Agree Realty Corp (ADC) 2022 Q1 法說會逐字稿

Good morning, and welcome to Agree Realty Corporation's First Quarter 2022 Earnings Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Reuben Treatman, Director of Corporate Finance. Please go ahead, Reuben.

Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's First Quarter 2022 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, including uncertainty related to the scope, severity, and duration of the COVID 19 pandemic. The actions taken to contain the pandemic or mitigated impact and the direct and indirect economic effects of the pandemic and the containment measures on us and our tenants. Please see yesterday's earnings release and our SCC 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 discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFO, 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 SCC filing. I'll now turn the call over to Joey.

Thanks, Reuben. I'm pleased to report that we're off to a very strong start in 2022. The first quarter marked record development in partner capital solution stats as well as our second-highest quarter of acquisition volume in the company's history. While continuing to execute across all 3 external growth platforms, we are very pleased that our fortress-like balance sheet and discipline portfolio construction received an upgrade from Moody's to Baa1. During the first quarter, we invested $1 million in 124 high-quality retail net lease properties across our 3 external. 36 of these properties were originated through our acquisition platform representing acquisition volume of just over $407 million.

While investment volume was impressive, we maintained our discipline focus on best-in-class opportunities with our leading retail partners as demonstrated by more than 74% of first quarter acquisitions being comprised of investment-grade retailers. The 106 properties acquired during the first quarter, at least of 42 sectors, including leading operators, power source, home improvement, (inaudible) service, and auto parts. We executed on several notable transactions during the quarter, including the 55 property, $180 million portfolio discussed on our last earnings call. The acquired portfolio has a weighted average lease term of nearly 10 years. It derives approximately 90% of annualized base [friend] from a diversified set investment-grade retailers. Top tenants include tractor supply, CBS, Dollar General, Sherwin Williams, Advanced Auto Parts, and O'Reilly Auto Parts.

For the quarter, the total properties acquired had a weighted average cap rate of 6% and had a weighted average lease term. Excluding the 55 property portfolio, the properties acquired during the quarter had a weighted average cap rate of 6.2%. During the first quarter, we also acquired 6 Sunbelt Rental Stores in North Carolina, New York, Washington, Florida, and Michigan.

Several years ago, we identified Sunbelt and their parent Ashtead Group as a compelling and aligned partner with the only investment-grade credit profile in their respective space. Our decision to invest in Sunbelt rentals was recently reinforced by their upgraded triple B by Phish.

We continue to look for opportunities to build our relationship with Sunbelt across all 3 of our external growth platforms. Given our significant acquisition activity, and if we are increasing our full year 2020 range of $1.4 to $1.6 billion representing point.

While the midpoint of our increased acquisition guidance would represent record volume for our company, we have not and will not sacrifice quality or yield. We continue to believe that retail is dynamically involving and we remain intent on investing in those retailers best position to succeed in an omnichannel and dynamic world.

Moving on to our development and partner capital solutions platform. This quarter demonstrates the results of our efforts to provide comprehensive real estate solutions to our (inaudible) relationships and as well as the team to increase productivity. Sir Craig Erlich our development into a host of exciting projects, had 15 new development and PCS projects, including 13 locations, a Sunbelt rental, as well as a Burlington and Turnersville, New Jersey. Development was 7-Eleven and Target, our mission continued on 2 Gerber Collision Port Richie, Florida. They're completed or under construction during $3 million of committed capital and our expectation to commence between fifth development and PCS platforms to see low end of that range and our pipelines unique and distinct.

(inaudible) combined with our outstanding asset management platform continues to do with a recently acquired ground lease. We acquired property during the third and unsolicited offer shortly there. Set at just over a 4 cap, approximately 200 basis points below the initial acquisition yield resulting in a gain in over $2 million in just 6 months. Well, this was a one-off transaction. It demonstrates the embedded value in our growing lease portfolio and validates the compelling risk-adjusted returns that we've discussed on prior calls. During the quarter, we askew to new leases, extensions, or options on approximately 358,000 square feet of gross leasable area. Notable new leases, extensions, or options included a Walmart in Ohio and a Best Buy in Amarillo, Texas.

