Q2 2025 Agree Realty Corp Earnings Call
Good morning and welcome to the agree, realy second quarter 2025 conference call. All participants will be in a listen-only mode. Should you need 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 to ask a question. You may press star then 1 on your touchtone phone to withdraw your question. Please press star then 1 please limit yourself to 2 questions during this call and note this event is being recorded.
I would now like to turn the conference over to Reuben treatment, senior director of corporate finance. Please go ahead Reuben.
Thank you. Good morning, everyone. And thank you for joining us. For our reality, second quarter 2025 earnings calls before turning the call over to Joey and Peter to discuss our results for the quarter. Let me first run through our cautionary language 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. Please see yesterday's earnings release and our SEC filings, including our latest annual report on form. 10 K.
For discussion of various risks and uncertainties underlying our forward-looking statements.
In addition, we discussed non-gaap Financial measures including core funds from operations or core. Ffo adjusted funds from operations or afo and net debt to recurring, reconciliations 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.
Thanks Ruben. And thank you all for joining us. This morning, I am extremely pleased with our performance during the first half of the Year. Having invested over 725 million across our 3. External growth platforms, while further solidifying, what we believe to be the preeminent, retail portfolio in the country. The 725 million plus invested, year-to-date representative more than 2-fold, increase relative to the first half of last year.
Third quarter. Hence, we are raising our full year investment volume guidance. Once again, to an updated range of 1.4 to 1.6 billion,
the midpoint of this range represents a 58% increase over total investment volume for last year.
Most exciting is not the defensive nature of our portfolio or balance sheet in a dynamic world. It is now, our dominant Market position driven by a best-in-class team that executes on hundreds of transactions, annually. A cross our free growth platforms.
This value proposition is unparalleled and when combined with our internal asset management platform and deep retailer relationships has built a differentiated and unmatched company.
It has been 15 years in the making. Since this decision was outlined in our 1-page operating strategy, December of 2009 to be exact and I am delighted to say that it has been realized.
I am confident that these factors will drive an increased earnings algorithm in the coming years, without moving up, the risk, curve in any manner,
We continue to expand our war chest during the quarter. Now, having raised over 1 billion dollars of capital a year to date with 1.3 billion of outstanding forward equity.
With over 2.3 billion in total liquidity no material debt maturities till 2028 and preform a net debt to recurring. Ebita of just 3.1 times a quarter end, our balance sheet remains best-in-class and is positioned to support our growth. Well, into next year.
To support this growth, we've continued to scale our team, enhance our systems, and refine, our processes building a well-oiled machine and widening our competitive mode.
We've added over 20 new team members year to date, to cross the organization, increasing the scale of our horizontally integrated platform to support current activities as well as growth for years to come.
We have driven industry-leading efficiencies with the deployment of additional systems, including Ai and machine learning tools as well as enhanced and Integrations and streamlined, workflows. Additionally, we have commenced the next iteration of Arc which will come on the line next year.
We've already started to reap. These benefits in 2025, as we're raing, our full year afo per share guidance by 2 cents at the midpoint, to a new range of 4 hours and 29 cents to 4 hours, and 32 sets.
this represents over 4% growth in the midpoint and demonstrates our ability to provide consistent and reliable earnings growth without deviating, from our investment strategy,
Peter will provide further details on the guidance range and its key inputs shortly.
We continue to see the biggest and best retailers take market share, which acts as a Tailwind to all 3 of our external growth platforms.
Even in today's uncertain macro environment, we are seeing the highest level of retail or demand for new brick-and-mortar locations since the great financial crisis
Nearly every retailer in our sandbox is focused on adding net new stores, underscoring the critical role that retail networks play in an omnichannel retail world, as outlined in our previous commentary and white papers.
Moving on to the second quarter in detail, we invested over $350 million in 110 properties across all three platforms. This includes $328 million of acquisition volume across 91 high-quality retail net lease assets.
Notable Acquisitions during the quarter included. A sale lease back with the leading National Auto parts. Retailer. A 1-off Walmart, Super Center in Ohio and a 75 million grocery dominated portfolio. Representing 1 of our largest non-sale leaseback transactions since the Inception of our acquisition platform. In 2010, this unique opportunity was owned by an elderly woman and was sourced through 18 months of working in off-market opportunity.
These differentiated examples underscore the strength of our platform and its ability to Source differentiated opportunities in a substantial and highly fragmented space.
The acquired properties had a weighted average cap rate of 7.1% and a weighted average lease term of 12.2 years. Over 53% of base rent acquired was derived from investment-grade retailers, and we continue to add to our ground lease portfolio during the quarter.
We anticipate selling a few lower yield non-core assets from the aforementioned, 75 million grocery dominated portfolio, which will improve both acquisition, cap rate and investment grade, percentage for the quarter post disposition.
Although we only commence 1 Project in our development and DSP platforms during the quarter, don't be fooled, we continue to see increased activity and have a deep pipeline.
We anticipate announcing several projects in the quarters ahead. While construction continued on 14 projects during the quarter with aggregate anticipated costs of over 90 million dollars.
Projects, during the quarter representing Agri investment of over 13 million. These projects are with leading Retail Partners including tgx Burlington. 711 Boot Barn, Starbucks, Gerber, Collision, and Sunbelt Rentals.
In total we had 25 projects either completed or under construction. During the first half of the Year, representing 140 million dollars of committed Capital, including 98 million of costs, incurred through June 30th,
we anticipate development spends to be up to at least 50% year-over-year as both platforms, continue to ramp
Our asset management team continues to address upcoming lease maturities. We executed new leases extensions or options and approximately 950,000 square feet of gross. Leasable area during the quarter.
