Good morning, welcome to the Agree Realty first quarter 2023 conference call. All participants will be in a listen-only mode for the duration of the call. Should you need any assistance during that time, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch tone phone. To withdraw your question, please press star, then two. We ask that you please limit yourself to two questions for today's call. 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. 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. 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, the seller fatigue that's contributing to a narrowing bid-ask spread. We have 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 multi-year 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 three 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 were leased to investment-grade retailers, and our weighted average lease term of over 13 years was a 5-year high.
We acquired two 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 two transactions in the grocery space with national and super-regional 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. Three 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 anticipated total costs 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 sq ft of gross leasable area during the first quarter. Notable extensions, options or new leases included two 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 Rent. 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 half a penny in the first quarter. 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%-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 two-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 non-cash 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 two-year stacked 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 million 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 3.7 times 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 4.5 times. Total debt to enterprise value at quarter end was approximately 24%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend, remained at a very healthy level of 5.1 times.
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.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star then two. Again, we ask that you please limit yourself to two questions for today's call. At this time, we will take our first question, which will come from Josh Dennerlein with Bank of America. Please go ahead with your question.
Yeah. Good morning, Joey. Good morning, Peter. Joey, I wanted to explore your comment on your just everything that's gone on. You're accelerating your shift to being, like, a full real estate provider for your, for your partners. Just what's shifted, what's accelerated, and then, you know, what's to come?
Good morning, Josh. I appreciate the question. I think this has been a long-term vision for us, building out all three platforms, all three external growth platforms, as well as the remainder of the team. 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 analysts 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 you know, accelerate their growth and to step into challenging situations, giving the availability of capital we have and then those multiple levers and options that we provide.
Got it. Then maybe just on the cap rate side, the Fed feels like it's probably close to, you know, stopping interest rate increases from here. Just kind of curious, what are you seeing on the private side? Like, do you still feel like there's adjustments to come on the cap rate side or is there further kind of uplift in cap rates?
Well, it's tough to predict the future in this, 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. What happens on a go-forward base will be difficult. 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 remind everybody this is a large and fragmented space, and we're looking for opportunities within it.
I'm not sure it's necessarily emblematic of the broader cap rate environment.
Thank you.
Thanks, Josh.
Our next question will come from Eric Wolfe with Citi. Please go ahead with your question.
Thanks. Good morning. Looking at your revised acquisition guidance, it amounts to nearly 5% of your current enterprise value. Just curious whether you have any sort of internal rule as to how much cash flow growth should be created from this level of activity. You know, 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 tell you there's no internal hard and fast rule there. Obviously, enterprise growth should result in AFFO, an increased dividend to shareholders. We're very cognizant investing capital to make sure that we're doing it on an accretive basis. At the same time, qualitatively, I would tell you is just important. As you can see during this quarter, it's 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. At the same time, we wanna deliver obviously accretion to our shareholders. We want to improve the portfolio.
You know, as we've talked about for a couple quarters here and as well as the prepared remarks, we're just not going to go 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. 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.
Got it. Is there any sort of, I guess, spread that would, you know, make you go out higher on the risk curve? I mean, if you were able to get a 9 cap rate, for instance, versus, you know, say, call it the 6.7? I'm just effectively trying to figure out, you know, if there's a certain level of loss that's embedded in your view of non-investment grade tenants versus investment grade, that sort of 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. You know, 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. You know, 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, you know, a good net lease investor, as opposed to a fixed income investor is 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. 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.
Got it. Thank you.
Thank you.
Our next question will come from Rob Stevenson with Janney. Please go ahead with your question.
Good morning. 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 three 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 sort of 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%-3% exposure. We've talked at lengths, at length about Gerber Collision and probably on the lower end, frankly, of that 2%-3%. 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 non-private 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 a 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 know, you tap your bumper on a light, on a light pole today, it's two cameras and a sensor. 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. 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%-3% on the low end of that 2% is probably appropriate.
Do they continue to be a disproportionate amount of the starts over the next, you know, 12 months? Is that sort of wind down now and replaced by other people in that development pipeline?
We'll see. I tell you, we obviously have a significant pipeline to wrap up with Gerber. We completed three 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. 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?
First of all, we're really comfortable with where the portfolio stands today. We have been e-active, especially on a relative basis historically on the disposition front, whether it was reducing Walgreens exposure, franchise restaurant exposure, health and fitness exposure. You know, 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. This team, which works their butt off here, rolling through 1031 potential purchasers for three different purchase agreements and dropping them is just frankly an inefficient use of our time for minimal proceeds.
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. 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.
Okay. Thanks. Appreciate the time this morning.
Thanks, Rob.