As a result of our asset management team's effort at quarter-end, our 2022 lease maturity stood at just 0.4% of annualized base friends representing a year-over-year decrease of approximately 80 basis points. At quarter-end, our quickly growing retail portfolios surpassed 1500 properties, a remarkable achievement in terms of our exponential growth in recent years and consisted of 1,510 properties across 47 states, including 186 ground leases representing 13.5% of total annualized base [reds.] Our investment grades exposure through it nearly 68% representing a 2-year stacked increase in more than 800 basis points.

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

Thank you, Joey. Starting with earnings, core FFO for the first quarter was 97 cents per share a 15.5% year over year increase. [SO] 97 cents representing an increase of 16.4% year over year, which is the highest AFFO per share growth achieved in 10 years. As a reminder, treasury stock is included within our diluted share count prior to settlement, if and when ADC stock trades above the deal price of our outstanding forward equity offers. However, the aggregate dilutive impact related to these offerings was negligible in the first quarter. Our consistently strong earnings growth continues to support an increasing and well-covered dividend.

During the first quarter, we declared monthly cash dividends of 22.70 cents per share for each of January, February and March. On an annualized basis, the monthly dividends represent a 9.7% increase quarter of last year. At 71%, 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 declared an increased monthly cash dividend of 23.40 cents per common share for April. The monthly dividend reflects an annualized dividend amount of $2.81 cents per share, or a 7.8% increase over the annualized dividend amount of $2.60 cents per share from the second quarter of last year.

General administrative expenses totaled $7.6 million in the first quarter. GNA expense was 7.2% of total revenue excluding the non-cash amortization of above and below market lease intangibles. While we continue to invest in people and systems, our anticipation is that GNA as a percentage of total revenue will continue to scale decreasing between 20 to 50 basis points as a percentage of total adjusted revenue compared to last year. Additionally, we continue to anticipate total income tax expense to be in the range of 2.5 to 3.5 million.

Moving on to our capital markets activities for the quarter. In March, as Joey mentioned, Moody's upgraded the company's issuer rating to Baa1 from Baa2 with a stable outlook. The improved investment-grade credit rating is a testament to the strength of our balance sheet and reflects the thoughtful and disciplined manner in which we've grown the company since achieving our initial rating 4 years ago. The Baa1 credit rating will further improve our long-term access to capital and enhance our ability to execute in the public bond markets.

As mentioned on last quarter's call, we have $300 million of forward starting swaps in place effectively fixing the base rate for a contemplated long-term unsecured debt issuance at 1.7%. Near the end of the quarter, we settled approximately 3.8 million shares of outstanding forward equity realizing net proceeds of 251 million.

At quarter end, we still had approximately 4.1 million shares remaining to be settled under the December 2021 forward offering, which is anticipated to raise net proceeds of $263 million upon settlement. Inclusive of the anticipated net proceeds from our outstanding forward equity, cash on hand, and availability under our 1 billion credit facility, we had almost $970 million of liquidity at quarter end.

As of March 31, our net debt to recurring EBITDA was approximately 4.3X proforma for the settlement of $263 million of outstanding forward equity. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was approximately 5X. Total debt to enterprise value at quarter end was approximately 26.5% while fixed charge coverage, which includes principal amortization and the preferred dividend remains at a company record of 5.2X.

In summary, we continue to maintain a conservative and well-positioned balance sheet that affords us tremendous flexibility with proforma net debt to EBITDA of 4.3X and roughly $970 million of liquidity to fund our robust investment pipeline. Our significant liquidity, more than $560 million of hedge capital, and our robust pipeline continues to give us confidence in achieving high single digit AFFO per share growth in 2022. Combined with our nearly 10% AFFO per share growth last year, this implies 2 year staff growth in the high teens. We view that per share growth to be very attractive when combined with our best-in-class portfolio, our fortress-like balance sheet, and extremely well-covered dividend. With that, I'd like to turn the call back over to Joey.