This included a Walmart Super Center in Ohio, a Best Buy in California and 5. Geographic, diversity leases with the TJX companies.
In the first half of the year, we executed new leases extensions or options at 1.5 million square feet of gla with recapture rates of approximately 104%.
Notable examples in recent quarters include the releasing of our, former Big, Lots of Manasses, Virginia and Cedar Park Texas. With net effective, recapture rates of almost 170 and 150% respectively, as well as the releasing of our former Party City in Port. Arthur Texas, with a net effective recapture rate of 115%
demonstrating our emphasis on funable boxes in dominant retail, corridors
At quarter end, our best-in-class portfolio surpassed, 2500 properties spanning all 50, states, the portfolio includes 232 ground. Leases comprising over 10% of annualized Base rents.
Our investment grade exposure, stood at 68% and occupancy rebound. Post, the returning of the former Big, Lots by 40 basis points to 99.6%,
Dispositions remain limited. However, our only at home located in Provo Utah, across from a new Target is currently under contract to sell at non-refundable at a 7 cap.
We purchased the at home as a pure real estate play in 2016 and have had interest in the site from multiple retailers and prospective purchasers
The disposition cap rate of 7% is nearly 50 basis, points inside of where we acquired the asset, and we anticipate realizing an unlevered irr of approximately 9% upon closing this quarter.
although at home recently exercised, the 5-year option and the lease is anticipated to be informed to bankruptcy, I'm confident that at home will ultimately suffer the same fate as Party City Joanne and raid and ultimately liquidate
With that said, I'll hand the call over to Peter to discuss our financial results for the quarter.
Thank you, Joey, starting with the balance sheet. We had a very active quarter with over 800 million dollars of debt and Equity Capital raised. Bringing total Capital markets activity year to date to over 1 billion dollars.
We raised approximately 415 million of forward equity in the quarter via our ATM program and a 5.2 million share overnight offering in April.
In may, we completed a 400 million public Bond offering comprised of 5.6% senior unsecured notes due in 2035.
In connection with the offering. We terminated forward starting swap agreements of 325 million receiving. Almost 14 million dollars upon termination and reducing our all-in rate to 5.35%.
during the quarter, we also settled close to 700,000 shares of forward equity for net proceeds of approximately 41 million
As of June 30th, we had approximately 17.5 million shares remaining to be settled under existing forward sale agreements for anticipated, net proceeds of 1.3 billion.
at quarter end, total liquidity stood at 2.3 billion dollars including cash on hand forward Equity as well as 1 billion of availability on a revolving credit facility, which is net of amounts outstanding on our commercial paper program at quarter end,
Pro-forma for the settlement of all outstanding forward Equity. Our net debt to our current ibido. Was approximately 3.1 times representing the lowest level since Q4 of 2022.
Excluding the impact of unsettled forward Equity our net debt to recurring. I but it was 5.2 times our total debt to Enterprise Value was approximately 28% and our fixed charge coverage ratio which includes the preferred dividend remains very healthy at 4.2 times.
which helps provide visibility into the acceleration in our multi-year earnings algorithm as Joey mentioned,
Core ffo per share was $15 for the second quarter which represents a 1.3% increase compared to the second quarter of last year.
Afo per share was $16 for the quarter. Representing a 1.7% year-over-year increase.
As Joey highlighted, we have updated our full year 2025 earnings Outlook to reflect a strong first, half to the year.
we raised both the lower and upper end of our full year afo per share guidance by 2 cents, to a new range of $4.29 to $4.32 which implies year-over-year growth of over 4% at the midpoint,
the increase in our earnings guidance, is largely driven by higher investment activity as evidenced by our increase investment guidance, as well as a lower assumption for treasury stock method dilution
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.
Our stock is trading at lower levels than in late April, and if it continues to trade near current levels, we anticipate that treasury stock method dilution will have an impact of roughly 1 Penny on full year, 2025 afo per share. That said the impact could be higher if our stock moves materially above current levels as was evident in last quarter's guidance, or if we were to issue additional forward equity,
Our guidance has been updated to include an assumption of 25 basis points of credit loss. At the high end of our afo per share range and 50 basis points of credit loss. At the low end of the range, I want to reiterate that our definition of credit loss is fully loaded. It encompasses, not only credit events but downtime due to a tenant vacating at least maturity unrelated to credit issues and other partial or non-payments for any and all reasons.
It also includes any operating and tax expense, that ADC is responsible for paying while a space is vacant and addition to Lost rental Revenue.
We believe this is an important distinction versus narrower definitions of credit loss used by some of our peers, as we're looking to provide a more comprehensive picture of not only credit events but overall economic loss for modeling purposes.
Our growing and well-covered dividend continues to be supported by our consistent and reliable earnings growth.
during the second quarter, we declared monthly cash dividends of 25.6 cents per common share for April May and June
the monthly dividend equates to an annualized dividend of over $3.07 per share and represents a 2.4% year-over-year, increase. Our dividend is very well covered with a payout ratio of 72% of afo per share for the second quarter.
We anticipate approximately 120 million dollars in free cash flow after the dividend this year up over 15% from last year.
This provides us with another source of cost efficient Capital to fund our growth, while maintaining a growing and well-covered dividend.
Subsequent to quarter end. We announced a monthly cash dividend of 25.6 cents per common share for July.
The monthly dividend also equates to an annualized dividend of over 3. Dollars per share and represents a 2.4% year-over-year increase with that. I'd like to turn the call back over to Joey.
Thanks, Peter operator at this time was over it up for questions.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you would like to withdraw your question, again, press star 1, we do ask that you limit yourself to 2 questions. Your first question comes from the line of Linda Tsai from Jeffrey. Please go ahead.
