Reuben Treatman: Reconciliation of our historical non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release, website, and SEC filings. I'll now turn the call over to Joey.

Joey: Thanks, Reuben, and thank you all for joining us this morning. We are extremely pleased with their performance in the first quarter of 2025, as we invested over $375 million across our three external growth platforms, while further strengthening our best-in-class portfolio.

Joey: This represents the largest quarter of investment volume since a third quarter of 2023, and is characteristic of the accelerating activity that we're seeing across our three platforms.

Joey: While the macroeconomic environment remains volatile and unpredictable, our company remains a fashion of stability and poise for growth.

Joey: Our liquidity, bolstered by our outstanding forward equity and swaps, combined with our preeminent cost of capital, position AgriRealty to again take advantage of market dislocations and disruptions.

Joey: Year to date, we have added over a dozen team members initiated several systems improvements and sequenced multiple process improvements to accelerate our investment activities.

Joey: Disgrowing investment activity is supported by a fortress balance sheet with $1.9 billion of liquidity and over $1.2 billion of hedge capital.

Joey: During the quarter, we raised another $181 million dollars of forward equity of the RATM program. Effectively, we're punishing amounts settled in the first quarter and maintaining an ample runway to execute our gross strategy.

Joey: With no material debt maturities until 2028, and proform a net debt to recurring eud of just 3.4 times a quarter end, our fortified balance sheet provides significant flexibility and protection against capital markets volatility.

Joey: Our balance sheet is paired with what we view to be the country's leading retail portfolio. We launched the acquisition platform in 2010 with a focus on recession-resistant retailers that have adapted to a comprehensive omni-channel strategy.

Joey: Although we have yet to experience a traditional recession since its inception, our portfolio has proven to be a pandemic group and we remain confident it will be terror-resistant [inaudible]

Joey: We have and will remain focused on the country's biggest and best retailers that sell necessity goods and services [inaudible]

Joey: Many of these retailers benefit from the trade-down effect during tougher economic times, and they have the scale and balance she's ranked to mitigate higher input costs and withstand margin pressure.

Joey: While tariff headlines continue to evolve and dominate the news well, ultimately, we believe the big will continue to get bigger in this environment, further validating our investment philosophy over the past 15 years.

Joey: Even our robust investment pipeline across our three external growth platforms, we've increased our investment guidance range from 1.1 to 1.3 billion to 1.3 to 1.5 billion dollars for the year.

Joey: At the midpoint, this represents a 47% increase over last year's investment volume [inaudible]

Joey: As I mentioned, all three of our investment platforms continue to find compelling opportunities to use of hurdle both our qualitative and quantitative analysis.

Joey: While increasing our investment guidance for the year, we remain disciplined and thoughtful in our approach to asset underwriting and portfolio construction during these valuable times.

Joey: In addition, we are raising the low end of our full-year AFFO per share guidance by a penny to a new range of $4.27 to $4.30, representing over 3.5% growth at the midpoint and demonstrating the durability of our cash flows. [inaudible]

Joey: As a reminder, this number includes realized potential treasury method delusion due to our significant forward equity position.

Joey: Peter will provide additional details on our guidance range and the input shortly.

Joey: Raising our investment in earnings guidance amid the current macroeconomic uncertainty demonstrates that our company is built for all markets

Joey: We thrive in periods of uncertainty where we can leverage our speed, relationships, exceptional team, balance sheet flexibility, and superior cost of capital.

Joey: We launch the acquisition platform on the heels of the GFC in 2010, double the size of the company during the depths of the pandemic, and are always positioned to take on the next challenging economic period.

Joey: Turning to our external growth activity, we had an active start to be here, leveraging our unique mark positioning and deep relationships with retail partners to uncover opportunities across all three platforms.

This includes 359 million of acquisitions across 46 assets [inaudible]

Joey: Act positions during the quarter included a lender-owned home depot in California, a cell lease back with a leading national grocer, and Albertson's back at the grocery store in Bronx,

Joey: An off-market portfolio from a relationship seller, a Kermax ground lease in Colorado, as well as approximately 41 off transactions .

Our acquisition activity remains focused on industry-leading necessity-based retailers.

Joey: The properties acquired in the first quarter are at least to operators and sectors including grocery, off price, auto parts, convenient stores, and tire and auto service

Joey: The acquired properties had a weighted average cap rate of 7.3% and a weighted average at least over 13.4 years.

Joey: Deroggy 69% of base rent afford was derived from investment grade retailers, and we continue to add to our ground lease portfolio during the quarter.

Joey: We continue to see increased activity to cross our development and DFP platforms as well During the first quarter we commence four new development or developer funding projects with total anticipated costs of approximately $24 million in dollars.

Joey: Construction continued on 14 projects during the quarter with aggregate anticipated costs for approximately $80 million.