Our next question will come from Haendel St. Juste with Mizuho. Please go ahead with your question.
Hi, good morning. This is Ravi Vaidya on the line for Hendel. Hope you guys are doing well. I wanted to ask you about, you know, larger portfolio deals. Can you discuss the pricing of the larger deals within what you acquired this quarter? Are you still seeing large portfolios come to market? Should we still expect portfolio discounts in this current environment?
Look, it's, it's a moving target, Ravi. I think the portfolio transaction we did was a diversified portfolio of approximately 8-10 assets. There was some unique nature in terms of short-term leases, and there are early extensions. I think the portfolio discount depends on who's out there in the market and wants to deploy capital at that time. A lot of it is time and place. What I will tell you is certainly there is less bidders out there. As I mentioned in our prepared remarks, the competition is infrequent, slim or none today. 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.
They're frankly, their needs at the time, I think.
Got it. Just one more here. Can you discuss your funding needs to execute on your, in a revised acquisition target? What would you let your leverage tick up from the 4.5 that it is today before issuing equity?
I'll let Peter talk about it in detail. Our funding needs are, frankly, 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. I'll hand that over to Peter.
Yeah, Ravi, we ended the quarter in a great position with pro forma net debt to recurring EBITDA 3.7 times total liquidity of $1.2 billion, including $360 million of outstanding forward equity. 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. We're in an excellent position today.
Got it. Thank you. Appreciate the call, guys.
Thanks.
Our next question will come from Linda Tsai with Jefferies. Please go ahead with your question.
Hi. Good morning. Can you provide color on the profile of the sellers who are capitulating on pricing and with rates potentially stabilizing now, you know, what do you think is the impact and how long would it take to show up in pricing in the transaction market?
Yeah, good morning, Linda. It's a wide breadth and range of sellers that are meeting the market. Well, I'll tell you, we've seen an acceleration in merchant builders, private owners, specifically, none that are overly notable, but that we're holding the line and hoping for 2021, the first two-thirds 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'Reilly's or Tractor Supplies or any of those types of credit crack, call it 6.15 on full term assets. That's no longer the case. You know, 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. We're gonna continue to see, hopefully, more sellers meet that market and frankly get off of their five handles. I mean, that was the real problem, is that sellers were holding on to those five handle transactions that frankly, really weren't transacting absent the lucky 1031 buyer.
On the merchant developers facing the need to sell that you've been talking about this past few quarters, how deep is this pool and, you know, how many more quarters do you think, you know, 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 wanna 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 are about solving for 2024 needs and beyond, and they involve both the merchant builders, but also the ultimate resolution is gonna be driven by the retailer and how they can change their platforms to execute on their storing strategy in this, in this new pricing paradigm that we're in today.
Thank you. Just one last question. In terms of portfolio allocation, how comfortable are you with, you know, 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 this quarter. We're not buying small grocers. Every grocery transaction we did during the quarter was with an investment-grade operator, including the two sale leasebacks. We acquired our first Whole Foods this quarter or this past quarter as well. I think if you look at, if you look into that exposure, we're acquiring the best grocers in the country here, that we have very good relationships with.
Thank you.
Thanks, Linda.
Our next question here will come from Brad Heffern with RBC Capital Markets. Please go ahead with your question.
Yeah, thanks. Morning, everyone. 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?
I don't think any of it is necessarily. I mean, that is obviously recent news here in terms of the recent turmoil in the bank markets. I think it is sellers finally realizing that holding out for the 1031 or private purchaser with that size handle just isn't working. Obviously, comps are trailing data. I think they're starting to see more realistic comps. I think they're talking to brokers here that are saying, you know, this is gonna be sitting on market. It's slim to none that this actually trades in the mid-fives or low fives. 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 this flag.
Okay. I mean, do you think that there will eventually be, you know, maybe more on the cap rate side that emerges from this bank stuff? I'm just thinking, you know, 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. Do you think eventually it creates some sort of pressure?
It certainly can't hurt. It certainly can't hurt. I think the 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. It certainly can't hurt. I'd tell you that it does put wind at the back of a potential expansion of cap rates here. Again, it really comes down to individual owners here and their willingness and/or decision to capitulate.
Okay, got it. Peter, going back to kind of the financing commentary from earlier, the capital markets commentary. You mentioned no need for equity for the rest of the year. For the incremental debt, I mean, is the expectation that that just goes on the credit line, or would you think about doing some sort of unsecured offering or a term loan and locking in where rates are now?
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. We have plenty of capacity there, as well as the $360 million of outstanding forward equity. 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.
Okay, thanks.
Our next question will come from Wes Golladay with Baird. Please go ahead with your question.
