Agree Realty Corp (ADC) 2023 Q1 法說會逐字稿

Good morning. And welcome to the Agree Realty First Quarter 2023 Conference Call. (Operator Instructions) Please also note that this event is being recorded today.

I would now like to turn the conference 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 first quarter 2023 earnings call. Before turning the call over to Joey and Peter to discuss our results for the quarter, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities law. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons. Please see 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 our 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.

Thanks, Brian, and thank you, all for joining us this morning. I'm extremely pleased to report that we're off to a strong start in 2023. The lack of competition amongst both public and private buyers has provided us with greater access to attractive risk-adjusted opportunities than anticipated. As demonstrated by our first quarter investment activity and even more evident in our pipeline is seller fatigue that's contributing to a narrowing bid/ask spread. We've seen a recent acceleration of seller capitulation as the reality of a new pricing paradigm has begun to set in. Due to market forces, capitalized competition within our targeted sandbox is extremely limited. Our ability to quickly diligence and certainty to close are very attractive propositions for owners that have been on and off market with private purchasers.

Our pipeline over the last few weeks has been very dynamic with a wide spectrum of opportunities. In the last several days alone, we've executed letters of intent to acquire over 100 million in high-quality assets at attractive cap rates, diversified portfolios, sale leasebacks, distressed developers, and early extensions are among the approximately 100 properties that we currently have under control. Given our acquisition volume in the first quarter and increased visibility into our pipeline, we are raising our acquisition guidance from at least $1 billion to at least $1.2 billion acquired for the year. That said, the world remains quite volatile, and we will not waver from our stringent underwriting criteria.

The investments we have made in technology and our team have provided our company a distinct competitive advantage. Both our analyst and rotation programs led by our EVP of People and Culture, Nicole Witteveen, have given us a deep bench of multifaceted and talented future leaders. Similarly, our multiyear investments in information technology led by both Arc and our ERP system are continuing to bear fruit, enabling us to be nimbler and review, source, and execute transactions more efficiently. Peter will speak to the G&A leverage we continue to gain in a few minutes.

Our decision to pre-equitize our balance sheet in advance of this year has proven prudent, and we remain in an extremely strong position. We ended the first quarter with approximately $1.2 billion of liquidity, significant outstanding forward equity, and well below the low end of our targeted leverage range. On earlier calls, I stressed that we would avoid moving up the risk curve or shifting our strategy. We have been very successful leveraging our relationships and core competencies to identify extremely high-quality opportunities as economic and geopolitical uncertainties remain.

During the first quarter, we invested over $314 million in 95 high-quality retail net lease properties across our 3 external growth platforms. This includes the acquisition of 66 assets for approximately $302 million in the tire and auto service, home improvement, grocery, auto parts, dollar store, and farm and rural supply sectors, among others. The weighted average cap rate of the acquisitions was 6.7%, a 30 basis-point expansion relative to the fourth quarter and 50 basis points higher than the full-year 2022. 75% of the acquisitions we leased to investment-grade retailers and our weighted average lease term of over 13 years was a 5-year high. We acquired 2 ground leases during the quarter, representing $19 million, approximately 7% of total acquisition volume for the quarter.

The breadth and variety of transactions during the quarter demonstrates our unique value proposition and the strength of our industry-wide relationships. We executed several sale-leasebacks with our retail partners, led by 2 transactions in the grocery space with national and superregional operators, both of which carry investment-grade credit ratings. We also completed the acquisition of a diversified portfolio from an institutional seller, several blend and extend opportunities as well as a number of developer-direct transactions. Our long-term vision, that of a full-service real estate focused net lease retail REIT and not simply a spread investor has accelerated due to the capital-constrained environment and our team's hard work across multiple fronts.

Moving on to our Development and PCS platforms. We commenced 5 new projects with total anticipated cost of over $19 million. Construction continued during the quarter on 21 projects with an anticipated cost totaling nearly $86 million. 3 projects in Florida and California were wrapped up during the quarter for Gerber Collision. In the aggregate, we had 29 projects completed or under construction during the quarter with the anticipated total cost of $115 million, inclusive of the $59 million of costs incurred as of March 31st.