Joey: We also completed six projects during the quarter representing a total investment of approximately 27 million.

Joey: These projects are with several leading retail partners including TGX companies, Burlington, 7-Eleven, Booth Byron, Starbox, Gerber Collision, and Sabba Reynolds.

Joey: Our development and DFP pipeline continue to grow with several upcoming starts we announced in the near future.

Joey: Our asset management team continues to proactively address upcoming lease maturities

Joey: We executed new leases, extensions, or options on over 584,000 square feet of gross leaseable area during the first quarter.

This included a Walmart Super Center in Rancho, Cordova.

Joey: A Home Depot in Farmington, New Mexico, and 16 Geographically Diverse AutoZone Leases comprising over 100,000 square feet

Joey: We remain well positioned for the remainder of the year with only 30 leases for 90 basis points of annualized base rents maturing.

Joey: Court over, quarter, our pharmacy and dollar store exposure decline 20 and 30 basis points respectively respectively.

Joey: We have been clear that our exposure to both of these categories peaked within our portfolio before their challenges had become newsworthy.

Joey: As of quarter end, our best in class portfolio comprise 2,422 properties spanning all 50 states.

Joey: The portfolio includes 231 ground leases comprising nearly 11% of annual wise-based rents [inaudible]

Joey: Our investment grade exposure stood at 68.3% and occupancy remained solid at 99.2% [inaudible]

Joey: This number represents a temporary dip as we continue to resolve the former remaining big lats in our portfolio.

Joey: Our second former big loss in Cedar Park, Texas, was successfully released to Aldi at a net effective rental lift of nearly 50% during the quarter, while an additional store was acquired during the bankruptcy process for variety wholesalers.

Ren has already commenced on both of these locations.

Joey: We anticipate further announcements on the next call about the remaining big labs in our portfolio.

Joey: With that said, I'll hand the call over to Peter to discuss our financial results for the quarter.

Peter: Thank you, Joey. Starting with the balance sheet, we remained active in the capital markets during the first quarter, raising approximately $181 million of forward equity VRATM program. We also settled 2.7 million shares of forward equity for net proceeds of approximately $183 million.

Peter: Additionally, we established our inaugural 625 million dollar commercial paper program during the quarter. The program allows us to tap into another pool of short-term capital and further diversifies our balance sheet.

Peter: We anticipate that we will be able to efficiently fund our short-term capital needs on the program at rates that are substantially lower than our revolving credit facility today.

Peter: Since the end of last quarter, we have taken further steps to hedge against interest rate volatility by entering into $125 million of Ford's starting swaps.

Peter: In total, we now have $325 million of forward-starting swaps, effectively fixing the base rate for a contemplated 10-year unsecured debt issuance at roughly 3.9%.

Peter: Combined with approximately $920 million of outstanding forward equity, we have over $1.2 billion of hedge capital which provides critical visibility into our intermediate costs of capital, particularly during this uncertain period.

Peter: At quarter end, we had liquidity of approximately $1.9 billion, including the aforementioned forward equity and availability on our revolving credit facility.

Peter: Pro forma for the settlement of all outstanding forward equity are not that to occur in EBITO was approximately 3.4 times.

Peter: Excluding the impact of the unsettled forward equity are not that to recurrent EBITO with 4.9 ht

Peter: Our total debt to enterprise value is under 26% and our fixed charge coverage ratio, which includes the preferred dividend, remains very healthy at 4.3 times [inaudible]

Peter: Our only floating rate exposure was comprised of amounts outstanding on the revolver at quarter end, and as Joey mentioned, we continue to have no material debt maturities until 2028. Our balance sheet is extremely well positioned to execute on our accelerating investment activity across all three external growth platforms.

Peter: Moving to earnings, Core FFO per share was $1.04 for the first quarter, which represents a 3.1% increase compared to the first quarter of last year.

Peter: AFFO per share was $1.06 for the quarter, representing a 3% year-over-year increase.

Speaker Change: As Joey highlighted, we have updated our full year 2025 outlook to reflect our strong start to the year. We raised the low end of our full year AFFO per share guidance to a new range of $4.27 to $4.30, which implies year-over-year growth of more than three and a half percent 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 inputs, our earnings guidance for 2025 includes anticipated Treasury stock method dilution related to our outstanding forward equity.

Speaker Change: 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 and accordance with the Treasury stock method.

Speaker Change: Provided that our stock continues to trade near current levels, we anticipate that Treasury stock method delusion will have an impact of roughly two pennies on full year 2025 AFO per share. That said, the impact could be higher if our stock moves materially above current levels or if we were to issue additional forward equity.

Speaker Change: Our growing and well-covered dividend continues to be supported by our consistent and durable earnings growth.

Speaker Change: During the first quarter, we declared monthly cash dividends of 25.3 cents for common share for January , February , and March.