Hey. Yeah, good morning, guys. How big can you get this development and PCS program this year? Can you give us an update on Bed Bath & Beyond? Can you start any redevelopments there this year if you get any back?
Good morning. To the second question, the Bed Bath, we have the three Bed Bath 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 our CDs would be this year. I would anticipate most likely next year as Bed Bath continues to wind down through their liquidation process. I'll also add, those leases could be acquired, right? Those leases could be acquired through the bankruptcy process, and then you'd have, on the flip side, absolutely no gap in terms of rent.
We'll see how those play out, but they're three really great pieces of real estate with significant interest from predominantly off-price players. With your first question, what was it, Wes?
Oh, yeah. I think you started five projects in the first quarter. How big could that get this year for starts?
Gonna 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, it has to be appropriate spreads that we think we're going to be remunerated appropriately. 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 wanna make sure we don't get caught behind the eight ball here if we continue to see cap rate expansion and have the shovels in the ground that are delivering 12 to 18 months from now.
Got it. 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?
Yeah, Wes, this is Peter. I think, you know, we continue to view the revolver as an effective tool for shorter term borrowings, 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. 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.
Great. Thanks, everyone.
Thanks, Wes.
Our next question will come from Ki Bin Kim with Truist. Please go ahead with your question.
Thanks. Good morning. Joey, given that your portfolio has a significant IG presence, you know, what kind of cost of capital pressures are they feeling? Does that open up additional opportunities for you guys? Secondly, do you try to price your cap rates somewhat in lockstep if you see a rise in cost of capital for your tenants?
Good morning, Kevin. 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. 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, 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.
It is, you know, it is an opportunity for us that I think will be disproportionate in terms of volume and the overall volume for the year, as everything goes as anticipated, which is probably a big asterisk there. We're seeing an increased flow from our retail partners that are coming to us and saying, you know, "Where does this make sense to do a sale leaseback?" Obviously, they're comparing that at the CFO level to where they can issue unsecured paper.
What does the cap rates look like for the acquisitions you have in the pipeline for 2Q? Second, at what price can you raise debt 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. 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.
Ki Bin, 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. Again, today we don't have a near-term need for that debt capital.
If I can cheat here and ask a third question. You did a deal with Kroger. You know, 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 single tenant retail here with dominant operators. The nine Krogers added during the quarter, I believe it was nine, were all freestanding grocery stores.
Okay, thank you.
Thanks, Ki Bin.
Our next question will come from Ronald Kamdem with Morgan Stanley. Please go ahead with your question.
Hey, 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?
I think if anything, people have been more cognizant of ground leases. I've talked on previous calls of probably due to some of our fault and then GAAP recognition, and then the sell side recognition, there's more attention paid to them. We acquired two during the quarter. There's a number of them in our pipeline. 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 blending extent. A really interesting one in California this quarter with this, a former seller. We'll continue to source those opportunities. I do think there is more recognition of the embedded value in that space now.
Got it. You know, the second question was just, so, you know, obviously the acquisition guidance ticked up this quarter. You talked about sort of more seller capitulation. I think we can sort of appreciate that comment. When do you think, sort of like what needs to happen for acquisitions to get back to, you know, 10% of EV, right?
Right.
Is it the macro? What are we sort of waiting for to get this engine back, given that you guys are sort of 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 that 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. 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. You know, our commitment has always been, as we see the pipeline materialize, we're going to keep market participants current.
That increase in guidance specifically reflects our Q2 pipeline and the beginning of Q3.
Got it. Makes sense. Thanks so much.
Thanks, Ron.
Again, if you have a question, you may press star then one to enter the queue. Our next question here will come from Tayo Okusanya with Credit Suisse. Please go ahead with your question.
Good morning, everyone. Joey, I mean, yeah, you guys are clearly IG, but I think, again, a lot of your peers also kind of do a lot of stuff in the non-IG middle market, side of the equation. I'm curious, I mean, are you surprised you haven't seen more issues on that side of the tenant base? It just seems interesting that with everyone kind of talking about credit being hard, you know, debt being harder to get, people kind of 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. 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. I would tell you the first step is always a rent 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. I would 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, the macroeconomic outlook, and we don't have a crystal ball, the strength of the consumer. We're starting to see, 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. I think we're gonna continue to see this, and it's not gonna be a falling knife unless something dramatic happened in the economy. It continues to demonstrate itself and reveal itself in cracks.
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.
Fair enough. Thank you for the commentary.
Appreciate it.
That concludes our question and answer session. I'd like to turn the conference back over to management for any closing remarks.
Well, thank you, everybody, for joining us today. 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.