Thank you, Peter. At this time operator, let's open it up for questions.

(Operator Instructions) Our first question comes from Joshua Dennerlein with Bank of America.

So you had a pretty sizable portfolio acquisition during the quarter. Just curious how that deal came about? And maybe what the bidder pool was like in the current environment.

Josh, I think we talked about it on the last call, that transaction with the portfolio itself, we started to look at in 2019. At the time the swap rate fees for the seller, which is a private individual in the Mid-Atlantic we're too heavy for him to burden. And so we were reapproached I believe in December of, last year. December of last year, and then within 3 days had a transaction that was getting papered. And so there was no bidder pool. It was fully off market. A single individual owner that had aggregated the portfolio over several years.

Okay, nice. And then I saw you had a record number of stats across your development and PCS programs. Are there any governors on how big your development pipeline can get?

No, I think -- look, we've always said that we're going to deploy our development capabilities selectively in terms of dedicating our time, energy and capital. Of course we want those projects to hurdle our internal rates to make sense. So we don't see any governor, we've made significant additions to the team, both on the development and construction side, as I mentioned in the prepared remarks. And so we're looking to continue to ramp that pipeline opportunistically. We have several projects we anticipate announcing in Q2, but we think there's ample opportunity right there giving the disconnect between rates and returns for private developers for us to step in. And we're having a number of conversations with retailers on both programmatic and individual projects.

Our next question is (inaudible).

Follow up on the last question. Was there anything in particular that sort of drove timing of doing that? I mean that was 13 of the 15 development PCS volumes at this point in time or is this just part of their expansion plans? et cetera.

Yes, part of this. We continue to look for opportunities with Gerber across all 3 external platforms. Gerber continues to grow both from a Greenfield perspective and an M&A perspective acquiring generally independence. These projects are I would tell you about half what we call retrofits, renovations, or expansions and then half Greenfield projects. So Gerber continues to take market share in this country and we see them as a pretty critical partner in an industry that is very favorable.

Okay. And then you guys sold the LA Fitness you acquired in the portfolio deal pretty quickly. How are you thinking about the other LA Fitness locations in the portfolio and the other gyms in the portfolio in general? Are those near-term disposition candidates? Was there something about this one that, caused this one to be sold so quickly versus the others? How are you thinking about gyms and fitness going forward?

Yes, just for clarity purposes, the LA fitness was not part of the $180 million portfolio. That was part of a Walmart and Home Depot portfolio that we acquired. We agreed to take the LA fitness, which was based in Houston but immediately looked to divest that even pre-close to divest that at our cost basis. We're just simply not willing to take on incremental, specifically LA Fitness exposure, but generally, health and fitness exposure, unless it's a really low-cost operator or a piece of real estate that we're really in love with. So as you can see, we reported the LA Fitness at 331 to 1.5%, but they're truly down to 1.3% just immediately after our subsequent to quarter close. We still look at the gym sector, or rather the health and fitness sector with general suspicion. We have some impaired balance sheets. Obviously, we still have COVID out there, but I think just, the fragmentation of the space, the private equity in the space, and just the sheer number of options of, that really make that space.

Okay. And then last one for me. Peter, if you were doing a note issuance today, where have you gotten indications from your bank's group that you could price 5 or 10-year debt versus where you would've been at the end of 2021?

Yes, Rob. First, as noted in the prepared remarks, we have $300 million of forward starting swaps in place today that have effectively fixed the base rate at 1.7% what is contemplated as a 10-year unsecured. The spread on top of that base rate it depends on when the capital markets have been somewhat volatile to start the year, but the good news is that can be opportunist and issue additional and secure debt.

From Nicholas Joseph with Citi.

With regards to the development pipeline, what are you seeing in terms of construction costs? And how does that ultimately allocate relative to the yield?