Hi, good morning. Um can you give us some color about your HPM activity in 2 q and overall timing? Given your overnight Equity option in late April,
Hey, good morning. Linda, you're breaking up a little bit, but I think you asked about the ATM activity during the quarter, correct.
Yes.
Overnight.
Yes, the ATM activity, during the quarter, all predated the overnight offering in April, during the overnight offering at post commencement of launch. I, I, I, uh, promised investors that we were be inactive in the capital markets and we were fully funded, um, and we held that promise.
Thanks. And then, I think you said acquisition cap rates would expand going forward, but the magnitude and any highlights on the tenants you're targeting.
No new, tenants that we're targeting. We're going to stay within our sandbox. That would anticipate Q3. Again, we just started sourcing for Q4, but Q3 Acquisitions to be, uh, similar to the first quarter, but larger in volume,
Macro headline volatility. How are you thinking about retailer and consumer health right now, do you have a view of whether it's improved or deteriorated year to date?
Well, I think consumer health has has undoubtedly. Deteriorated, at least, at least consumer sentiment. We've seen that we've seen those numbers swing. I think this number is this morning's jobs report.
Um most likely affirms that conclusion. Ultimately this this inner to the benefit of our portfolio which is focused on core durable
Goods and necessity based retailers. That are the biggest in the comp, in, in the country. And that has been our Focus. We'll continue to be our Focus. We will stay away from experiential. We'll stay away from discretionary and we're going to buy things. As you see in this quarter, whether it's Auto Parts, or in grocery, or Tire and Auto Service, that continue to be required by consumers to live their daily lives from the biggest and best operators. Cannot that can offer the lowest price, um, and we're seeing that throughout retailer, earnings reports, right? The biggest and best operators here are going to continue to gain market, share, um, and when simultaneously, we're going to continue to gain market. Share.
You think retailer health is improving though? Overall?
Well, see how retail our health is? I think you're going to see small retailers. I think the big beautiful bill and what we're seeing going on in Washington ultimately is going to impact, and tariffs are ultimately going to impact the smaller retailers.
Smaller retailers that have to deal with tariff pass throughs here right on Goods that they're selling or components of the goods that are selling are going to be have to either take margin or pass on and price themselves out. And so at the end of the day, the bigger retailers with the larger balance. Sheets not dissimilar from a recessionary type environment, not predicting a recession but not dissimilar the bigger retailers with a bigger balance. Sheets are going to be able to have choices and Alternatives. But in terms of passing through incremental costs, and inflationary costs to Consumers, due to tariffs or to eat margin or better negotiating leverage with their ultimate suppliers and that is just that's a fact.
This bill hurts this bill and the tariffs.
Current Main Street, right? They help large retailers such as Walmart and Kroger, and the biggest and best operators in the country.
Appreciate the color. Thank you, Joey.
Your next question comes from.
Of key bin.
Truist securities.
Please go ahead.
Thank you. Good morning. So looking at, uh, out at the investment landscape Joy, uh, can you just talk about some of the opportunities that you see maybe in particular the DFT business, um, for developments and maybe you can just touch on you know, volume quality and pricing things like that. Thank you.
So, the opportunity is, um, as I mentioned in the prepared remarks, this is the most excited that I have personally been since Co. It's the culmination of 15 years of a vision. And then in the net lease space, everyone loves to focus only on acquisition volumes. Our acquisition volume will be strong; our Q3 pipeline is very significant. But in terms of development and our DFP business, we're going to break ground on a minimum of $100 million in projects before year-end.
It's over 10 projects, it's geographically Diversified with some of the country's largest retailers coming behind. That is a significant Shadow pipeline.
And I'll say this was the vision that we laid out 15 years ago. Prior to the Inception of the acquisition platform, when we were still a micro cap and it was to become a, it was to be a real estate company and then at least space and not what everyone in the space refers to as a simple spread investor, anybody can do that to different degree.
Of success. Ultimately, um, frankly, I'm not interested in being part of that crew. I grew up on a real estate site. This company is a real estate company, and what you're going to see is all three external growth platforms, pipeline scale.
The results of those pipelines being scaled and the culmination of that vision to be a full-service real estate company. The biggest retailers in the country.
And can you remind us, what is the type of uh margin or spread that you're earning on the development versus a equivalent acquisition yield?
Sure all subject to duration and scope of the project. And so we Benchmark those yields of of against where we can buy a light, kind asset at pricing today.
We're going to take an existing building in retrofitted for a tenant, and they're going to commence paying rent in 120 days from rent. Commencement that could be 50 basis points. Wide of where we'll acquire such an asset. If it's an 18-month entitlement process and there's significant obstacles, and hurdles, that we're going to overcome for True, organic development, that can be as wide as 150 basis points. So again, duration and scope, internal allocation of time and overhead um are are critical there. So we're doing all different types of projects. You will see in the second half of this year, Roundup projects retrofit projects. Um,
Many of them are 10 million dollars plus, um, and we are very close to commencement or have commenced uh post June 30th.
Okay, thank you.
Thanks. Kay, you're next. You're next. Question comes from the line of smees rose with City. Please go ahead.
Hi, thanks. Um, on the development platform. Um, I wanted to ask you kind of what what do you think? It's kind of the or is there sort of an upper limit of where the investment there could go. And I guess just bigger picture. I, you know, I think when people 1 of the reasons, 1 of the reasons he traded at a pretty premium, multiple is the sense that you can grow ASO by at least kind of 4% plus a year. Um, and you know, that's driven by external acquisition
Opportunity to earn your spread to the cost of capital and I'm just wondering are you sort of suggesting that you know you'll be shifting more into this development platform over time because you think the spreads are better and you can grow as so you know faster that way. Or is it this? Just a growing kind of platform concurrent with your you know call it 1.5 billion dollars of acquisition activity.
