Agree Realty Corp (ADC) 2022 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Agree Realty Fourth Quarter and Full Year 2022 Conference Call. (Operator Instructions) And please note today's conference is being recorded.

At this time, I'd like to turn the conference call over to Brian Hawthorne, Director of Corporate Finance. Please go ahead, Brian.

Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's Fourth Quarter and Full Year 2022 Earnings Call. Before turning the call over to Joey and Peter to discuss our record results for the year, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities laws.

Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-K for a discussion of various risks and uncertainties underlying our forward-looking statements. In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations, or AFFO, and net debt to recurring EBITDA. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release, website and SEC filings.

I'll now turn the call over to Joey.

Thank you, Brian. Good morning, and everyone, thank you for joining us today. I am pleased to report that 2022 was another record year for our company. Notable milestones over the past 12 months included record investment activity over $1.7 billion, surpassing a record high by 20%. The addition of over 440 high-quality net lease properties to our growing portfolio, the commencement of a record 28 development and Partner Capital Solutions projects for total committed capital of nearly $110 million, the receipt and upgraded investment-grade credit rating of Baa1 and from Moody's Investors Service and positioning our balance sheet to execute in 2023 without the need for additional capital while raising approximately $1.7 billion, including $1.3 billion of equity.

We closed 2022 with approximately $1.5 billion of liquidity at year-end, including more than $550 million of outstanding forward equity available at our election. Including our forward equity, pro forma net debt to recurring EBITDA was approximately 3.1x at 12/31. As demonstrated by our fourth quarter acquisition activity, cap rates crept higher, but a bid-ask spread remains as sellers are slow to adjust to current market dynamics.

As always, we remain disciplined to our investment strategy and refrain from going up the risk curve via credit or residual risk to create the appearance of a quickly expanding cap rate environment.

Similarly, we will not chase cap rates down to levels that fail to create sufficient spreads to drive appropriate returns for our shareholders. Our focus remains on the best retailers in the country with strong balance sheets to allow them to withstand the current macroeconomic environment regardless of the level of deterioration.

Our team is doing a terrific job navigating this environment, leveraging our strong industry-wide relationships and track record, while uncovering opportunities to add to our growing portfolio. Our pipeline includes both smaller one-off transactions and larger sale leasebacks with our leading retail partners. Given that pipeline, I am confident our team will be able to source north of $1 billion of acquisition activity at spreads that are appropriately accretive.

During the fourth quarter, we invested approximately $421 million across 157 properties via our 3 external growth platforms. 131 of the properties originated through our acquisition platform, representing acquisition volume of approximately $405 million. The properties acquired during the quarter are leased to best-in-class operators in the auto parts, tire and auto service, home improvement, dollar store, off-price retail, convenience store and farm and rural supply sectors, among others.

The acquired properties had a weighted average cap rate of 6.4% and a weighted average remaining lease term of 10.6 years. Over 73% of the acquired rents are derived from investment-grade retail tenants. For the full year 2022, nearly 70% of the annualized base rent acquired was derived from leading investment-grade retailers while ground leases represented more than 5% of rents acquired.

Moving on to our development in PCS platforms. We again had a record year with 31 projects either completed or under construction, representing over $118 million of committed capital. This includes 28 projects commenced during the year with a total anticipated cost of $110 million.

During the fourth quarter, we commenced 6 new development in PCS projects with total anticipated cost of approximately $37 million. We completed the development of 2 projects, while construction continued on another 18 projects. We continue to call noncore assets from our portfolio with 7 properties sold during the prior year for gross proceeds of over $45 million. These dispositions were completed at a weighted average cap rate of 6.5%.

On the leasing front, we executed new leases, extensions or options on approximately 850,000 square feet of gross leasable area in 2022, including 198,000 square feet during the fourth quarter. Notable new leases extensions or options included a Chase Bank ground lease in Stockbridge, Georgia, where we had our first opportunity to recapture a ground lease due to the tenant's lack of options. We eventually executed a new 15-year lease with Chase, and we're able to increase the rent by approximately 160%. The NOI lift we were able to generate is emblematic of the embedded value in our ground lease portfolio.

Moving into this year, we are in a very strong position with 1.3% of annualized base rents maturing. Subsequent to year-end, we have executed a number of lease extensions, bringing this number down to only 1% for the remainder of the year.