Yes, Nick. Welcome back to net lease. Construction costs continue to rise across the country and so we're very cognizant of where those costs. These are generally fixed return projects, I think most tenants are aware of the construction costs and also lead times, things like HVAC units, roof. Those things are factoring into construction costs, but also why we see a number of retailers looking to us with the liquidity, obviously being publicly traded and having the access to the revolving credit facility to be able to provide certainty, truly of delivery at the end of the day. But construction costs continue to be a challenge for everybody here. We're very cognizant of those and like I said, most of the transactions that we enter into are open book, fixed return and so that risk isn't going to be on us.

Okay. And then as you think about kind of pricing forward deals, more returns is what you've been experiencing, or ultimately, is there kind of a price point where maybe that yield has to come down?

On which side specifically?

On development.

Yes. Out the curve, we're really looking at shovel-ready projects. Nothing that's taking too long from an [intective]. As we can see of a few start next quarter as well. In the case where we are going out longer with a longer entitled period, and again, it's going to be a fixed return, open cost structure where we know what those costs are. But even in that instance, given the volatility we see out there, we're pretty hesitant to enter into those without a significant premium.

Our next question comes from Spenser Allaway with Green Street Advisors.

Can you just comment on the broader cap rate environment specifically as it relates to what you're seeing in terms of portfolio?

Spenser, I think I always compare the net lease space to single-family residential. It's the longest lag time in terms of cap rate movement because of the fragmentation of ownership, but also the sheer number of intermediaries in the forms of brokers and agents that are out there trying to get or promising to get aggressive pricing for sellers.

I'll tell you, we're starting to see some cracks in specific instances of cap rates moving upwards. But I think it's really going to take that 90 to 150 days, which are typically upon expiration of those listings. Agreed, promise sellers very aggressive pricing and then set the tone for the overall market but we're starting to see some cracks. In terms of portfolios versus one-off, it's really dependent upon the quality of the portfolio, and the type of portfolio.

Now we're not looking at anything that generally EBS buyers or by heavily levered buyers would have played in that pool historically. Those IRRS have gone down significantly because of the availability of debt and obviously the coupon on debt available today. On both sides of the equation, we're hopeful we see more movement. It takes time, we haven't seen material movement across the board yet, but there are of course opportunities where we've been able to push cap rates.

Okay. And anything like thematic in regards to the cap rate increases that you're seeing? Or is that just perhaps maybe just some color on environment and where pricing is there?

Yes, nothing thematic, it's really one-off sellers. Generally what we're dealing with average price point of 5 million absent to portfolio transactions we've mentioned. Grab partly because of the large portfolio transactions, the 180 and then the other 80 million. We've always said, we're going to take advantage of ground lease opportunities when we see them. I think we acquired 5 during the C-Store ground lease at an extremely aggressive cap rate for the $2 million. That was off market, just an opportunistic inbound bid by a high-net-worth individual. There are a number of ground leases in our pipeline today. Don't see any material change on the ground lease versus the turnkey structure although there is obviously more focus on ground leases today, given the analysis while it's safe and some of the work that you guys and others have done.

Next question comes from Wes Golladay with Baird.

You have a lot of Gerber Collisions added to the program this quarter, do you anticipate adding more retailers at a similar scale? And the program also appears to be building momentum throughout this year, can you comment about how big you think this program going to get? 300, 400, 500 million?

With Gerber specifically, Wes?

Well, just more so it's like you clearly have a programmatic program going with Gerber Collision. Will there be more added to a similar scale? And then just not the Gerber program, but just the developer PCS program. How big can that get?

Yes, we're very pleased and (inaudible) mentioned. We've always held that (inaudible) started as the Agree Development in 1971, and then up until the launch of the acquisition platform in 2010. I'll tell you we've had more and more inbounds from retailers to provide that. Retailers that are growing in this country for shortages that their historical developers cannot. And in a rising interest rate environment, potentially a rising cap rate environment, their history delivers the stores that they're typically being public have produced promise I should say to wall street. So we're having a number of conversations. I'll be Frank, some of them aren't fits for us. They may be credit fits for us, we may like the operator but the price point is too small. It would be akin to us launching a single family home construction business across the country and we're not interested in doing that.