That makes sense. I'm just trying to figure out like this. Yeah, yeah, yeah, no many parts. Let's let's break it down. First, this is not a capital l, these are not capital allocations.
We have a war chest of a balance sheet with 2.3 billion, in liquidity and 1.3 billion dollars of forward Equity that we built for a reason.
Now we will do every deal that hurdles across our investment guidance and and and internal uh underwriting standards across all 3 platforms.
So again, our Q3 acquisition pipeline. We just started building; Q4 is quite significant. There's no material, say, at least facts in their regular way.
Q4 I, we'll see. Alright, but that's uh, it grows every day. Now we're off to a good start since Monday.
um, ultimately
We achieve better returns and yields through development and our DFP program.
But that will not dissuade us or not deter us from investing in acquisition. So that is not a capital allocation decision. These are the same tenants that we are targeting and working with our Retail Partners in the same sandbox.
If you look at our earnings algorithm, which I mentioned in the prepared marks, and you look at our 5 year, historical afo growth Trend, I think that's a good place to start.
I'm out. I'm not sure that all investors realize we're coming off a 2024 investment volume which was the lowest level since 2019, just over $900 million.
Due to the nature of the capital markets and our stock being in the 50s for approximately. I can't recall the first 6 months of last year, you know that obviously for that, that earns through to the following year of this year's earnings where we're at a midpoint of now of over 4%. You know, we we made a conscious decision last year to remain disciplined. We started with a a effectively to do nothing scenario. If you will recall, we're not going to. We weren't going to invest inside of 75 basis point. Um margins we were going to go up the risk curve and invest in real estate or credits that didn't meet our historic underwriting standards.
And then additionally this year, we had to restart with the big Las Vegas vacancies after the first exit from Chapter 11 failed, with Nexus 1 purchasing the company. So we paused those leasing efforts in anticipation of all the Big Lots being affirmed.
That deal fell apart the week. It was supposed to close uh it decreased occupancy during the first half of this year by 40 basis points. You've seen that rebound now to our releasing efforts of 99.6, uh, occupancy today at June 30th.
So, I would look at our 5 year earnings algorithm, I think that's a good place to start. It is higher than the uh, our historic 5 year earnings algorithm. Excuse me, I think it is a good place to start. Uh, this is a down year for us to be frank in terms of afo growth. All 3 platforms will contribute to afo growth in the future obviously development, if its 1 of those longer duration, projects takes longer to contribute.
this is the envisioned future of having all 3 platforms firing on all cylinders being here and now
Okay, thank you. All right, I'll leave it. I will leave it there, but thanks for the increments that I missed anything. There was a multi Park question. I know.
No, I think it's good. I mean I guess I you know just on the on the developed platform. I mean do you see sort of an upper limit of of how much you can have invested there at 1 at 1 time?
You know, I do now a billion dollars, 500 million, what we foreshadowed and set up about 6 months ago, was our intermediate, we called it a 3 year goal of putting 250 million dollars in the ground per year. Uh, we have obviously made significant strides towards that goal.
I will tell you our shadow of the Shadow pipeline. We are working with new retailers that could uh come to fruition and have Geographic territories assigned to us. That could come to fruition. So I can't tell you about an upper limit. Every time I give a number of the size of the company or what we're able to achieve, frankly, we achieve it. So I don't want to put that out there. My goal when I, you know, when we launched the acquisition platform was to be a billion dollar Diversified net lease company. So I don't, I don't want to put that number out there. I think there is we've made considerable Investments and we'll open to making more investments in people and processes and systems to continue to expand that. And again, I want to remind everybody. This is not
Speculative development.
Right? We are not speculating on land. We're not speculating on vacant space. These are TurnKey or ground lease projects that have guaranteed maximum price bids prior to Us closing and returns that are effectively fixed. Um, that is our business. It is non-speculative in nature and it is a margin of of cushion above where we can acquire a, like, kind asset.
Very good. Your next question comes from the line of Michael Goldsmith with UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. Just to follow up on the developments in the DFP as it relates to the earnings algorithm, is the point that...
That add in the develop.
To kind of regular way Acquisitions. It provides more consistency. Both from like a from a magnitude perspective and then also from a stability of that earnings algorithm. I'm trying to get just try to understand like the the point with the diverse, you know, the diversification of the different uh of the 3rd here.
I would, I, I would think of it quite simply, we have 1 business that everyone focuses on net lease 1, line of business, external growth Acquisitions, and that's what everyone wants to focus on in net, lease acquisition volume, our acquisition volume will be very strong at the same time. We have been working for years now to build, and scale development, and then our development funding platform.
These are just additives that that that's all they are. They are additive both qualitative qualitative, excuse me, and quantitative.
And they ultimately build out a holistic relationship with retailers.
That we are a critical real estate partner.
That we are working along multiple different fronts with them.
And we are a differentiated real estate company.
That has never been done in the net lease space. Again, the quote unquote spread investors, anyone can do it.
We have no interest in being part of that. Our goal, when we created our 1-page operating strategy in 2009, over 15 years ago, was to be a differentiated real estate company in the net lease space.
I am more than proud to say that this team has now achieved that goal, we are going to see in the coming months. The fruition of the results of all those efforts.