At year-end, our portfolio encompassed 1,839 properties across all 48 continental in the United States, including 206 ground leases representing 12.4% of total annualized base rents. Occupancy remained a very healthy 99.7%. Again, our investment-grade exposure stood at nearly 68%, and all of our top 10 tenants carry an investment-grade credit rating. Our best-in-class portfolio is very well positioned to withstand the current macroeconomic environment.

With that, I'll hand the call over to Peter, and then we can open up for any questions.

Thank you, Joey. I'll start by recapping our balance sheet and capital markets activities during the year. As Joey mentioned, we were highly active in the capital markets, raising approximately $1.7 billion to further bolster our balance sheet and position us for continued growth. Notable activities include $1.3 billion of gross equity proceeds raised through 2 overnight offerings and our at the market equity program and a $300 million public bond offering of 4.8% senior unsecured notes due 2032 with an effective all-in rate of 3.76%, inclusive of prior hedging activity.

Our capital markets activities during 2022 provided us with approximately $1.5 billion of liquidity at year-end, including $557 million of outstanding forward equity, $900 million of availability on the revolver and $29 million of cash on hand.

Our existing liquidity plus free cash flow after the dividend of approximately $85 million and any disposition proceeds enable us to opportunistically execute our growth strategy in 2023 without the need for additional capital. As of December 31, pro forma for the settlement of the $557 million of outstanding forward equity, our net debt to recurring EBITDA was approximately 3.1x.

Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was 4.4x. At year-end, our weighted average debt maturity stood at approximately 8 years. With limited variable rate debt and no material debt maturities until 2028, we remain well positioned to withstand interest rate headwinds and capital markets volatility.

Total debt to enterprise value at year-end stood at 23%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend, remained at a healthy level of 5x.

Moving to earnings. Core FFO was $0.96 per share for the fourth quarter and $3.87 per share for full year 2022, representing 3.5% and 8.1% year-over-year increases, respectively. AFFO per share was $0.95 for the fourth quarter and $3.83 for the full year, representing 3.9% and 9.2% year-over-year increases, respectively.

As a reminder, treasury stock is included in our diluted share count prior to settlement if ADC stock trades above the deal price of our outstanding forward equity offerings. The aggregate dilutive impact related to these offerings was less than $0.05 in the fourth quarter and roughly $0.02 for the full year. Our consistent and reliable earnings growth continues to support a growing and well-covered dividend. During the fourth quarter, we declared monthly cash dividends of $0.24 per common share for each of October, November and December.

On an annualized basis, the monthly dividends represent a 5.7% increase over the annualized dividend from the fourth quarter of 2021. For the full year, the company declared dividends of just over $2.80 per share, a 7.7% increase year-over-year and a 16% increase on a 2-year stack basis.

Our payout ratios for the fourth quarter and full year remained at or below the low end of our targeted range of 75% to 85% of AFFO per share. After year-end, we announced a monthly dividend of $0.24 per share for each of January and February. The monthly dividend reflects an annualized dividend amount of $2.88 per share or a 5.7% increase over the annualized dividend amount of approximately $2.72 per share from the first quarter of 2022.

General and administrative expenses in 2022 totaled $30.1 million. G&A expenses were 7% of total revenue or 6.5%, excluding the noncash amortization of above and below market lease intangibles. We achieved 50 basis points of G&A leverage during 2022. Given our investments in systems, including our recently implemented ERP system and further improvements to a proprietary Art database, we anticipate achieving similar G&A leverage this year. Lastly, total income tax expense for 2022 was approximately $2.9 million, including $723,000 of expense during the fourth quarter.

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

Thank you, Peter. At this time, operator, we'll open it up for questions.

(Operator Instructions) Our first question today comes from Nick Joseph from Citi.

Joey, I was just hoping to get some more color on kind of current cap rate trends, maybe specific to what you're seeing on the merchant builder side and the impact it's having on any recent deals?

Yes. Nick. Well, first, on the merchant builder side, you saw during the fourth quarter, we had a number of transactions with merchant builders for Dollar General, O'Reilly Dollar Tree, Family Dollar where we were taking advantage of the stress situations where they need to clear their inventory. I'll tell you, we're still talking to a number of retailers that leverage -- historically have leveraged their merchant builder platform for net new stores since that business is effectively interrupted on a time out at this point. And so for 2023 year-end and 2024 new openings, retailers that we're focused on merchant builders are all looking for new solutions, and that's where we think we can potentially play a part.