Speaker Change: Our dividend is very well covered with a payout ratio of 72% of AFFO per share for the first quarter.

Speaker Change: We anticipate having almost $120 million in free cash low after the dividend this year, up approximately 15% from last year. Review this as another source of cost-efficient capital while maintaining a robust and growing dividend.

Speaker Change: Subsequent to quarter-end, we announced an increased monthly cash dividend of 25.6 cents per common share for April . The monthly dividend equates to an annualized dividend of over $3.07 cents per share and also represents a 2.4% year-over-year increase.

Joey: With that, I'd like to turn the call back over to Joey.

Joey: Thank you, Peter, operator at this time with opening up for questions.

Joey: 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. You will hear a prompt that your hand has been raised.

Joey: Shudwa Shudwa declined from the polling process, police parts star followed by the two, and if you are using a speaker phone, please let the Haendel set before pressing any news.

Speaker Change: The first question comes from Ki-Ben Kim at Trouist. Let's go ahead

Keebin Kim: Thank you, good morning. So, Joey, you guys raised investment guidance by $200 million, you know, you guys, and I'll also mention the Treasury stock dilution method. What were there other detracting items because I would have thought you guys raising that much of your investment guidance that the AFL guidance could have been more than half a cent. Thank you.

Keebin Kim: Good morning, Keepen. No other detractors. Obviously, we've included, as Peter mentioned, the prepared remarks approximately two cents of treasury metadata anticipated.

Keebin Kim: on a daily or for an annual basis here. But we've been conservative. We think an appropriately included that treasury method delusion as it incurs and what's incurred to date. Peter can talk about any other puts and takes in there, but that's really the only offset to the investment increase.

Keebin Kim: Keeping it, this is Peter, in terms of other puts and takes there's to Joey's point really no other offset if you think about the incremental 200 million. Thank you very much.

Keebin Kim: of investment spend this year, subject to timing of that investment spend and spread. We think that should translate to about a million dollars or so of incremental earnings or about a penny. Obviously, at the low end of our guidance range, we took up.

Keebin Kim: The range by a penny, we didn't touch the top end. That's really a reflection of the fact that we do anticipate treasury suck method delusion.

Keebin Kim: We'll be closer to that two pennies rather than one to two pennies given where we're trading currently and obviously that remains subject to where we trade for the remainder of the year and any other capital markets activity throughout the year as well Let's go.

Speaker Change: And I guess this is a high class problem that your stock price goes higher and creates treasury stock dilution, but when does the kind of calculus start to work out so that we can start to get to, you know, a plus like 4% type of A of a full per share growth rate or for more from Agree

Speaker Change: Well, I think of the near term. Obviously, subject to macroeconomic conditions which are outside of our control, this business is built for that. And so we made the decision to pre-equitize the balance sheet, put hedges in position in terms of the swaps this year in anticipation.

Speaker Change: of increased volatility, but we think that algorithm kicks in there outside of just balance sheet protection, treasury method delusional.

Okay, thank you.

Thanks, Kevin.

Speaker Change: Thank you. The next question comes from Smedes Rose. Please go ahead.

Smith Rose: Hi, good morning. I just wanted to ask you a little bit about some of your tenant exposure. It looks like grocery exposure went up by about 90 basis points and within that your name tenant's cougars was up and I was just wondering is that any specific change in your strategy around groceries or is that more just sort of a one-off opportunity that you found during the quarter? Yeah, sure.

Speaker Change: Good morning, Steve, that was a one-off opportunity predominantly in the quarter. I also mentioned the Acme in Bronx, still in New York.

Speaker Change: We'll continue to find dominant grocers across the country. There's a number in the pipeline.

Ready for the second quarter? [inaudible]

We continue to believe that dominant grocers...

Speaker Change: We'll gain share here, given the macro obviously, but also just the challenges for small grocers to operate in a 2% margin business, ex tariffs and all the other noise out there.

Okay, and then just maybe just touching on tariff, um...

Speaker Change: Even your tenet exposures, anyone that you are particularly concerned about are watching more carefully, particularly given the...

Speaker Change: Pire Tower, Sys China, specifically, which I realize is kind of a moving, a very fluid situation, but what's on your, on your radar?

Speaker Change: I appreciate you acknowledging the moving and fluid situation. It seems to be day-to-day .

Speaker Change: I'll be honest, there really is nobody that we're overly concerned with tariff inputs in the portfolio today. Now, all retailers subject to carve-outs and exclusives, obviously the electronics carve-out [inaudible]

Speaker Change: for the Truth Social Post, or whatever it was last week, alleviated concerns for computers and televisions. Now that could all obviously change.

Speaker Change: But we think this portfolio is in tremendous position that continues to benefit from the trade down effect.

Speaker Change: As you mentioned, grocery, obviously, with economic conditions where there are people...