On the leasing front, we executed new leases, extensions, or options on approximately 510,000 square feet of gross leasable area during the first quarter. Notable extensions, options, or new leases included 2 Sam's Clubs located in Lansing, Michigan, and Brooklyn, Ohio. We are in a very strong position for the remainder of the year with just 16 leases or 80 basis points of annualized base rents maturing.

At quarter end, our growing retail portfolio surpassed 1,900 properties across all 48 continental United States, including 208 ground leases representing over 12% of total annualized base rents. Occupancy remained very strong at 99.7% and our investment-grade exposure stood at 68%. Our portfolio continues to be the preeminent retail portfolio in the country and remains extremely well positioned to withstand any macroeconomic headwinds.

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

Thank you, Joey. Starting with earnings, core FFO for the first quarter was $0.98 per share, representing a 0.6% year-over-year increase. AFFO per share for the first quarter increased 1.5% year over year to $0.98. We received over $1.2 million of percentage rent during the quarter, which contributed more than $0.01 of earnings to core FFO and AFFO per share, respectively. This should largely dissipate for the remainder of the year as most tenants are obligated to pay during the first quarter.

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 $0.005 in the first. Our consistent and reliable earnings growth continues to support a growing and well covered dividend. During the first quarter, we declared monthly cash dividends of $0.24 per common share for each of January, February, and March. On an annualized basis, the monthly dividends represent a 5.7% increase over the annualized dividend from the first quarter of 2022. At 73%, our payout ratio for the first quarter was below the low end of our targeted range of 75% to 85% of AFFO per share.

Subsequent to quarter end, we announced a monthly dividend of $0.243 per share for April. The monthly dividend equates to an annualized dividend of nearly $2.92 per share, which represents a 3.8% year-over-year increase and a 2-year stacked increase of 11.7%. General and administrative expenses totaled $8.8 million in the first quarter. G&A expense was 6.5% of revenue adjusted for the noncash amortization of above and below market lease intangibles, or 7% of unadjusted revenue. For the full year, we expect G&A to decline a minimum of 50 basis points as a percentage of adjusted revenue as our IT investments that Joey referenced earlier and process improvements have enabled us to scale very efficiently. This would represent a 2-year stack decrease of at least 100 basis points. Total income tax expense for the first quarter was approximately $783,000. For the full year 2023, we expect income tax expense to be between 3 and $4 million.

Moving on to our capital markets activities. We settled approximately 2.9 million shares of outstanding forward equity during the first quarter, realizing net proceeds of $195 million. At quarter end, we still had approximately 5.3 million shares remaining to be settled under existing forward sale agreements, which are anticipated to raise net proceeds of $362 million upon settlement. As of March 31st, our net debt to recurring EBITDA was approximately 3.7x pro forma for the settlement of our outstanding forward equity. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was approximately 4.5x.

Total debt to enterprise value at quarter end was approximately 24%, while our fixed charge coverage ratio, which includes principal amortization in the preferred dividend, remained at a very healthy level of 5.1x. We ended the quarter with total liquidity of $1.2 billion, including approximately $804 million of availability on the revolver, $362 million of outstanding forward equity, and $13 million of cash on hand. In summary, we continue to maintain a fortress-like balance sheet that affords us tremendous flexibility to take advantage of the lack of competition in the market and execute on high-quality opportunities.

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) At this time, we will take our first question, which will come from Josh Dennerlein with Bank of America.

I wanted to explore your comment on your just everything that's gone on, you're accelerating your shift to being a full real estate provider for your partners? What shifted, what's accelerated, and what's to come?

Josh, I appreciate the question. I think this has been a long-term vision for us, building out all 3 platforms, all 3 external growth platforms as well as the remainder of the team. So it's really a function of being able to deliver on multiple different avenues for growth, whether that's sale-leasebacks with our retail partners, all the way to organic development and anything in between. I think the personnel changes we've had here, the team that's developed through, again, as I mentioned, the analyst and the rotation programs, we're actually celebrating the 10-year anniversary of our first analyst today at lunchtime. It's really provided us the opportunity to lever multiple platforms. At the same time, retailers today, given the capital-constrained environment, I think appreciate our ability to really accelerate their growth and to step into challenging situations, given the availability of capital we have and then those multiple levers and options that we provide.