In terms of cap rates, it's a complicated situation, frankly. I think cap rates is -- I wouldn't call it bifurcated, I would call it trifurcated. If you want to go up the risk curve, which we will not do here, that is something that is readily available. You can clearly go acquire things with 7 handles in front of them. They are private equity-backed operators or second or third-tier operators in their respective spaces.

What we see in the IG space is no shortage of opportunities out there, we could acquire over $2 billion if we wanted to in 2023. It's finding the right opportunities where we can drive AFFO per share while maintaining our quality of this portfolio in those qualitative hurdles. And so there's a lot of nuances to it. Much of it is price point driven, much of it is credit driven. But cap rates have obviously coming off their lows in 2021 and 2022. But I think, first of all, everyone understands that this is a bond-like business, right? And that lease are bond-like assets. And so in the last year, we've witnessed debt financing costs, both short term and long term go up significantly.

We have yet to see cap rate -- commensurate cap rate expansion in the space. And so what we're seeing is a result is, frankly, private and public investors in that lease space moving up the risk curve to drive the appearance of spreads. That's just something that we won't do. We will never sacrifice long-term value creation for a short-term pop. And so we'll remain disciplined and we'll see how this year plays out.

That's very helpful. And then just maybe on the current pipeline. You talked about at least $1 billion of acquisitions, maybe less specificity than normal given the environment. How are you thinking about the timing of those? Maybe you can talk about the current pipeline? And then is the opportunity more in the back half of the year to exceed that $1 billion if deals start to materialize?

I love when I hear the opportunities is going to be back half of the year weighted. I don't know if -- what's going to happen in the back half of the year, let alone tomorrow. I'll tell you our current pipeline for Q1, as I mentioned, has larger-scale sale leasebacks with industry leaders, has one-off transactions. We're starting just to build our Q2 pipeline. We're about 1/5 of the way through that. We have nothing for Q3 and Q4. I'll be honest. Not one deal today for Q3 and Q4.

I don't know that this is going to be a soft landing or it's going to be a meteor hitting earth here in terms of this economy. So again, I think it's most appropriate for us to be flexible, which we are with our balance sheet. We don't need a dollar of equity and then be disciplined as we deploy that capital as this year materializes, and I think everyone has a different perspective there.

Our next question comes from Rob Stevenson from Janney.

Joey, can you talk about your future pipeline of development and partner capital projects? How aggressive are you being with new projects today and you see the current dollar volume of that pipeline growing, stable, shrinking over the course of '23 as projects go in and come out.

Rob, it's very similar to my last answer in terms of acquisitions. We're not going to chase the yield down given a potential, I'll call it, rise in cap rates throughout the course of this year. Obviously, when you enter into any development transaction or PCS transaction, there's duration to it. So some of those transactions take 6 months, some of them take 12 to 18 months. And so you have to be appropriately compensated in terms of the return on cost.

Now we announced a number of projects in the fourth quarter. We have some in our pipeline. Obviously, today, that are unannounced still. But the most important thing is we're getting that appropriate premium for that duration risk. It's not going to be credit risk. It's not going to be the residual risk, but it will be the duration risk. And so if we're going to -- if we have the ability to buy something with a similar credit profile or from third parties from our retail partners. And it's not -- and it's well inside of or close to, I should say, where we could develop or enter into a PCS transaction, we much prefer to have visibility into that 70-day closing period or as much as early as possible.

And then talking to your core tenants, where is retailer expansion demand today versus where it's been over the last few years? And how does that sort of match up with your understanding of merchant developers ability to get capital to start new projects to fund that sort of development?

It's a great question. It is extremely topical. We are having literally weekly conversations with our retail partners, the biggest retailers in the world who the vast majority of them aren't afraid of the overall macro environment because they know they would benefit from the trade-down effect. Large format C stores, we have 2 entering Metro Detroit, both sheets and [ComnGo], who we've had various levels of discussion with -- the dollar stores, obviously, trade down effect, deep discount grocery or discount groceries, Aldi wants to continue to grow throughout this country, Dollar General and the Dollar General market format, Dollar General with Popshelf, 5 below and now 5 beyond.