Speaker Change: We'll stop eating out. Auto Parts. You've seen that accelerate in our portfolio. Obviously, new cars will be impacted significantly by tariffs. The average new car in this country is already approximately $45,000. That's pre-tariff . . . . . . . . .

Speaker Change: Tyron Auto Service, another category we highlighted during the prepared remarks, Off-Price Retail, where when a T-Jax is in Burlington's largest landlord, we continue to think they'll gain from...

Speaker Change: It was built to be recession-resistant, we haven't heard it hit a traditional recession since 2010 upon its inception But it proved to be pandemic-resistant and we're resistant and we're very confident it will be ultimately whatever way shape-informed tariffs panel will be tariff-resistant as well

Okay, thank you. Appreciate it. Thanks, Mids.

Speaker Change: Thank you. The next question comes from Arjory Milligan at Raymond Chains. Please go ahead.

Speaker Change: Thank you. Good morning, guys. Joe, I was wondering if you are having conversations with your development partners. What's their current appetite for opening new stores? Is there been a pause just trying to get a broader market read there?

Speaker Change: Yeah, good morning, Arger. We have not seen any pause to date. I'll be if this is a volatile and fast-moving environment. The team was with a number of retailers this week and will be...

Speaker Change: Again with two or three in the upcoming couple days here.

Speaker Change: We haven't seen a pause, we've actually seen announcements, SAMS Club has announced that they're opening that new stores, Kroger's made announcements in terms of remodels in that new stores in the past two weeks as well and so we have not seen that pause so we've seen that pause.

We haven't had any deals frankly tabled. [inaudible]

or put on hold either yet, but obviously again...

Speaker Change: This is a fluid situation which is out of our control.

Speaker Change: Those tenons today, I don't think are overly scared by Tenet Terrace, I think a lot of them see this as an opportunity is.

Speaker Change: As I mentioned in the prepared remarks, the bigger getting bigger, and this is what we've effectively...

Speaker Change: Built this portfolio and constructed around. To invest in price, they have to, to invest in labor and invest in omnichannel fulfillment. And terrorists will require retailers to effectively invest in price unless they're going to pass that entire tariff on to the end consumer.

Thanks, that's helpful. I wanted to move over.

Speaker Change: From a portfolio standpoint, is there any tenants out there? Obviously, this is not really tariff-related, where you're just keeping a watch on them and saying, ex the tariffs, there might be some fundamental issue.

Speaker Change: No new entrance into that, obviously, one of the three movie theaters total in the portfolio.

Speaker Change: Which is one last follow up in terms of cap rates. Where do you think we end the year in terms of Agree's acquisition cap rates? Is it going to be higher or lower and sort of how do you think about the inputs there?

Speaker Change: Margette B. Frank, I have no idea. The volatility in the 10-year treasury which...

Speaker Change: His has been historically obviously the base rate for the world, the fear, greed, spectrum...

Speaker Change: continues to best lead obviously we're on the fierce side we are just starting effective Monday building our cute repipe line just given our 66 67 days letter of intent to close

Speaker Change: I think this is going to be a volatile world. I think it's going to change. I think the volatility doesn't effectively move cap rates as a secondary impact.

Speaker Change: I think the volatility that we're frankly accustomed to, all of us are accustomed to, inclusive of real estate owners are, you know, when you have 10, 15%

with interest.

Speaker Change: Ultimately make a disposition or investment decisions based upon the fear of greed spectrum

Speaker Change: And so the 10-year going sub four or the 10-year piercing five can move cap rates but with the 10-year moving between four two and four six and just using a band here I don't think that ultimately moves cap rates in any material way just because of the frankly people being accustomed to that volatility [inaudible]

Great, this is for me, thanks Cuss [inaudible]

Thanks, RJ.

Speaker Change: Thank you. The next question comes from Michael Goldsmith, UBS. Please go ahead.

Speaker Change: Good morning, thanks for taking my question. Maybe a similar question, those just asked about from a different angle. Have you seen any changes in the transaction market post the April 2nd tariff now? Maybe not directly from the tariff, but just from the overall uncertainty. You sort of touched on the cap rate environment, but are you seeing any changes in competition or any deals told just given the uncertainty? Yes, I do.

Speaker Change: Extremely limited, obviously the 1031 buyer has effectively been cut in over half just to the commercial real estate transactional volume being done by half the lap of liquidity and invested markets.

So just frankly the, sorry, the lending markets, we see very limited competition.

Speaker Change: I often make the analogy I did during fourth quarter of a door versus a window, we see a door here, and our balance sheet, our cost of capital as I mentioned, as well as our portfolio and the tremendous team here we have, take advantage of that opportunity. [inaudible]

Speaker Change: And so, we took advantage of the opportunity during the GFC. We took advantage of the opportunity.