Those kind conversations have significantly ramped up, given the environment we're in today. Specifically to Gerber, I think it's almost akin to regards to the prepared remarks in terms of identifying early on a retailer that we thought was in a tremendous position to access a fragmented space and had the balance sheet capabilities to do so. So Gerber specifically owned by the Boyd Group of Canada publicly traded on the Toronto stock exchange has over 700 stores. Very low leverage at just over 3X levered. It's a conservative company in its core. As you're probably aware, there are the big 3 collision operators in this country, Gerber, Caliber, Service King. Service King if you read media reports is entering into potentially an out of some of their financial constraints and if not, could be heading into bankruptcy.

What's interesting about the collision business, is it's really a tremendous business today. It used to be that you bump something with your bumping and maybe you got it fixed, and maybe you didn't. Now you got 3 sensors, 2 cameras, LIDAR, all of this high-tech equipment in there. And so frankly, the days of the local collision shop having the skilled labor and the capability for all of those high-tech repairs are pretty much gone. Now the vehicle, the accident rate we see going down generally across the features as well, but the cost to repair this what used to be minimal repairs. The national vendors within power with the auto insurers are really thriving. Gerber works hand in hand with those insurance companies to direct customers to their collision centers. We see very similar to the equipment rental business, we see Gerber really taking the lead on collision. And so we're excited to continue to work with them across all 3 platforms.

That great. Thanks for all that. And then one for Peter. I guess, can you talk about the swaps? Are those 10 year swaps? And for your 200 million of potential issuance, what would the all rate be including the swaps? And then just to follow up to that, does that Moody's upgrade at all help you from your current debt issuance?

Yes. Thanks for the question, Wes. So first, the 300 million of forward starting swaps contemplate a 10-year unsecured debt issuance, so that they're hedging effectively apply them to an issuance with a different tenor. They have effectively fixed the base rate at 1.7%, as I mentioned, and they (inaudible) 2022 so there's no near-term rush to use those swaps. Certainly, we think that the upgrade for Moody's to Baa1 will help improve pricing and also access to capital and the public markets. And in terms of ultimately where that price is, I think that's dependent on when we access the market and liquidity and can be opportunistic in terms of when we go to the public debt markets.

Our next question comes from Ronald Kamdem with Morgan Stanley.

Great. Just, can I touch on tenant health a little bit? Saw the occupancy was up sort of very little bankruptcies that we're hearing of. Maybe you just give us an update, how are the tenants feeling and what are you hearing about sort of inflationary pressures or even talks of a recession that we've seen mentioned broadly?

Look, we're in a very unique position. We have basically zero, I believe bankruptcies in the portfolio. And this is a portfolio that is built for with recession resistance (inaudible) but omnichannel critical. And so the largest tenants in our portfolio are nondiscretionary led by the nondiscretionary retailers that are core goods and services to customers. They also have the greatest ability to absorb and compete on price and given inflationary pressures and have the greatest distribution logistics networks amongst. And so today for a smaller mid-size retailer who is dealing with labor pressures and inflation, you name it right? Logistical pressures. It is extremely challenging. If you're Walmart or if you're Home Depot or T.J.Maxx, you have global procurement network that can quickly pivot.

And always talked about, we want to invest in retailers that have a few distinct characteristics. Number one, they have the cap channel. We know how expensive micro and macro fulfillment can be. We need to try and test out new delivery to meet customers’ needs. And then 3, they can compete on price because once you lose customers due to price today in a price transparent world where any customer can see in about 4 seconds, they generally don't come back. And so we are heavily focused on those retailers that even in the short term if they have to impact margins, can retain customers and frankly grow their customers.

Great. And just wanted to sort of go back. It's been asked a couple different ways, but, look, I think you talked about sort of cap rates, maybe having a little bit of a lag before repricing, which is all fair. But just specifically on either the private equity buyer, have you started to see any sort of deals being re traded? Just signs of that sort of buyer pool taking a step back at all, or is it sort of too soon to see?