The auto parts operators, obviously, with the cars on the road eclipsing 12 years and still not able to get a car because the chip shortage, the auto parts operators, AutoZone, O'Reilly, NAPA want to continue to grow. The tire and service operators in this country, the National Tire and Batteries Bridgestone Firestone, Goodyear, want to continue to grow.

The challenge for these retailers is they historically don't have a self-development platform and/or don't have the summit to keep them on balance sheet and then load off low them be a sale leaseback or permanently keeping them on balance sheet is the merchant builder business is debt. And so our conversations with these retailers revolve around which 3 of our external growth capabilities, acquisition, development and Partner Capital Solutions could potentially be a solution for them.

And so these are conversations that are ongoing, and they're producing some interesting dialogue, we'll see if any of them strike. By the way, you can add to that with Sam's Club for the first time in what, 12 years announced 30 net new stores. And so you see that these discount-oriented retailers, these value-oriented retailers want to grow here regardless of the storm clouds on the horizon, but frankly, the ability to grow is their challenge.

Our next question comes from R.J. Milligan from Raymond James.

Joe, your comments that there's plenty to buy if you were willing to sort of hit the pricing expectations, but obviously being a little bit more prudent here. I'm just curious, what do you think has to happen for sellers to adjust those pricing expectations?

It's a great question. I think, first of all, we see the sentiment swings and shifts daily with new data and the Fed speakers rambling on like Tony Romo during a football game. Nobody knows if this is going to be a soft landing, a hard landing. This economy is going to float up there like the Chinese spy balloon for a while. We have no certainty to this market still hopeful, inclusive of real estate sellers that the Fed is going to cut rates at the end of this year, maybe that got washed away yesterday.

And so I think the current status quo results in a bid-ask spread. Now we have more data this morning with consumer sentiment or consumer spending. And so the challenge here is that nobody has visibility into how this economy is going to evolve here. And hence, unless you are a middle market or a private equity-sponsored retailer who needs capital today via a sale leaseback, where banks have pulled back and lenders have pulled back on LTVs, rates are obviously extremely elevated.

You can find a lender of last resort in terms of a sale leaseback, who will be there as a secured creditor with your real estate to help you with your growth. The challenge on the third-party market specifically is that there's still too much hope out there. And until that clears up, I think we're still going to have a bid-ask spread.

Now what we're doing is scouring the market through all of our contacts with all of our different distribution groups, all of our different stakeholders and partners out there and looking for the capitulation. And we're finding it. The question is how much will we find as the economy evolves. And that, I just don't have any idea because I don't know how the economy is been involved.

That makes sense. And I guess a question for Peter. I'm just curious what you're seeing on the debt market side. Obviously, the markets opened up a little bit for the REITs here. And I'm just curious, what are you hearing in terms of bank's appetite for debt and what pricing might look like today?

Yes. I think first, R.J., in terms of the unsecured market, I think we could probably price 10-year unsecured debt today in the mid-5s. This is down from, call it, the 6 as we discussed on last quarter's call, but frankly still isn't overly attractive today, given we view our cost of equity to be in a similar range. In terms of the bank debt market and the term loan market, assuming we enter into swaps to fix the rate, I think we could probably price a 5-year term loan today in the high 4s. And I view a 5-year term loan to be more attractive today than a 10-year bond given the current pricing.

All that being said, the good news is we have, as Joey mentioned, $1.5 billion of liquidity, more than $550 million of outstanding forward equity. And so we don't need the capital today either debt capital or equity capital, and we can continue to monitor our options and be opportunistic in terms of any future capital raises.

Our next question comes from Ki Bin Kim from Truist.

So within the IG realm that you guys invested in, I'm just curious how the triple net financing option compares to their -- to your tenants alternative financing options and how that spread might may have migrated over the past few months?

Well, first of all, Ki, it's great to hear an operator say your name correctly on our earnings call. Apologies for the last one. So when you say the financing options, are you talking about a seller's potential financing options relative to sale?

No. I mean for financing, I mean they can tap the unsecured bond market, bank market for your IG tenants. I'm just curious how triple net financing compares to those type of traditional debt financing options.

Well, as Peter mentioned, we think the term loan market is a possible avenue for us a quarter where we think the 10-year market unsecured market is today will continue to be an unsecured borrower. We think that's the most efficient way for us to continue to borrow capital. Go ahead, Peter.

Ki (inaudible) are retailers.