Speaker Change: During COVID, obviously, when we double the size of the company, we see a light-kind opportunity potentially on the horizon, obviously subject to the next truth social.

Speaker Change: Post here, and changes in the macro, but with limited competition across all three investment platforms.

and with our core strength here.

Speaker Change: This is a tremendous opportunity for our company to continue to grow this portfolio in a creative manner and solidify it as the preeminent and at least portfolio in the country.

Speaker Change: Thanks for that, and as a follow-up. On slide 22 of your presentation, you highlight what you're investing in or what you're not, and you call out the avoidance of private equity sponsorship. So, you know, just given where we are in the cycle and the uncertainty, you know, what's been your experience with private equity sponsorships at this point in the cycle, you know, just give them some of that uncertainty. Thanks. Thank you.

Speaker Change: Ultimately, and this isn't part of the cycle, we seek to work and partner with retailers that have a long-term perspective on the operations of their business. [inaudible]

Speaker Change: Post-special dividends, levering up the balance sheet, app co-prop co-structures, cell

Speaker Change: You know, to improve liquidity and frankly in order to special dividend it out, probably. Those just aren't things that we believe work in a 21st century omni-channel world which is hyper-competitive.

Speaker Change: And so, we'll continue to focus on our sandbox as the 3035 biggest and best retailers in this country rated or unrated and a few sub-investment-grade rated

Speaker Change: Retailers that are selling essential goods and services that have long-term sponsorship and ownership and frankly private equity doesn't match that duration for us.

Speaker Change: Thank you very much, good luck in the second quarter [inaudible]

Speaker Change: Thank you. The next question comes from Linda Tsai at Jeffries. Please go ahead.

Linda Tsai: Hi, the temporary occupancy dip from Big Watts, would that be resolved by your end? [inaudible]

Speaker Change: Oh yeah, I would anticipate that would be resolved much sooner than year end, most likely by the end of the second quarter.

Speaker Change: And so we've resolved the number of them. The off-price retailer in Manassas, Virginia was the first one where we have a net effective lift, Peter jumped over 150%. A net effective lift of over 150%.

Speaker Change: Cedar Park, Texas, is released with an effective rent lift of approximately 50% to a large German-based grocer for the rest of the year.

Speaker Change: and then Fuqua Verino was acquired in the bankruptcy by variety wholesalers and we're working through those others to have optimal solutions here but we think they will be favorable and not a concern.

Speaker Change: And then for the 50 to 150% rent up list, is there CapEx involved? [inaudible]

Speaker Change: The other net effective basis, not same store NOI. So the least that we purchased in bankruptcy, we purchased for a couple hundred thousand dollars and that was the only truly expense on that. It was an Aziz basis, same with the grocery and Cedar Park Texas with that approximate 50% net effective rent left.

Speaker Change: from Large National Retailers Predominantly. That's our focus there, our first order of business, and we hope to further expand upon it on the Q2?.

Speaker Change: Different perspectives on each sector, pharmacy, we've been pretty adamant about Walgreens exposure, we was pretty adamant about right age future, that bankruptcy and liquidation will occur any day, most likely now.

Speaker Change: really isn't relevant in today's world, isn't something that we're overly attracted to. That said, we'll continue to work on unique pharmacy opportunities where we think the basis is rental basis is appropriate or high store sales or barriers to entry. [inaudible]

Speaker Change: I remind everyone our largest two pharmacy exposures in terms of asset size, our Greenwich Connecticut on Greenwich Avenue, the CVS, and the Walgreens on the corner of the Diagg, the best piece of real estate, and the University of Michigan.

Speaker Change: Dollar Stores, we just saw them being overbuilt, frankly. We took advantage in 2023 of merchant developers that were stressed.

Speaker Change: and took some of those properties out. We've never engaged in a family spec with a dollar store operator. Very different themes running through dollar general and dollar tree family dollar, but we saw the spaces overbuilt.

Speaker Change: But also, we were having challenges getting our arms around the pricing and conjunction with the residual and so you'll see and I mentioned in the prepared remarks that they fell year over year, quarter over quarter. They peaked in 2023 and we were pretty clear on the Q3 2023 call that would be the case. [inaudible]

Speaker Change: Thanks for that helpful context. Just one last one. The dozen team members, you added what departments were they located in and has AI reduced the need to stop up in other areas.

Speaker Change: Certainly, so to roll back to class, 2024 obviously started with the do-nothing scenario, effectively a hiring freeze. We are more than caught up now. This is all built into our GNA forecast for the year that we've provided to the street. Those team members are strewn across the entire organization from HR to IT to acquisitions, construction development, analyst.

Speaker Change: We got an update actually yesterday from our general counsel that we're very pleased with the results, continue to make some tweaks there

Speaker Change: AI will continue to be deployed throughout this company. We have been utilizing AI for lease abstraction.