Thanks for that. And and just as a follow-up, uh, you know, you've talked a lot about in the past about the importance of scale and grocery last quarter, you did a sale lease back of an Acme backed by Albertsons and now you're taking on uh, more Albertsons with, with this portfolio deal. So this does that kind of put like does that reflect like a, a view that Albertson's kind of fits into that. Uh, the scale that you're looking for in the stability within grocery that that you're interested in. Thanks.
With 1 Albertson, I believe in the portfolio. Prior, this was our first transaction with on Albertson's leases. It was from a third-party elderly woman in her 80s, out of California, whose family was historically in multi, family development and then 1031 into a net. Net lease assets.
The 75 million hour Diversified portfolio had had, I believe it was 5 hours since Peter correct, 5 Albertsons in it. Um, it is aligned with our thesis of investing in the biggest and best growers in the country. Albertsons is still 1 sub 1% of, uh, total rents here. Total abbr. Obviously, Albertsons is a double b plus company. The third largest ger of the country with approximately almost 2,300 stores.
You know, as an aside, our peers are investing in small regional and local operators, and I'm quoting a billion dollars in revenue for a ger in a 2% business which has obviously challenges right now, because of just consumer sentiment. Like we've talked about, we're going in the opposite direction once again.
We are building what we think. Is we have built. What we think is the best grocery portfolio in the country. Albert's is a is a minority piece of that.
The stores we acquired had a average average sales of 740 dollars, approximately per square foot rent to sales below 2%. They are very strong performers, weighted, average lease term of approximately 14 years and their and they're paying below 14 dollars per square foot on average.
Geographically Diversified, Texas, Illinois and Colorado. This is wholly consistent with our white paper on grocery that we're going to invest in the country's largest growth in a 2% business. At the 2% margin business have the scale and the balance sheet to win on price. Um otherwise we think there's going to be significant Fallout in the grocery space from those local operators with only a billion dollars in revenue. And let's do the math, a billion dollars in Revenue at a 2% business is 20 million.
Start doing sale lease backs and guess what? Your lease adjusted leverage and your, uh, and and and, and your cash flow starts to deteriorate pretty quickly. And then I mentioned in the Preparatory, mark this number, um, the the depression of IG, and then investment grade during the quarter and the yield in the quarter due to the sourcing of the stock market portfolio, it will will ultimately be enhanced through the sale of the Dutch Brothers, Coffee Shops at 5 caps, that we'll dispose of that were included in the portfolio. The corporate Jiffy, Lubes, that were included in the portfolio, that are non-core and 1031 like assets, um, that we will dispose and ultimately our
Returns for the quarter and investment grade will be more aligned with his ORC standards.
Thanks for that. Good luck in the back app.
Appreciate it. Thank you.
Your next question comes from the line of Jana Gallon with Bank of America. Please go ahead.
Thank you. Good morning. Um, maybe a question for Peter. Um, I'm the bad debt. In the guidance of 25 to 50 bits? Is there anything identified or that does that just give you some room on the potential? That the 0.4 of expirations doesn't renew?
Thanks for the question. Why I'd say through the first half of of the year the the credit loss. Um and again in my prepared remarks, I mentioned that this is a fully loaded credit loss for us. Inclusive of not just credit events and loss rental Revenue. But any other Opex or or expenses that we're responsible for during the downtime of an asset. That's vacant for any reason related to credit or otherwise. And in the first half of the year we realized um credit loss relatively in line with the the lower end of that, that 25 to 50 basis, point range. So, closer to, um, the 25 basis point range. As we look to the back half of this year, I would say that based on known credit issues in the portfolio, we would anticipate operating closer to that that 25 basis points or experiencing credit loss closer to that 25 basis points. So at at the lower end, or or the higher end of the range at 50,
Basis points, um, you know, that includes unknown credit events or a cushion of approximately 20 to 25 basis points.
And is is Peter let me just chime in. Yeah, as Peter articulated in the prepared remarks, our definition of credit loss is fully loaded.
So, credit loss is any and all events where a tenant does not pay rent.
Plus.
During that period of vacancy, when this building is vacant, you have to temper its heating coolant. We don't want mold, and we don't want frozen pipes. You’ve got an army; you have fire suppression, and you have maintenance of that building in order to lease it. So it is fully loaded.
And so, once again, net lease companies have become very creative in their definition of credit loss.
Now, credit loss is due specifically to a credit event, and then it's pro forma for the lease-up with footnote 1 and footnote 2. We are not going to go down that road. We are going to give, as Peter said, the true economic impact of 25 basis points to our total revenues.
for the year.
And that is outflows as well as the lack of inflows to make this is real, real estate economic underwriting.
This is not putting things in the position for investors to have to parse through words and guess in fancy decks.
Thank you.
Your next question comes from the line of John kilki with Wells Fargo. Please go ahead.
Hi. Um, this is Cheryl on for John. Thank you for taking my question.
Um, could you provide us an update on your watch list and what is baked in your guide in terms of going in yields?
Um, our watch list is very diminished at home was clearly on our watch list as I suggested during the prepared remarks, I have fully anticipate the 2 Step into bankruptcy, like we've seen chapter 11, the unsecured creditors have no recoveries. They emerge like Party City Joanne Wright, and then there's no ongoing business. And so then the unsecured creditors, who take equity and move their non-recovery is then liquidate the company. Uh, that's under contract for a 7 flat. Um, we could have worked through that redeveloped it. Um frankly, we have better use of our time given the aggressive offer we took their
So outside of that our watch list is very immaterial. Frankly. At this point, we continue to monitor the couple movie theaters, we have in the portfolio. Um, that's really that's it. I mean, we've paired that back to 25 basis points and that was really comprised of big loss this year, right? During the first half year? Yeah, I think the, the watch list to Joey's Point. Historically. Um, the 2, biggest components there were were at home at Big Lots. And, and with those
Is now resolved, the the remaining credit issues in the portfolio are fairly dim. Minimus 1-off and there's nothing on the horizon of any material size that we see as eminent in the portfolio, continues to perform very well.