For the region. Well, that's a very interesting bifurcation today. So some of the most transactions that we have in our pipeline today are with sophisticated retailers, S&P 500 companies that recognize where their relative cost of capital are where they can issue 10-year paper and say, you know what, a sale-leaseback makes sense and what is similar to what I referenced prior. Now when we compare just to take a step back, IG versus non-energy. First, let's reframe this as high-quality retailers versus other retailers because I continue to remind people, I love Chick-fil-A, I love Popeyes. I love [Publix]. I love all. These are not investment-grade retailers. They're privately held, closely held companies that don't have a rating.

The high-quality retailers have options. A low-quality private equity-sponsored retailer has very limited options today. One of those options and the largest option is a sale leaseback on their real estate. And so we will not be the lender of last resort or one of the largest creditors to a car wash start-up and urgent care. There are 4 car washes literally expanding in Metro Detroit as we speak that are all private equity sponsored with REIT capital behind them. They own none of their real estate.

I can't figure out where all of these new cars that need to be washed are from and how many monthly memberships are required by metro Detroiters. So I think -- in reality, we're back to the pre-COVID days here. We're back to days where the high-quality retailers are going to thrive. They have the liquidity, the balance sheets, the low-quality retailers are now faced with a stressed economic environment. They need whatever capital they can to shore up their balance sheet or frankly, offload the real estate.

And in terms of your balance sheet strategy, your leverage is at 4.4x. How should we think about this as the year progresses? I'm curious if you would let the leverage kind of drift up here or keep it this way.

Our leverage is definitely going to drift up. We ended pro forma for the settlement of the $552 million in equity at 12/31 effectively 3.1x levered. Leverage is going to drift up to the 4 to 5x targeted leverage range. We are not interested in the equity markets. We're not coming back to the equity markets via regular way or the ATM anytime soon. We have the capital and the flexibility to execute on our strategy for this upcoming year. And we're going to obviously drift leverage higher here to what we think is appropriate at 4 to 5x.

And our next question comes from Omotayo Okusanya from Credit Suisse.

I just wanted to follow up on my buddy R.J.'s question. Joey, again, part of your response to his question was to use where the economy is going. No one has a crystal ball, no one can call (inaudible) so to speak. But I'm just curious, in either economic scenario, how do you see -- how do you kind of see ABC sparing? Do you see yourself faring better if the economy continues to kind of do well and -- or starts to improve? Or if the economy goes south and you start to see distress opportunities, is that your time to pounce. Just curious how you're kind of thinking about different economic scenarios and how ADC will do in each one.

I appreciate the question. Obviously, with the caveat, the good news is bad news with economic data today. Look, I think we're in a very unique position. We have a defensive portfolio, the most offensive, defensive balance sheet, the most defensive, and we're able to play offense. And so we can play both sides of the ball here. So whether we see a significant deterioration in the underlying environment, this portfolio is going to perform the best.

Now if all of a sudden, you know what, there's a soft landing and everything takes off again, we have the cost of capital, the balance sheet and the liquidity to execute. And so we have -- we're in a very unique position. It's hard nearly impossible to poke a hole in this company through any single aspect today. And that was that was strategic coming into this year, given all of those unknown factors that are out of our control.

And so it's not time and I've said this repeatedly and I apologize. It's not time to slam on the gas, and it's not time for us to hold up the stop side. Right now, we're going to be disciplined and prudent. But if one of those 2 things happen, we'll pivot. And we'll pivot very quickly just like we did during COVID just like we did when we launched the acquisition platform. So I think in both environments, we are going to grow AFFO, we are going to grow our dividend and this portfolio and balance sheet is going to be a fortress.

That's helpful. And then, Peter, could you talk a little bit about, again, how you're -- again, I know you guys didn't give guidance, but in terms of just kind of credit and credit provisioning and how you kind of think about the impact to '23 versus '22, could you just kind of walk us through that? And granted you guys are massively IG, have [barely] any credit issues. In fact, I don't think you've seen any, but just kind of curious how you're thinking about that.