Speaker Change: Peter Cretchwood, 2022 You're dating back to 2022 when no one was talking about AI?

Speaker Change: We think there's significant opportunities both within our underwriting as we launch the next iteration of ARC in 2026 to deploy AI, but also I would tell you significantly in overall transactional expense.

Thank you.

Thanks for listening.

Speaker Change: Thank you. The next question comes from John Killachowski at Wells Fargo. Please go ahead.

Speaker Change: Thank you. Good morning. Joey, you touched on this briefly earlier, but how will Terrace that they stay on impact your go forward strategy as it relates to investments? And if so, would you not expect tighter pricing on those assets?

Speaker Change: O'Reilly's AutoZones, The Dominant Tyronautoservice Operators, Dominant Sea Stores throughout the country, Off-Price Retail, I think all of these sectors are effectively winners in a large tear of the environment . . . .

Speaker Change: There may be some short-term pain, but long-term, they have the balance sheets, the market position to continue to thrive.

Speaker Change: Got it. And then in a similar vein on the bad, dead, non-reimbursable side, is it just too early to change your outlook or do you feel very comfortable with the conservativeism already built in?

Speaker Change: I'll let Peter hit it. I think it's pretty early to change the outlook. Obviously that outlook incorporated the few big laps that we continue to work through, but I think it's frankly pretty early in the middle of April .

Peter: John , just to hit specifically on credit loss and our guidance for the year, our 20-25 earnings guidance, as I mentioned on the last call, includes an assumption for 50 basis points of credit loss.

Peter: And that included an allowance for big lots, as we talked about on this call.

Peter: In Q1, we experienced roughly 30 basis points of credit loss. [inaudible]

Peter: And that compares to the 35 basis points roughly that we experienced.

Peter: That 50 basis point is a fully loaded number for any lease explorations where we are carrying a vacancy, taxes, insurance, maintenance of the building [inaudible]

Peter: 50 basis points that we put in there that is akin to our underwriting on the acquisition side, right? To truly understand the full economic impact and to provide the street transparency into that full economic impact.

Peter: Just to confirm the 40 bits of occupancy loss, would that have been included? Yep, that was, it's specifically tied to the last that is included in that number.

Speaker Change: Thank you. The next question comes from Ronald Kamden at Morgan Stanley , please go ahead.

Ronald Camden: Hey, just two quick ones. Just going back to the development and a DFP platform, any sort of early indications of how much construction costs could be going up, and how are you guys thinking about sort of your yield requirements for that channel?

Ronald Camden: Yeah, great question, Ron. We have done a preliminary and had third parties also do studies on tariff implications, obviously a moving target.

Ronald Camden: Call it the vertical cost here in terms of construction. We would anticipate a two to five percent on the high end increase in tariffs, obviously.

Ronald Camden: Again, these projects are effectively rectangle and so we have our arms around them.

Your second question? Sorry, Ron.

Ronald Camden: Yes, sorry, part, part two. Just, I don't think we fit on sort of the, the dispositions yet, just any sort of thought indication there would be helpful.

Speaker Change: It didn't change the guidance for this quarter, it didn't change our annual guidance, I don't think you'll see us change that annual guidance this year unless there's...

Speaker Change: Some sort of change, frankly, I think we have done a tremendous job leaning out assets that we didn't think were core in the portfolio over the last several years.

Speaker Change: That said, we'll look at opportunistic dispositions, we have in-bounds all the time, we'll continue to look for opportunities to prune the portfolio of the portfolio.

Speaker Change: As we get feedback, either on the ground level or the corporate level.

Speaker Change: Or, if we just think something is above market, and the reteninability is limited, so...

I don't see dispositions being a major contributor.

in terms of capital this year. [inaudible]

Speaker Change: But I will continue obviously to be active on that front but I don't think it's not a priority as it was last year and we were focused on recycling capital.

Helpful, thank you.

Speaker Change: Thank you. The next question comes from Spenser Climbshire at Green Street. Please go ahead.

Spencer Glimcher: Thank you. Just one for me. As you started working through your QA position pipeline, have you guys observed any cap rate movements or changes to the bit off-spread and any particular retail

So, Good morning, Frederick Q2 is effectively built.

Right, subject to diligence and closing, Q2 is effectively built. [inaudible]

Spencer Glimcher: Just using that 65-day plus transaction timeline from letter of intent execution, we're effectively to close, we're effectively through Q2. If you look at the volatility in the 10-year Treasury during that 65-70-day sourcing period, obviously the 10-year drop, then it pulled back up. [inaudible]

Spencer Glimcher: Having this hedge position in terms of both forward equity and the swath in place allows us to be frankly consistent.