Thank you, that's helpful. And then one quick one on Big Lots. Can you remind us how many assets were sold or released and what was the final outcome? Thank you.
Yes, we have 1 or 2 left. 1 has been approved by a national retailer, which we will disclose next quarter. You're all familiar with that. We will release to Cedar Park, Texas, which was released to all, as we mentioned in the preparatory remarks, with a significant lift in the effective rent. A brand-new term, Manassas, Virginia, was released with a significant rent increase on a net effective basis. Um, we disclosed that obviously in the prepared remarks. We have 1 or 2, and we're continuing again to work through. Um, but we uh,
We will work through those very quickly here.
Thank you so much.
Thank you.
Your next question comes from the line of Brad heeran with RBC Capital markets, please go ahead.
Yeah. Hi. Thanks everybody. Um, Joey in the prepared comments, you talked about the highest level of demand for Brick and Mortar location. Since the GFC, obviously, we're still in a pretty uncertain environment and you have the, the potential tariff headwinds for retailers. I'm curious. Why you think that demand is is so strong
Yeah, Brad it's we haven't seen any retailer pull back and it's not that they won't potentially do so due to the, the Tariff noise headwinds and the 85 different dates that have been handed out by the White House. We just haven't seen it. The biggest retailers in this country and it's aligned with our thesis going back.
A decade and our white papers and I encourage everyone to look at them. There's there's 2 drivers here. 1 is the bigger operators are taking share.
The Hub.
Right. Do free delivery and free returns. Same day don't work from an EA perspective.
Not unless you got ews, backing it up.
And cloud computing, advertising revenue, and other sources of revenue. But from a selling goods perspective, that doesn't work. Retailers have all realized that we have never seen Walmart, Home Depot, or Target lows, all growing their store count. It's all public information out there. Plus, plus, plus, plus, since prior to the Great Financial Crisis.
Sam's Club Costco. You can keep going all of these retailers invested for well to call it a 7-year period in distribution and fulfillment and Logistics.
and then they realized,
These Investments are great, they make us more efficient, but guess what? We still lose money.
We need the customer to get their butt in the car and try to get them to pick up those goods from the store rather than delivering them to their house for free, because they're accustomed to it. Now
And if we can get them, to the store, to pick up those goods, or return those goods, which is an absolute disaster, right? I mean, those get Paladin and sold by the pound returned Goods. We've actually done it as an exercise here from Amazon.
No, those return good. Return them in store and maybe repurchase something else.
So we've had a number of retailers speak to the team here. Um, we have more retailers National retailers had the real estate department, it's coming in and speaking to the team here that we're partners with and articulating. How those impacts on the business.
The other piece to it is.
specifically, in some
In some sectors, let's use auto parts.
Auto Parts. We have seen the rise of the Hub store. We have a white paper on this I believe as well Peter right? Yeah. Correct. The rise of the Hub store, the rise of the Hub store is to fulfill.
Commercial.
Tire and auto service collisions and dealerships demand for a part within 30 minutes.
That is impossible from a central distribution facility. So Auto Parts retailers realize that the standard stores of 7,000 ft. Can't carry enough skus. So they need Hub stores of 20 and mega Hub. Stores up to 50,000 ft, which are effectively storefronts with, warehouses in the back to carry. All of the different skus to get that car off of the lift and get that part there within 30 minutes.
That's the business. So we see all of these different areas, the convenience stores. Let's take that the rise of the large format convenience stores, which were obviously very active in.
The convenience stores are taking share. It's not because there's more fuel being pumped. In this country. There's not more cars on the road convenience stores are taking share from fast food restaurants, they're taking share from the front end of pharmacies, they're taking share from convenience items, you run in grab milk. You overpay instead of go into Walmart, Kroger or Albertsons and navigate 100 or 200,000 square foot store and they're taking share due to their service and offerings food enough. Beverage for off, premises consumption, primarily breakfast and lunch.
And so, there are different drivers here, but it's about convenience and time. And even at the end of the day,
Okay, thank you for the detail there. Um, maybe 1 for Peter on the guidance. You know, the implication is a decent-sized ramp and a half of Hope or share in the second half of the year. Is there anything lumpy on the expense side that maybe is driving some of that, or is that purely just the ramp and acquisition volumes?
No, I think that's largely driven by the rampant acquisition volume. I also mentioned in my prepared remarks the Treasury Stock Method, dilution, and our assumption for roughly 1 penny of impact there for full year 2025 versus 2 pennies last quarter. But there's nothing lumpy from an expense perspective anticipated in the back half of the year.
Okay, thank you.
Nice bread.
Your next question comes from the line of West Gallade with Beard. Please go ahead.
Hey, good morning guys. I just want to go back to the comment of $100 million in the starts and getting $200 million into the ground. Can you clarify if that was for development or development and funding? And then, for these assets that you're going to develop, would you plan on owning them afterwards?
Projects between June 30th and the end of the year.
Okay, and then you did mention something. Yeah, go ahead.
the at minimum,
Okay. Um, if you also mentioned another version of art coming out next year can you elaborate on what's going to be in the latest edition?