Sure. I guess just to recap 2022 first, we recorded about $400,000 of bad debt expense in 2022. That's, call it, roughly 10 basis points of revenue. That's slightly below our longer-term average, which is probably closer to call it 20 or 25 basis points of revenue. But as you mentioned, we specifically identified tenants are instances of bad debt. And so predicting bad debt on a go-forward basis can be difficult. With the current macroeconomic environment where it is, I think that obviously presents some challenges for retailers. But we certainly feel with our portfolio and 68% of rents coming from investment-grade tenants that is very well positioned to withstand the current environment and wouldn't really anticipate any significant deviation from what we've seen historically.

Our next question comes from Josh Dennerlein from Bank of America.

Joey, just kind of curious how you think about dispositions as a potential source of capital in today's environment?

Yes. We didn't give disposition guidance this year because, frankly, entering into the world of dispositions outside of the seller who -- or sorry, buyer, excuse me, who is prescreened is an all-cash buyer is, frankly, an initial use of our time. We went through the 1031 gyrations this portfolio is a nearly in pristine position if anyone wants to buy a couple of AMCs, please tell them to call. But effectively, a near pristine -- in pristine position here. And so I'm just hesitant to waste our time out there in the 1031 market. We've got 77-ish team members here that are extremely busy. There is just so many stops and starts in that space today. And given the nature of this portfolio, I don't think we need to execute any significant amount of dispositions this year.

Okay. Appreciate that. And has the competitive landscape for acquisitions in your space? Has it shifted at all? Are you seeing less competition or maybe are there certain asset classes people are really gravitating towards to that?

Yes. No, I appreciate the question. We've seen less competition. We see less competition for the assets that fit within the context of our portfolio. 1031 buyers continue to wane as transactions grind slower in this -- in the country overall. And so we see less competition. If you talk to brokers, transactional volume is down 60% in this space right now. In the month of January, they were effectively down 60% were my most recent conversations where that will go, nobody knows.

And so there is less down legs of 1031 buyers. Obviously, you remove leverage out of the equation or leverage, frankly, doesn't do much for you negative leverage almost into the equation. It will inhibit some buyers from entering the space. And so we're seeing tons of opportunities. We just won't pay up for them. So we're not going to take a dollar and break it into 4 quarters. At the end of the day, we're not a change machine. We want to earn money on our capital just not cycle it. And so less competition, we're counting capitulations and we hope that continues to accelerate. Joshua (inaudible).

Yes. No, I'm good.

Our next question comes from Haendel St. Juste from Mizuho.

This is Ravi Wade on the line for Haendel St. Juste. I hope you guys are doing well. I just wanted to follow up here. Given that there's less competition for the assets that you're targeting, are you able to secure better terms, maybe better annual escalators?

Well, again, historically, the minority of what we've done is third-party acquisitions. So we're not negotiating a lease with escalators. So I'll tell you, in the sale leaseback transactions or the development arena retailers are more comfortable today and more amenable to increasing acquisitions, increasing those increases that are scheduled for every 5 years.

Got it. That's helpful. Just one more here. Are you expecting any impact to the portfolio from the Kroger Albertsons merger?

Absolutely not. Kroger is one of our largest partners. We have full Kroger guarantees. The recent speculation has a 250-store divestiture. We'll see how that materializes with the 2024 potential closing as they've telegraphed. We'll see how that materializes through the FTC, but we expect absolutely no. We have no Albertsons in the portfolio, I should mention.

Our next question comes from Linda Tsai from Jefferies.

Can you remind us what percentage of your acquisitions have been from the 1031 market versus sale leasebacks historically?

Peter, I'm going to try to throw that one to you. I don't have that number on hand. I'll tell you approximately last year 7%, does that sound right with sale leaseback?

Yes, sub 10%, I think, in 2022.

Sub-10%. We anticipate that number being elevated in Q1. I can't give you a historic -- when you say 1031 market, don't forget, these are sellers, and so there are maybe 10 to 31 buyers competing with us. What they do with the proceeds, whether they enter into a down leg, they have the ability to do a new purchase agreement or they just pay capital gains tax. Is it always -- we're not always previous to it, frankly, Linda or not privy to group.

Got it. And then just earlier, you were talking about the ground lease situation with the Chase Bank in Georgia, you noted a lack of options that resulted in a high recapture rate. Was that more of a one-off situation or something you think happens more in the current environment?

Well, I appreciate the question. It was a very unique situation. It was the first time in the history of the company. We had ever had a ground lease expire with no options remaining. We had another tenant at the table who was ready to take the property at that over $70,000 a year, which was what, 60% plus lift. Chase came around and signed a new 15-year lease at that 60-plus percent lift with 10% bumps every 5. And so I think that demonstrates the embedded value in the ground lease portfolio when a building reverts for free.