Spencer Glimcher: And so this is not, we're not in a situation where we have to constantly be changing our targets in terms of yield hurdles [inaudible]

Spencer Glimcher: We'll see how Q3 now plays out. Again, that sourcing effectively starts on Monday or Friday of this week, just given our traditional transaction timeline.

Spencer Glimcher: And frankly, I have no idea what the next, again, what the next move from the administration will be, where the 10-year treasury goes, where our stock price goes but the good news is we're locked and loaded and we'll come into with a running start here [inaudible]

Speaker Change: Okay, understood you have the pricing power, I guess, and you don't have to be volatile, as you mentioned, in terms of your, you crossed the capital, but did you observe anything in terms of pen and ask, or where kind of pricing expectations were on the other side of the bidding? [inaudible]

Speaker Change: Could be out for a little while here, as spreads wind out of the 10-year treasury yield spiked.

But again, I forewarn everyone.

Speaker Change: The number one sell lease taxes and minority of what we do. We're trying traditionally a third party acquirer, we think we create more value there, rather than being just a financier of real estate. And then two drawing, you know...

Speaker Change: Drawing parallels or even putting threads through transactions in this massive fragmented, indivigially owned market called NetLease is very difficult.

Speaker Change: I gave some examples of the transactions that we executed on the acquisition front in Q1.

Speaker Change: They were wholly disparate from a cell leaseback with a national grocer to a portfolio with a relationship sellers are probably seventh or eighth transaction with that seller to a family office that owned the Bronxville Acme grocery store

Speaker Change: And so the cellar pool remains extremely disparate. We're seeing more institutions come to the table, the recycle capital and potentially dispose of assets. We're in those types of conversations.

Speaker Change: who effectively owns a portfolio that her husband acquired. And so, at the end of the day, the aggregation of those transactions comprise the quarter. And I always say, the most exciting part about this business, as you never know where the next one's going to come from. [inaudible]

Great, thank you.

Thanks, Spencer.

Speaker Change: Thank you. The next question comes from Jenna Galana at Bank of America. Please go ahead.

Jenna Galan: Thank you. Good morning. Just following up on the commercial paper program, Peter, can you quantify the spread relative to the revolver and if this benefit is included in the updated guidance or did you already plan to launch the program with the initial guide?

Jenna Galan: Sure, just in terms of pricing on the commercial paper program, obviously we closed on the program on March 31st, dependent on the tenor of commercial paper notes that we're issuing as well as conditions in the commercial paper market which are subject to change.

Jenna Galan: Today we think we can issue commercial paper notes, 40 plus basis points.

Jenna Galan: inside of our borrowing cost on the revolver. The current borrowing cost on the revolver at quarter and was around 5.2% for reference.

Jenna Galan: Today so far in Q2, we have been active in the CP market and used that for short-term borrowings and in our current guidance range we have contemplated the impact of using commercial paper throughout the years appropriate.

Jenna Galan: Thank you, and I know you think of your kind of long-term whack but just between this and the swaps that you have in place, I mean I think investment spreads should be kind of a historic highs currently.

Can you maybe comment to that?

Jenna Galan: I would agree absent the deaths of the pandemic when the rates were at effectively zero and we were issuing ten-year paper at two plus percent and perpetual preferred four and a quarter.

Jenna Galan: There's no doubt that our investment spreads are wide. We'll be the beneficiary of those investment spreads in our superior cost of capital here, but we're no doubt in an advantageous position. [inaudible]

Thank you.

Thanks Ana.

Speaker Change: Thank you. The next question comes from Jim Kamout at Evercore. Please go ahead.

Jim Cameron: Good morning. Thank you. Joey, you obviously had the conviction to raise your investment volume for the year. Is that really built? You're just expanding with your existing relationships? Or have you kind of started to identify additional partners?

Jim Cameron: All over the board, Jim, it's existing relationships, it's additional partners, it's the breadth and depth of the coverage that this team has across the country.

Jim Cameron: Well, we are the go-to buyer for net lease retail, high-quality net lease retail assets barn on today and so I think our transactional history, the quality of the team, our marketing and e-marketing campaign

Jim Cameron: They all honor to our benefit here. Our ability to look at the real estate with the different lens, our relationships with the retailers, the end users of these properties is the secret sauce, part of the secret sauce, and so it's all the above and more.

Speaker Change: Great, and the more attentive question, the ground leases have about a nine-and-a-half year remaining waltz. Is that remind me, is that your final expiration, or is that really just the first potential extension? Because the kind of thing about potential organic growth opportunities, if they, so any help there, thank you. That's exclusive of auctions, just as waltz is for the remainder of the portfolio. Got it, thank you guys. Thank you very much.

Speaker Change: Thank you. The next question comes from Upal Rana at Keybank Capital Markets. Please go ahead.

Upal Rana: Great, thank you. Joey, you mentioned seeing more opportunities in the development and DFP side, and you know the increasing construction costs as well, but just wondering how big do you think the development pipeline could potentially get from here?