Ron, frankly, we don't have much exposure to the private equity, heavily levered buyer pool. They're just not participants in the types of transactions and the types of opportunities that we're pursuing. We haven't seen on the disposition side, obviously, very negligible. We haven't seen, I've heard rumblings of re trades, obviously IRRS have gone from upper teens to lower teens, if that, for a number of heavily levered purchasers. But our competitive set is generally the 1031 purchaser, the private individual, and so if they do re trade or if they do back out of a deal, we're generally.

Our next question comes from Linda Tsai.

The high single digit earnings growth, you hit that last year and you're on track to achieve it this year. What do you see as the key puts and takes in potentially sustaining this growth going forward?

Linda, a number of them. One is our ability to source obviously a creative transactions across all 3 of our platforms. Cost of capital obviously moves into that cost of equity capital as well as debt, predominantly equity. Capital cap rates, where cap rates move maintaining spreads. What amaze me is the team's ability here to consistently and continuously find across the country across all [treating] our investment criteria.

Again, this quarter, 74% investment grade, that number now is 68% investment grade. So we haven't changed our tune and I think that's most important. So the investments in the team we've made, the additions to the team we've made, the investments in technology that we've made specifically arc.

Frankly to surprise me to the upside, I never envisioned, if you would've asked me several years ago that we'd be deploying at the midpoint of just that acquisition here at 70 plus percent investment grade, and then putting another. I would've told you that's pretty crazy. Massive space, which is 65% of U.S. retail GLA, it's highly fragmented. And the team just continues to do a tremendous job by uncovering those opportunities.

Thanks. And then I know you for the unsolicited ground lease. Would be reasonable to assign into the rest of your ground lease portfolio. That's close to 14% of your ABR.

It's a great question. I'll tell you that that was not a dominant operator. It was not Wawa. It was not the quick dripper sheets. It was a smaller regional operator. I believe elicited inbound 4 months from closing about 200 basis points inside. I don't think I have ever flipped an asset that quickly in my career, but a 2 million gain was something that we just couldn't turn away. I think that is demonstrative of the overall value of the ground lease portfolio here. I mean, this was a C store. It was a smaller regional operator. This wasn't Walmart or Lowe's or Wegmans. I think it's demonstrative of the overall value of the ground lease portfolio. Others could decide, but it was an interesting unsolicited offer. Someone who is familiar with the credit, with the real estate. And then we were pleasantly surprised to be able to book that game.

Our next question comes from Ki Bin Kim with Truist.

So just wanted to tie together a few things that you mentioned about higher rates. You also increase your full year acquisition guidance, and I know this isn't like a video game that you can spark or stop and turn on and off, I mean business. But as a CEO, how do you balance the prospects of higher race and maybe better deals ahead versus pushing that throttle up a little bit and buying more today versus wage. How do you balance that?

It's a terrific question if we didn't have our overall hedging policy in place, I think we'd change the answer. And so having forward starting swaps at 1.7%, as Peter mentioned, having a $260 plus million in forward equity already priced. So let's call it nearly $300 million put forward before 331, gives the us that medium term visibility into a pipeline and also into effectively outside of just spreads on the debt side locked in our cost of capital. And so if we were a spot issuer of capital and a spot purchaser with no given plus or minus 70 days of acquisitions, every single decision becomes much harder. And that's why we have always been emphatic. That's getting visibility into a medium term cost of capital. If you really think about it, what we're acquiring months ago, right? I mean, that's the bottom line.

And so we know what those spreads are today and that's the critical component of it. And I said, I'm the last call. It's much easier to lever up, right? Than to de lever. And so maintaining that balance sheet capacity, having an intermediate view of your cost of capital and an external growth business makes that question. It removes a great pre ponder of the answer to that question. That said, you always have to look out at opportunities and you have to try to project forward in that video game simulation you said of what's going to happen with (inaudible) balance what we think is going, this is with the opportunity at hand. But again, knowing that you have your cost of capital locked in for the easier decision, because of course there is no video game and there probably there's no right answer.