And then maybe just on the cap rate side, that feels like probably close to stopping interest rate increases from here. Just curious, what are you seeing on the private side. Do you still feel like there's adjustments to come on the cap rate side or is there further uplift in cap rates?

It's tough to predict the future in this world we live in today. What we see, as I mentioned during the prepared remarks, is we see frankly more seller fatigue and capitulation. That's accelerated in the past few weeks, as I mentioned, but we see sellers frankly meeting the market, and we are the purchaser of choice there. And so what happens on a go-forward base will be difficult to -- obviously, we have visibility into Q3. I anticipate cap rates could potentially tick up nominally as well -- sorry, Q2 could tick up nominally as well. Seeing beyond 70 days is very difficult. And I'll remind everybody, this is a large and fragmented space, and we are looking for opportunities within it. And so I'm not sure it's necessarily emblematic of the broader cap rate environment.

And our next question will come from Eric Wolfe with Citi.

Looking at your revised acquisition guidance, it amounts to nearly 5% of your current enterprise value. Just curious whether you have any internal rule as to how much cash flow growth should be created from this level of activity, call it, every 10% growth in EV should equate to 4% to 5% growth in cash flow. Just basically internal rules that you have around rewarding capital providers.

Well, I'll tell you there's no internal hard and fast rule there. Obviously, enterprise growth should result in AFFO and increased dividend to shareholders. We're very cognizant investing capital to make sure that we're doing it on accretive basis. At the same time, qualitatively, I would tell you, it's just important. As you can see during this quarter, probably the highest quality quarter of acquisitions potentially we've ever had outside of maybe the depths of COVID. You're looking at 75% investment-grade assets, over 13 years of term into some of the best retailers in the country. So at the same time, we want to deliver, obviously, accretion to our shareholders.

We want to improve the portfolio. And as we've talked about for a couple quarters here and as well as in the prepared remarks, we're just not going to go up to the risk -- up the risk curve there to create larger spreads while sacrificing on real estate and credit quality. That's not something we're willing to do. And so I think the most important thing that investors and listeners can take away from this call is we've been able to maintain our discipline. We haven't undertaken any strategic shifts, and we're able to execute through all the different levers that we have in terms of growth.

And is there any I guess spread that would make you go out higher on the risk curve? If you were able to get a 9 cap rate, for instance, versus, call it, 6.7%, because I'm just effectively trying to figure out if there's a certain level of loss that's embedded in your view of noninvestment-grade tenants versus investment grade that would help explain if there's a certain spread that might make it more or less attractive.

It's a great question. It's case specific for us. I'll remind everyone, we don't target investment grade. That is not a bogey for us. We're huge fans of operators like Publix and Chick-fil-A, and Hobby Lobby and ALDI, which don't carry an investment-grade credit rating, just the predominance of the best retailers in this country obviously carry an investment-grade credit rating. In terms of going up the risk curve and spreads, it's a function of credit, but also a function of just residual, and we're not interested in single-purpose boxes here. That is something that we avoid.

We're not interested in car washes or Topgolfs, I'm just naming a few, obviously, that we can't get to the residual. I've always talked about a good net lease investor as opposed to a fixed income investor is it doesn't have a repayment of principal upon the expiration of that term. The art of net lease investing is understanding what that residual real estate is and what the demand for that is. So single-purpose boxes to us are our biggest challenge. From a credit perspective, obviously, we're able to underwrite those. But again, that single-purpose boxes drive less demand and unfavorable outcomes when it comes to re-leasing in the event of a lease expiration or a bankruptcy and rejection.

And our next question will come from Rob Stevenson with Janney.

Joey, there's a slew of Gerber Collisions in the development pipeline, and the ones you've referenced that were recently completed. I think it's like 21 including the 3 completed. Once these are all completed by year end, where does that take the 1.7 of ABR? I know a lot depends on what else you acquire elsewhere, but where does that exposure stabilize? Is that a 2% exposure tenant when all is said and done, 3%? How do you envision that?

No, I think you're dead on. I think that's most likely a 2% to 3% exposure. We've talked at length about Gerber Collision and probably on a lower end, frankly, that 2% to 3%. But we've talked at length about Gerber Collision. Their relative position in their collision space, again, there's 3 large operators in this country. Gerber is the only nonprivate equity-owned, publicly-owned by Boyd Group. You can look and see their balance sheet, their financials on the Toronto Stock Exchange. They're a tremendous operator. They're a great partner for us.