Upal Rana: So we've set that medium-term target of putting $250 million in the ground for a year. We are on track. Again, it's a medium-term target, not for this year. We are on track. Our pipeline and our shadow pipeline are very large. [inaudible]

Upal Rana: They're obviously subject to diligence and closing conditions, sometimes entitlements as well. I would tell you...

Upal Rana: Very distinctly, our development platform and the team has done a tremendous job. We've added team members that have really hit the ground running and Craig Relic and his team, our Chief Growth Officer, are working with retailers all the time. It's a very significant pipeline.

Upal Rana: and their developer funding platform continues to benefit from just the lack of liquidity out there as well as unknown exit cap rates through other third party developers.

Upal Rana: And so we've used our developer funding platform as a bridge to get projects across the finish line. A lot of them are directed to us by retailers.

Upal Rana: Some sourced by the acquisition team, via development team here

Upal Rana: Both Pipelines, they don't get a lot of headlines, but both Pipelines we think combined with our acquisition and an active as a management platform.

Upal Rana: Provide really a full service value proposition to retailers, and it's recognized by all of them today that we can step into any and all types of situations and frankly create value and provide for value in that partnership.

Speaker Change: Okay, great, that was helpful. And then just a quick follow-up on the commercial paper program. You know, does this put ADC in a position to push more on investments in the future, especially combined with your increase in team members? [inaudible]

Speaker Change: No, I think the commercial paper program is Peter mentioned while it's priced inside of the revolving credit facility. We don't use the revolver or short-term cost of capital to impact

Speaker Change: or to impact or even in our calculus for our weighted average cost of capital. These are short-term borrowing needs, the commercial paper program effectively supplants the use of the credit facility at cheaper pricing, but that does not impact how we look at deals or impact our weighted average cost capital. [inaudible]

Okay, great, thank you [inaudible]

Thank you.

Speaker Change: Thank you. The next question comes from Richard Hightower at Barclays. Please go ahead.

Rich Hightower: Hey, good morning, guys. Thanks for taking the question. I really just got one, but I want to go all the way back to Keben's line of questioning to start the call, just on equity issuance. Now, I think we all appreciate...

the TSM dilution conundrum.

Rich Hightower: You know, and things like that, but it is sort of a high-class problem, and so...

Rich Hightower: You know, it looks like equity issuance went down quarter over quarter relative to the fourth quarter Stock price has done obviously very well, you know, absolute and relative year to date, so maybe why not?

Rich Hightower: Lean in a little more to equity issuance in this environment especially but seems like the acquisition pipeline is biased to get bigger and not smaller. Thanks.

Rich Hightower: I think if you look at the amount settled during Q1 of existing forward, or formally existing forward, but net of what we issued, we effectively ended up neutral, 3.3, 3.4 times just over $180 million each.

Rich Hightower: and so the balance sheet while deploying $370 million approximately ended up effectively in a neutral position.

Rich Hightower: and so we continue to have nearly two billion dollars in hedged capital. We have significant liquidity. We're in our two billion hours liquidity, excuse me, in 1.3 billion dollars of hedged capital approximately.

Rich Hightower: And so we're in a terrific position here from a balance sheet of liquidity and cost of cattle perspective to execute it on our pipeline. Does that answer your question?

Speaker Change: Yeah, it does. I didn't know if there was any sort of internal back and forth on...

Speaker Change: You know, if it makes sense to go any bigger in that light, but obviously you guys are in a really great position, no one would dispute that. And actually, if I may ask a quick follow up just again on bad debt, I think you guys have articulated pretty clearly how that gets built up, but just to be clear, is that a...

Speaker Change: It sounds like from your perspective, given the credit worthiness of the tenant base, it really is kind of a...

Speaker Change: You know, a bottom's up, you know, location by location, tenant by tenant situation, build up to get to that 50 basis points. Is there any sort of...

Speaker Change: General Credit Overlay on top of that that gets you to the 50 or is it really highly, highly specific as it sounds at least from my end?

Speaker Change: Yeah, thanks Rich, this is Peter. I think in terms of the build up and how we think about that 50 basis points of credit loss I mentioned in the first quarter we had roughly 30 basis points of credit loss and so to answer your question it is a location by location and tenant by tenant build up that we look at as we think about credit loss.

Speaker Change: Based on what's identified or known today, I think the 30 basis points that we experienced in Q1, we anticipate more or less seen throughout the remainder of the year.

Speaker Change: And then we have some level of cushion, if you will, built into that 50 basis point that allows for other potential tenants that we're monitoring but there's not a known issue today.

Okay, helpful, thank you guys.

Thank you [inaudible]

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 everybody at the upcoming conferences and we appreciate your time. Thank you.

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.