All right. And going back to the global collision questions, and I think about the next generation of automobiles coming out. I'm not an automobile expert, I can barely drive one. But if you think about EV revolution in auto, it's foreseeable to think about a bear case scenario where maybe the auto part used for it going forward. And I'm sure this question is 5 years too early, but.

Well parts, right? Moving parts and engine. The benefit to (inaudible) any longer, these minor fender benders, let alone any larger collision. Again, when you bump into the white pool in the parking lot by accident used to be a little ding on your bumper. Now it's a camera on a sensor. And so if you don't get that fixed, then your overall vehicle protection system doesn't work. Repairs, I mean, it's almost an IT job today.

It's not a bump job, right? It's not a bump shop anymore. These are IT professionals that have to be working on the cars. And so the days of the local collision shop, as I mentioned are gone, you can't just bump things out or paint things or all the little fixes anymore because these cars are loaded with high tech equipment that works on an integrated basis to provide for the overall safety of the driver.

And so those repairs are much more nuanced and that's inuring to the collision operators benefits who have the relationships with the retailers and who can maintain that labor pool, which is also challenging obviously today to be able to get those people working at those collisions to fix those repairs. But it very different profession today and a very different business than it was just several years ago.

But you don't see any longer-term risk to the auto parts retailers?

Well, auto parts retailers, they're very different from collision. The collision operators generally are working on the exterior of the cars right down to this and the combustion engine. That's a different operation there. That's the mechanics. The auto parts retailers keep forms of customers, the do it yourself customer, which has been O'Reilly's core business. Now working to continue to expand the back door customers, the commercial customers.

Now O'Reilly which their core businesses historically been more commercial oriented works front door business as they called it. No, we really don't see much in the way there. If you look at their same store sales, if you look at the trajectories and their commentaries and their earnings call, those operators continue to gain market share through recessions, through pandemics. The average age of cars on the road continues to go up.

You can't even find a car anymore, half the time. And so it's a benefit now there's no doubt the auto industry we're sitting here in the motor city is going to continue to change with EVs, especially but those premier operators with the balance sheets and the store network and the distribution networks are going to continue to thrive here.

Crossett with Berenberg.

Maybe some funding questions just on the swaps. When do those expire or where they are today or higher, is the swap, would you continue to, I guess do swaps regardless of where rates are? And then altered equity, you did that. Is that funding options, is that off the table given where rates have gotten?

So Nate, this is Peter. With respect to the swaps we can use the forward sergeant swaps at any point. Clearly there is an option available to us too, to roll the asset related to those swap if we really wanted to. But we have plenty of optionality and flexibility in terms of when we use those swaps this year. As it relates to the preferred equity, that's still an optional forms of capital markets and what makes the most sense in the context of market conditions, pricing, and how we want fund our business. It’s' today, probably not something that we would look at giving more pricing is, but certainly an option list.

A question on the portfolio that you bought. Is there any, and sorry if I missed it, but is there any pruning that needs to be done from that portfolio or is essentially every property a property that you'd want to have?

No, you probably saw in the jump intending concentration, tractor supply was the largest operator in there. The largest concentrations is a few dollar generals. There's a FedEx in there that we'll look to dispose of it, we are not in the business here. We think that will be accretive, obviously. The overall portfolio, it's a small FedEx, I believe in North Carolina adjacent to the airport. And so we'll dispose of that asset. Other than that, we're pretty comfortable with the entire portfolio. Again, it was 90% investment grade, a hundred percent retail outside of that one FedEx asset with 10 years weighted average lease term. We're very cognizant of the CVSs that we acquired in terms of that pharmacy exposure. We're very comfortable with the store performance there, their long duration CVSs, they're not on any closure list.

This was a really unique opportunity, frankly, the only portfolio absent a ground lease portfolio from 7 years ago that truly fit qualitatively within our existing portfolio composition. And that's why it was such a great fit, let alone the unique circumstances here. And so we'd love to be able to find more of them. The problem is most of them don't have one asset you got to dispose of, they have 20% of it, it doesn't fit qualitatively to the portfolio. So that was, I would tell you that you hit it on the head. There was one asset basis that we intend to execute on.