Yeah, Peter understands technology way more than I do. I drew it on a piece of paper originally and Peter's handle it from there. But I will mention we have now fully built out our Our, IT team here. Um, and we're thrilled with that team and the partners were working with. If Peter you uh, your Wastewater here than I am sure specific to Arc. I think the, the primary goal of that project is to build the ark on effectively, a new backbone or system that will allow for more self-service and and more Dynamic reporting that can be used across the organization. Um, and, and we'll drive efficiencies in that we, we can manipulate the data more and drive to, um, the decisions that we're trying to make, across the organization. I think, in addition to Arc, um, Joey mentioned, some of the industry-leading efficiencies, um, that we've gained through the, the implementation of AI. We implemented AI for a lease abstraction um, about 3 years ago now and we've been using that tool to abstract hundreds of leases, um, that we I'm
Board each year, with a high degree of accuracy that has um, increased over time, um, the the accuracy and the tool has resulted in, in significant Time Savings for the team more recently, we we've launched an AI tool to complete. What we call, our lease underwriting checklists which Compares our initial underwriting to the lease. And confirms there are no significant issues with that tool. You know, it used to take an attorney roughly 4 hours to complete each 1 of those and that's now a matter of seconds. So we've seen um, you know, hundreds of hours of Time Savings, there are 400 plus hours from that on an annual basis, hundreds of thousands of dollars of savings just from the inflammation of that, implementation of that tool. And then looking forward, I think, you know, we'll look to combine Ai and incorporate more of that into Arc from a decision-making process moving forward.
So, Wes, we ran a test. Our IT team here ran a test looking backwards into deals that were approved in the investment committee. And this is far out; this is a far-out component, but I think it should demonstrate the future of what AI.
Is capable of?
Our team ran a test of deals that were brought into investment committee and what they would be approved with the percentage of approval using AI.
They were 90% accurate um and there was just a test, it was a game to see if they could replicate investment committees approval.
We're using AI today, as Peter mentioned, for functional tasks and driving efficiencies. I want to take legal costs and cut them in half. That's my goal here. We have a great team and a great external team, but we don't need warriors extracting leases or summarizing leases. We can now do them in 15 seconds using artificial intelligence that is generative AI learning.
And so the new arc which will be unveiled next to your 3.0 and I look forward to unveiling. It will enable our full data warehouse in multiple tools to be layered on in the future.
All right, thanks a lot for that.
Thanks Wes.
Your next question comes from the line of Rich Hightower with Barkley's. Please go ahead.
Hey, good morning, guys. Um, thanks for taking the question here. Uh, maybe just to shift gears a little bit on the asset management side of things. Um, I guess traditionally speaking, you know, one of the trade-offs with, you know, very high credit quality in the tenant and low escalators would be, well, one would be low escalators and two would be relatively short WALTs. Um, and so just as you're, um, you know, renewing leases and, and just tell us about any changing parts.
Regards to the lease structure. That might be interesting, especially given just the shortage of good retail space in this country. At this point,
And in this country we see and I think the shopping center reporters have demonstrated this and we've demonstrated with our releasing efforts is the second generation space that is is AB. Space is in high demand.
No, we that said seaspace functional, obsolescence is a challenge single-purpose boxes are I will always be challenges.
Now, I'll take issue with the first statement. Um,
Investment because the portrayal that investment grade has shorter weighted average, lease terms.
We have effectively net of credit loss approximately 100 basis points of internal growth.
Um, when you look at the totality of those circumstances, I don't think that is, frankly, economically true.
So anyone can sign a sale lease back, if you're a private operator or public operator, for 30 years, 50 years, remember Nick scores had, uh, Red Lobster signed 25 years say, at least facts.
Um, anybody can sign glass from the past.
This stuff is coming.
with all out of the private credit and the private Capital that's flowing in
Oh oh, you can sign a sale lease back on your house. Um, you can have escalators, you can sign a sale lease back at anything escalators. You can do it for 50 years.
Um, the piece of paper isn't worth what it's printed on, though. I mean, ultimately, this is real estate, and can the tenant ultimately afford the compounding impacts of those annual escalators that you're going to write into that lease?
sale lease back with non-credit, tenants are simply Financial structures that are akin to A lender
That is all it is. It is not our business.
And when we talk about sale-leaseback facts being an alternative form of financing for these non-credit, small middle-market, private equity-sponsored operators or small private operators,
It is not an alternative form of financing. There is no other place where you can pull out 100% of the proceeds from the building.
If I am a car, private equity-sponsored car wash operator, and I go to a conventional lender, and I say, "I want a first mortgage." Maybe they give me 50%, maybe they give me 60%. Then I go and I try to get mezzanine financing on that real estate. Maybe, if I'm really lucky, I can ramp that to those two combined to 75%. Good luck on that. It's going to be expensive.
Who's filling the last 25% in that primary method of financing, this real estate, a hard money lender?
A bookie.
Nobody.
Right. And so what we see is alternative markets aren't alternative markets to finance. These assets look, what we've seen in spaces like the car wash space and the experiential space, they are primary assets that don't provide for risk-adjusted returns that are ultimately appropriate.
if I'm going to finance for full Capital stack for any of those types of uses,
I want a 14 cap, and I want my money out in 6 and a half years. I wouldn't even do it there. I think I'd rather just run the business myself and own the equity.
Help helpful, uh, helpful comments. Um, it'd be fun to get you on another panel with with your peers and kind of go at it um from multiple directions. Um, but let me by the way, by the way, ha happy to do. So
I think it is would be educational for investors I think comparing and contrasting rather than isolation in earnings calls and in meetings debating these things is healthy for investors. The siloed nature of what has transpired in our sub sector as well as reach them generally. Does not give investors a full picture of and transparency, you combine that with reporting as I mentioned prior that has all the types of discrepancies and footnotes and proformas this is a simple business. The second slide of Our Deck is consistency. We've done the same thing since we started this acquisition platform in 2010 and I took over operating this company we're going to continue to do it, making nuanced arguments, let's do them in Merit, what what, what debate the merits and considerations, and ultimately, let investors.