It is an extremely interesting space given the depth and complexity of just the collisions and the repairs that occur today. I think I talked about it. You tap your bumper on a light pole today, it's 2 cameras and a sensor. And so Gerber's got a very unique proposition, and they're really aligned with the third-party payers, the auto insurers in this country in terms of targeting net new store opportunities. And so we're a big fan of Gerber, and we think that they are the preeminent operator in the collision space. But I think your 2% to 3% on the low end of that 2% is probably appropriate.

And do they continue to be a disproportionate amount of the starts over the next 12 months? Or are there other -- does that wind down now and replaced by other people in that development pipeline?

We'll see. I'll tell you, we obviously have a significant pipeline to wrap up with Gerber. We completed 3 projects in Florida and in California, but we're always looking at opportunities with Gerber, but then also other retailers that can change on a dime.

Okay. And then second question, how are you thinking about dispositions today given the current market environment? You've been buying, but is today also the right time to sell assets, other than theaters, or are you better off holding assets without near-term tenant issues until interest rates settle down? How are you thinking about that?

I think we're really -- first of all, we're really comfortable with where the portfolio stands today. We have been active, especially on a relative basis, historically on the disposition front, whether it was reducing Walgreen's exposure, franchise restaurant exposure, health and fitness exposure. Luckily we didn't make too many missteps along the way since launching the acquisition platform in 2010. I think the biggest challenge with disposition activity today is just it's a cost-benefit analysis, frankly, of time and this team, which works their butt off here, rolling through 1031 potential purchasers for 3 different purchase agreements and dropping them is just, frankly, an inefficient use of our time for minimal proceeds. So, look, if everything in our portfolio of 1,900 assets are for sale at the right price, but we aren't going to be inefficient and waste our time with buyers that aren't necessarily capable of executing. And so we'll continue to vet opportunities. At the same time, we don't need to be in recycle capital mode to try to generate those spreads given the position of our balance sheet.

And our next question comes from Haendel St. Juste with Mizuho.

This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well. I wanted to ask you about larger portfolio deals. Can you discuss the pricing of the larger deals within what you acquired this quarter? And are you still seeing large portfolios come to market? Should we still expect portfolio discounts in this current environment?

Look, it's a moving target, Ravi. I think the portfolio transaction we did was a diversified portfolio of approximately 8 to 10 assets. There were some unique nature in terms of short-term leases and they're in early extensions. I think the portfolio discount depends on who's out there in the market and wants to deploy capital at that time. And so a lot of it is time and place. What I will tell you is certainly there's less bidders out there. As I mentioned in our prepared remarks, the competition is infrequent, slim or none today. And so it's really based upon the timing of that potential sale as well as the composition of it. And then the select purchaser -- potential purchasers that are out there, frankly, their needs at the time, I think.

Got it. Just 1 more here. Can you discuss your funding needs to execute on your revised acquisition target and what would you let your leverage tick up from the 4.5x that it is today before issuing equity?

I'll let Peter talk about it in detail, but our funding needs, frankly, are none. We were very clear coming into the year pre-equitizing the balance sheet that we could execute while staying within our targeted leverage range. But I'll hand that over to Peter.

Yes, Ravi, we ended the quarter in a great position with pro forma net debt to recurring EBITDA of 3.7x, total liquidity of $1.2 billion, including $360 million of outstanding forward equity. And so as Joey mentioned, we have plenty of capital today to execute on our acquisition guidance, and we don't have a need for additional equity this year, and we can stay within our targeted leverage range while executing on that guidance. And so we're in an excellent position today.

And our next question will come from Linda Tsai with Jefferies.

Can you provide color on the profile of the sellers who are capitulating on pricing? And with rates potentially stabilizing now, what do you think is the impact and how long would it take to show up in pricing in the transaction market?