Again, this was the first instance. I look forward to future instances of it. But when you get a building back for free and then all of a sudden, somebody has to pay rent on it, you're going to see NOI go up. And again, I remind everybody, we have a fee simple ownership of the WAN. This is a leasehold split fee simple leasehold split and the tenant paid for the construction of that building. In this instance, it was a predecessor to Chase that was on a ground lease pad for the building, then Chase had taken that lease and hence, why there was no options remaining. And so we were obviously able to negotiate a very favorable outcome there. We actually bought that ground lease with 2 years remaining and no options.

And then how do you feel about the overall retail environment, Regal, Party City, Tuesday Morning, [Fed Bath], they're not issues for you, but do you think this is a limited situation or indicative of more distressed forthcoming?

(inaudible) I think it's what's coming. I think we're on the pre-COVID train. So there will be no time outs call like Coin, where everyone just tried to call it time out and flood the system with capital and deep debt. Obviously, you mentioned we saw another bankruptcy just recently with Tuesday Morning. Bankruptcies will occur, we can probably say hello bankruptcy to at home, an office supply operator, pet supply stores, sporting goods operators. We saw Tom's Capital, large Burger King franchisee, we disposed of all of their assets in years prior. If you look at our disposition, we developed for them in the Chicago MSA filing bankruptcy. There will be more.

The car wash space, the child care space, the urgent care space, the quick Blue oil change operators, the experiential entertainment operators, there will be private equity-backed companies that have to, again, either had fixed or variable rates, short-term debt, where their LTVs and their rates are going to go way up. Those loans don't last longer than 5 years, as we all know.

And then again, we're going to see retailer attrition akin to the pre-COVID days as we make -- as we march towards this omnichannel world, we're 25% e-commerce penetration, either through online, delivery, BOPIS, click-and-collect, it's coming. And so it's just a matter of time. So I'm very confident that we are now on the pre-COVID train for rationalization of retailers.

And our next question comes from Wes Golladay from Baird.

Are you guys seeing a lot of opportunity for the multi-tenant PCS openings. Looking at the earnings release, you had a few, I think, Brenham, Texas and then on Alaska, Wisconsin and almost like a shop is at first glance. So what is going on there?

Yes, the TGX multi-tenant effectively development. We're doing a number -- looking at a number of opportunities with both them, off-price retailers, TJX, Burlington, the Rosses of the World, Hobby Lobby, again, those retailers that are looking to expand that were historically working with developers and merchant builders that can no longer finance these projects and make them work. And so that's an area where we can continue, we think, to invest capital and continue to seek out opportunities.

Got it. And then I know at the -- maybe 2 quarters ago, there seemed to be a bid-ask spread between which you wanted to do these transactions that what the retailers thought they were -- what the pricing should be. Has that narrowed at all now that debt markets have calmed down a bit, I think you mentioned your cost of debt is down about 100 basis points over the last few months.

No, I think Peter referenced about 20 basis points over the last few months, 10 years specifically, right?

10-year came down from maybe, call it, low 6s to what's mid-5s today relative to what we discussed on the last call, but less than 100 basis points (inaudible).

I think everybody is looking at the relative cost of capital. I think from the merchant builders perspective, specifically, they're looking at not only their relative cost of capital, they're looking at their construction loans, the availability of construction loans, the interest rate on the construction loans the labor shortage we have in this country, leading to the inflationary pressures. Construction costs in this country haven't gone down since 1904 year-over-year.

And so now you combine that with an exit cap rate that's unknown to put a shovel on the ground as a private developer and build a TJX combo store with a Burlington or a Ross, you've got to be pretty bold. And so we think those are the types of asymmetrical opportunities where we can step in with our divergent capabilities and create value and create the appropriate spread for shareholders while not going up the risk curve into assets that we don't think are appropriate.

And ladies and gentlemen, with that, and showing no additional questions, I'd like to turn the floor back over to the management team for any closing remarks.

Well, thank you, operator, and thank you, everyone, for joining us today, and we look forward to seeing you in the coming weeks at the upcoming conferences. Thank you.

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session as well as today's presentation. We thank you for joining. You may now disconnect your lines.