Decide for themselves. But I will stand here and I will say buying those types of uses is a primary function source of real estate financing.
In the with a 7 handle in front of it. I do not believe it is risk-adjusted appropriate, and I'm happy to articulate that further in any form.
Uh, great. Why don't I leave it there? Thanks, Joey.
Thank you.
You're next question comes from the line of Jim Kurt with Evercore ISI. Please go ahead.
Those retailers.
That's an interesting question. Uh, Jim. It's
We are definitely supplanting RE or developers that can no longer perform due to capital constraints and volatility.
There are also new relationships that we have formed.
I'm trying to figure, you know, some retailers have internal capabilities. We have not seen them give up those internal capabilities. Frankly, retailers are trying to scale their internal capabilities in order to be able to execute.
On their store growth plans to the street generally.
So, um, it's not supplanting retailers' self-development. It is taking share.
That's interesting. And then uh you know, what would you say have you can canvas all of your retailers and said, hey you know we can do this for you or have you still have uh new tenants that you haven't really been approached to say and and really explain to them any degrees full capabilities just think about how far this could expand for you.
I'd say we have a scorecard and a scoreboard. Um, it is in Ark. I would tell you there are very few; we have it. There better not be more than a few, but there are not many that we haven't talked to.
Time and place economics has to be correct. We have new relationships that will...
Will pull through in 27. Um, and then existing relationships, always
You know a lot of it again is time and place, right? We need to write we're ramping. We need help. You can be a critical partner for us. Our other partners are failing, right. They're not they're not executing on their promises.
When you have 2.3 billion dollars in liquidity and you pair that with expertise of a private, real estate developer.
You have a very unique combination that no 1 else can offer in terms of value proposition.
Thanks for your time.
Thanks Jim.
You are next question. Comes from the line of uppal Orana. With keybanc capital markets, please go ahead.
Great. Just a quick one for me, you know, with the development and DFP pipeline ramping. You know, how are you thinking about construction costs today? And you mentioned building 50 basis points. Why do we, where you can acquire? So, just wondering if, you know, construction costs continue to rise, you know, could that potentially eat into your 50 basis points? Thanks.
No, appreciate the question. We've done a full internal uh comprehensive study of the implications of all of these different types of tariffs led by Jeff, kaggle here, our head of construction. And then we're very fortunate to have John wrote to the chairman of Walbridge 1 of the biggest contractors in the country, on our board and his team ran also a a a a study of the implications of tariffs in in uh the construction area. You know, we estimate that that tariffs. And if you look at project costs, generally vertical costs, Right Moving dirt doesn't cost buying or acquiring land obviously? Well not yet isn't tiffed. Um you know, we're talking about vertical costs which are approximately 25 to 35% of entire projects. We think the implication in the current tariff
Environment is 1 and a half percent of total costs. We generally have a contingency of 7 to 10% in projects so we're not concerned about the this tariff in environment right now, in projects but it's certainly something that we'll pay attention to
Maybe not daily because, uh, can't we can't monitor, uh, X and true social daily. Uh, but is certainly something that we'll monitor but no material impact in overall construction costs. Now, if you look, there's different sourcing that we will, um, sourcing methodologies that will change. We, we will buy domestic products. Um, retailers are also who does
Designate different specifications for building components, HVAC units, things like that. Uh, they may have components that are tariff shift building, um, architectural features, and Engineering features, Structural Engineering features, even potentially to make it, uh, most efficient and continue to drive efficiencies to even bring that 1 and a half percent down.
Okay, great. That was helpful. Thank you so much.
Thank you.
Your next question comes from the line of Amateo, a customer with Deutsche Bank. Please go ahead.
Hey guys, this is, uh, Sam on Fertile. I hope I didn't miss this, but, uh, what gave you guys the confidence around pre-increasing your investment outlook, given the uncertainty presented by the macro backdrop, as well as potential credit risks stemming from tariffs?
um,
Called the middle of October, we already know it's there.
Uh, got it. All right. That's all I have on my end. I appreciate the time.
Your next question comes from the line of Ronald Camden with Morgan Stanley. Please go ahead. Hey, 2 quick ones, just all ramping on the developments. Maybe if you talk a little more about the are the we structures. Any different from the Acquisitions. In terms of duration, yield contracts, just, uh, cursor,
Yeah, brand generally obviously they're they're new Visas. So these are 10 15 20 year leases generally, the fresh face terms that are starting standard lease structures. Nothing different either ground leases or generally TurnKey leases, the economics. Again will subject to project duration and scope will be 50 to 150 basis points wide of where we could acquire and do acquire, the like kind assets. Um, really, really no different there except, um, the methodology of sourcing, obviously. And then the duration and the return requirements internally here.
Great. And then my second 1, uh genuine parts company added to the top 10 list, just any color there on, maybe the opportunity with them to continue to grow. And I think with that look that's Nappa obviously it's an investment grade, auto parts retailer had a, they have made it to the top 10 in list know we're very fond of Auto Parts as we discussed.
Wrote in the white paper, funable boxes, great business cards. And every day, setting a new record on the road. I'm not sure if anyone can be able to afford a car after all these tariffs actually hit.
We continue to like the space where we like Napa, but no plans and material increase exposure from here.
Thanks so much.
Thanks Ron.
It's our question and answer session and I will now turn the conference back over to Joey for closing comments.
I appreciate everybody's time today. Thank you for joining us. We look forward to seeing you in the near future um and good luck to the rest of the verdict Susan. Thank you. This concludes today's conference call. Thank you for your participation and you may now disconnect