Linda, it's a wide breadth and range of sellers that are meeting the market. Well, I'll tell you we've seen acceleration in merchant builders, private owners specifically, none that are overly notable, but that we're holding the line and hoping for 2021 and the first 2/3 of 2022 pricing, and then have effectively capitulated to pricing that we think made sense. On prior calls, I mentioned we hadn't seen O'Reillys or Tractor Supplys or any of those types of credit-correct, call it, 6.15% on full-term assets. That's no longer the case. And so rates may be stabilizing here, spreads are still wide. The cost of capital, the inputs for private owners today, whether it's construction loans or more permanent debt is still obviously extremely disparate from where it was just a year ago.

And so we're going to continue to see, hopefully, more sellers meet that market, and frankly, get off of their 5 handles. That was the real problem is that sellers were holding on to those 5-handle transactions that, frankly, really weren't transactioning absent the lucky 1031 buyer.

And then on the merchant developers facing the need to sell, you've been talking about this past few quarters, how deep is this pool and how many more quarters do you think you could opportunistically buy from them?

Well, it's interesting. I would tell you that the conversations have now transitioned to our retail partners who are now looking at their 2024 pipelines and the merchant build programs and how they can effectively backfill those programs. That can range from creating self-development programs, doing more on balance sheet, converting their merchant builders to fee programs, partnering with somebody like us to either develop or be the capital source. I'll tell you, those are weekly conversations that we have. The merchant builder stuff will continue to flow. The question is how high do we, frankly, want to take some of these exposures where merchant build programs were effectively the driver of growth for some of these retailers.

The conversations right now that we're having here about solving for 2024 needs and beyond, and they involve both the merchant builders, but also the ultimate resolution is going to be driven by the retailer and how they can change their platforms to execute on their storing strategy in this new pricing paradigm that we're in today.

Just 1 last question. In terms of portfolio allocation, how comfortable are you with exposure -- I guess your grocery exposure ticked up a little bit, close to 11% now of ABR?

Extremely comfortable. We're not going up the risk curve. Obviously, Kroger jumped this quarter. We're not buying small grocers. Every grocery transaction we did during the quarter was with an investment-grade operator, including the 2 sale-leasebacks. We acquired our first Whole Foods this quarter -- this past quarter as well. So I think if you look into that exposure, we're acquiring the best grocers in the country here that we have very good relationships with.

And our next question here will come from Brad Heffern with RBC Capital Markets.

I'm curious how much of the seller capitulation is just a final recognition that the world has changed and how much of it is more attributable to just the recent turmoil in the bank and financing markets.

Yes, I don't think any of it is necessarily. That is obviously recent news here in terms of the recent turmoil in the bank markets. I think it is seller finally realizing that holding out for the 1031 or private purchaser with that size handle just isn't working. Obviously, comps are trailing that. I think they're starting to see more realistic comps. I think they're talking to brokers here that are saying this is going to be sitting on the market. It's slim to none that this actually trades in the mid-5s or low-5s. And I think we're just seeing, frankly, seller fatigue. Now, this isn't across the board by any means. These are cracks. We're guiding to $1.2 billion at least this year. This isn't a wholesale change, but we are seeing an acceleration especially in the past few weeks of sellers waving the flag.

Okay. Do you think that there will eventually be maybe more on the cap rate side that emerges from this bank stuff? I'm just thinking the market you guys compete in, 1031s with small boxes like presumably a lot of people would go to a bank to finance things like that. So do you think eventually it creates some sort of pressure?

It certainly can hurt. It certainly can hurt. I think we've seen the 1031 market dwindle to a fractional piece of what it was. Many of those purchasers, if they weren't all cash, as you mentioned, relied upon the regional bank market for leverage. And so it certainly can hurt. I'll tell you that it does put wind at the back of potential expansion of cap rates here. But again, it really comes down to individual owners here and their willingness and/or decision to capitulate.

Okay, got it. And then, Peter, going back to the financing commentary from earlier or the capital markets commentary. You mentioned no need for equity for the rest of the year. For the incremental debt, is the expectation that just goes on the credit line or would you think about doing some unsecured offering or term loan and locking in where rates are now?

Yes, I think that will ultimately depend, Brad, on the markets and what we see from a pricing perspective. As you mentioned, there's no near-term need for capital today. Our revolver has just under $200 million on it as of the end of the quarter. And so we have plenty of capacity there as well as the $360 million of outstanding forward equity. And so in terms of accessing the capital markets for the remainder of the year, we'll continue to monitor them and be opportunistic in terms of how and when we access.