Is there any reason why, I know it's a Testament to your like, portfolio that the seller would want to think they could get?

I'll give you a little background on the seller. The largest post office, private, is a works out of a converted house with 4 women that have been with thousands of acres of land in the beltway, 4 brothers. He disposed and started acquiring net lease properties. His lawyer/friend/broker, we started the conversation. But Jim, our seller on this wanted to get something done. Doesn't like to mess around and would've done. It was a very unique situation, a great guy with a great eye for real estate whether it's agricultural land, whether it's net lease real estate. But he's a unique guy for us and someone who can get something done quickly.

(Operator Instructions) The next question comes from Haendel St. Juste with Mizuho.

I guess, Joey, one follow-up on the back of that portfolio question. I guess just tying to seller psychology. Sounds like the gentleman in this scenario was looking to perhaps monetize them as real estate holding, but I'm curious if you are seeing a noticeable change in seller psychology from folks looking at the market, looking at the rising rates, and thinking well, maybe now might be a better time to sell. And so curious if that's resulting in more deals coming across your desk as result as well?

It's a good question, Haendel. It's really tough when you work on so many transactions. A hundred at any given time, it's hard for us to draw any broad strokes here. I think there are sellers out there given the volatility that will say, I need to sell quick. And then there are sellers out there or owners out there that say, I want to get past this volatility. It's a bell curve. I think it ends up on both sides. What will be interesting to see as we progress through the year is obviously what will happen with cap rates, but the seller psychology is going to drive that. And I've always said, real estate owners have 2 primary emotions, greed and fear. And so we will see how much of that fear sets in. And then, that's when we always operate the best, whether it's a pandemic or a recession, our balance sheet is always prepared and we're always ready to pounce when we see an opportunity there. But it'll be interesting to see as this played out, given just the extreme volatility we've seen obviously in recent weeks. I don't have a true answer for you.

I just want to get some perspective from you, but did you mention earlier...

Let me qualify one area where we do see weakness. Merchant developers who have developed projects and signed leases with tenants that now have zero to no margin and maybe even a loss because they did not anticipate the price appreciation in building components and labor. And that inflationary pressure need to sell their existing product to try to get to their next projects.

And that's on the merchant developer side, not the passive owner or longer-term owner. We are seeing more and more of that, where I'll give you the example. The dollar general developer that was trying to hold out ice for their dollar general, and they're developing them at a let's call it a 7. And all of a sudden they wrapped up the project and they were pretty close to a return on cost at a 7 net of a brokerage commission or whatever else. It's a break-even deal.

And they promised 5 or 10 more projects to dollar general. They have to recycle that capital. They can't hold out. And so we are seeing pressure there that's led to a number of conversations with review provide a more seamlessly, give us some predict delivery. So that is the one that was necessitated by the Fairman to recycle that capital and redeploy it.

Got it. Got it, interesting. Is there anything that you perhaps would be willing to do in some of these scenarios? Maybe be a short-term or mere lender or something that to capitalize on that opportunity?

We've never been a lender. I don't see that happening. I wouldn't rule it out. It's not something that's a core competency that we do. The opportunities we've looked at and the discussions we've had with retailers jumping in and taking over the entire programmatic relationship and or pipeline. But again, we're not going to do that for million-dollar projects strewn across the country, i.e. for a dollar store. That does not make sense for us. We're just too busy to do that. But as you can see in opportunities like Gerber collision in some of the work we've done with these repeat tenants, the certainty of execution here, there is a premium placed on that from retailers.

Got it. Got it. Did you mention, or would you mention, is there anything notable under contract or otherwise today, and if that would include any portfolio summary?

About as far as I'll take it? I think the increase in guidance speaks for the robust thing from $2 million transactions to larger transactions that we've been working on. So we anticipate obviously the pipeline is pretty large and that includes some larger opportunities as well.

This concludes our question and answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.

Well, thank you everybody for joining us this morning. It will be great to see you in June. And good luck to the rest (inaudible). Appreciate it.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.