And our next question will come from Wes Golladay with Baird.

How quick can you get this Development and PCS program this year? And then can you give us an update on Bed Bath & Beyonds? Can you start any redevelopments there this year if you get any back?

Yes. To the second question, the Bed Baths, we have the 3 Bed Baths paying an average of $9.50 or $9.40 a foot in the portfolio. We're extremely excited to get those back. We think we'll see a significant NOI lift from those opportunities and have tenants effectively ready to go. It really depends on when Bed Bath turns those stores over, whether or not RCDs would be this year. I would anticipate most likely next year, as Bed Bath continues to wind down through their liquidation process. I would also add, those leases could be acquired, right? Those leases could be acquired through the bankruptcy process and then you'd have on the flipside absolutely no gap in terms of rent. So we'll see how those play out. But there are 3 really great pieces of real estate with significant interest from predominantly off-price players. Your first question, what was it, Wes?

Yes. I think you started 5 projects in the first quarter. How big could that get this year for starts?

Going to get as big as -- it can get as large and as deep as opportunities make sense in today's environment. Again, duration equals risk, development has longer duration, and so it has to be appropriate spreads that we think we're going to be renumerated appropriately. And so we will be selective on what we enter into from a development or partner capital solutions platform just because of that duration risk and the unknown macro, cap rate, interest rate environment that we're in. We're seeing a lot of projects, we're seeing a lot of opportunities on both fronts. We're working with a number of retailers on organic fronts, but we want to make sure we don't get caught behind the 8 ball here if we continue to see cap rate expansion and have shovels in the ground that are delivering 12 to 18 months from now.

Got it. And then just my final question. We talked in the past about the cost of debt being maybe higher than the cost of equity, especially on the short term. Is there a point where SOFR gets to where you just settle the forward early without acquisitions lined up, and just pay down the line of credit?

Yes, Wes, this is Peter. I think we continue to view the revolver as an effective tool for shorter-term borrowings, and we'll continue to utilize it throughout the year where appropriate. As you mentioned, we have $360 million of forward equity and fully backstop, our current outstanding balance on the revolver. And so we'll continue to monitor what makes the most sense in the context of revolver pricing our pipeline and other capital markets opportunities available to us.

And our next question will come from Ki Bin Kim with Truist.

So, Joey, given that your portfolio has a significant IG presence, what cost of capital pressures are they feeling and does that open up additional opportunities for you guys? And secondly, do you try to price your cap rates somewhat in lockstep if you see a rise in cost of capital for your tenants?

Ki Bin, it's a great question. You can see sale-leaseback transactions that trade. Extremely disparate or more in lockstep with the unsecured paper of the respective retailers. And that's an interesting question that Peter frankly often brings up when we look at potential transactions or transactions relative to the space. I'll tell you we are seeing an increased opportunities. We executed on a number of sale-leasebacks in the first quarter. Obviously, these retailers are very cognizant of where their cost of capital is, specifically their cost of debt is. There's a number of transactions in the pipeline we'll execute in Q2 and Q3 or early in Q3 already. And so it is an opportunity for us that I think will be disproportionate in terms of volume -- the overall volume for the year if everything goes as anticipated, which is probably a big asterisk there. But we're seeing an increased flow from our retail partners that are coming to us and saying, where does this make sense to do a sale-leaseback? And obviously, they're comparing that at the CFO level to where they can issue unsecured paper.

And what does the cap rates look like for the acquisitions you have in the pipeline for 2Q and at what price can you raise that at longer-term debt?

I'll take the first part. I'll let Peter answer the debt question. Q2, as it stands right now, will either be nominally, higher similar composition in terms of credit profile, nominally higher cap rates or equal, really depending on the timing of some closings here. But I think our Q2 pipeline obviously is strong. That's why we increased guidance here. And it's accelerated, as I mentioned in the prepared remarks, quite drastically in the last week.

And Ki Bin Kim, in terms of our cost of debt today, we could price 10 year debt in roughly the mid-5s, which is relatively in line with what we discussed I believe on last quarter's call. But again, today we don't have a near-term need for that debt capital.

And if I can cheat here and ask a third question. So you did a deal with Kroger. Obviously, they have a joint venture with Ocado to build out their CFCs, the automated grocery distribution centers. Is that at all an opportunity you're looking at?

No, we're going to stick to retail. Obviously, they've actually pared back the openings with Kroger-Ocado, but we're going to stick to a single tenant retail here with dominant operator. So the 9 Krogers added during the quarter, I believe it was 9, were all freestanding grocery stores.

And our next question will come from Ronald Kamdem with Morgan Stanley.

Just a couple quick ones. Just on the ground leases, I appreciate the commentary on seller capitulation on the acquisitions. But maybe, can you talk specifically to the ground leases, what you're seeing there in terms of cap rate movements and opportunities?

Yes, I think, if anything, people have been more cognizant of ground leases. I've talked on previous calls, probably due to some of our fault and then sales recognition and then the sell-side recognition, there's more attention paid to them. We acquired 2 during the quarter. There's a number of them in our pipeline. But I think people are becoming, generally speaking, more aware of the embedded value in the ground lease space. We were very fortunate to take advantage of it for a while, but we continue to find those select opportunities, whether they be blend and extend. We got a really interesting 1 in California this quarter with a former seller, but we'll continue to source those opportunities. But I do think there is more recognition of the embedded value in that space now.

Got it. And then the second question was just so obviously the acquisition guidance ticked up this quarter. You talked about more seller capitulation. I think we can appreciate that comment. But when do you think -- what needs to happen 4 acquisitions to get back to 10% of EV, right? Is it the macro? So what are we waiting for to get this engine back given that you guys are in an advantaged position at this point?

Well, at $1.2 billion we're more than 10% of EV for the year, right? I think we're still at, call it 12%-ish of enterprise value. I think what needs to happen is we need to see spreads adjust appropriately, whether the cost of debt comes in or cap rates rise or any of the cost of capital inputs give us a more favorable spread. And so again the year is still fairly young. It can change any day here. We don't have visibility outside of the first couple weeks, frankly, right now of Q3 with an average transaction taking 71 days. Our commitment has always been, as we see the pipeline materialize, we're going to keep market participants current. And so that increasing guidance specifically reflects our Q2 pipeline and the beginning of Q3.

(Operator Instructions) Our next question here will come from Tayo Okusanya with Credit Suisse.

Joey, you guys are clearly IG, but I think, again, a lot of your peers also do a lot of stuff on the non-IG middle market side of the equation. I'm curious, are you surprised you haven't seen more issues on that side of the tenant base? It just seems interesting that with everyone talking about debt being harder to get, everyone is talking about potential slowdown in consumer demand, all these kind of things that credit across the board, both on the IG and non-IG side has been so stellar.

Well, I wouldn't tell you I'm surprised. I think we're seeing cracks that are publicly available. So whether that's Bed Bath & Beyond, Party City, Tuesday Morning filing bankruptcy as public entities, whether it's the Burger King franchisees we've seen that have made the news. I think a lot of the challenge is the lack of transparency in this space relative to individual asset, credit, and then portfolio concentrations. And so I would tell you the first step is always a right concession or deferral. The second step is generally something more overt that's available to investors to see if at all, which shows up in obviously occupancy first. But I will tell you, we're very early on in this cycle. I continue to believe that we are seeing a post-COVID retail world that is rationalizing back to the pre-COVID world, which will involve more bankruptcies, more store rationalizations, and the cream rising to the top.

Now a lot of that is subject, obviously, to macroeconomic outlook, and we don't have a crystal ball to strength of the consumer. But we're starting to see cracks in the casual dining space. You'll see lots of those assets currently flooding the market with some names everybody's familiar with. I think the Red Lobster challenges have, obviously, been in the news with their parent company. And so I think we're going to continue to see this. And it's not going to be a falling knife, unless something dramatic happens in the economy, it continues to demonstrate itself and reveal itself in cracks. Now, how you read through those cracks and what you think the potential outcomes are relative to the macroeconomic outlook, I think that is up to everybody's individual discernment.

And that concludes our Question-and-Answer Session. I'd like to turn the conference back over to management for any closing remarks.

Thank you everybody for joining us today, and we look forward to seeing you at the upcoming conferences and we appreciate everybody's time.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.