Agree Realty (ADC) Q2 2023 Earnings Call Transcript

Agree Realty (ADC -0.48%)
Q2 2023 Earnings Call
Aug 02, 2023, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Agree Realty second quarter 2023 conference call. All participants today will be in a listen-only mode. [Operator instructions] Note, today's event is being recorded. I would now like to turn the conference over to Brian Hawthorne, director of corporate finance.

Brian, please go ahead.

Brian Hawthorne -- Director, Corporate Finance

Thank you. Good morning, everyone, and thank you for joining us for Agree Realty second 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 discussed non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO, and net debt to recurring EBITDA. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release, website, and SEC filings. I'll now turn the call over to Joey.

Joey Agree -- President and Chief Executive Officer

Thanks, Brian, and thank you all for joining us this morning. This quarter we celebrated several notable milestones for our company. We surpassed the 2,000 property mark in 49 states, adding Alaska to our geographic reach. Our tremendous team has now doubled the size of our portfolio in less than three years.

Additionally, we have completed and moved into our new state-of-the-art headquarters to support our continued growth. The building includes cutting-edge technology, a wellness center, locker rooms, and auditorium, a coffee bar, outdoor spaces, and other collaborative meeting areas. We've incorporated a number of environmentally friendly features and anticipate that the building will achieve LEED certification in the near future. Lastly, we have continued to invest in information technology and made further enhancements to our proprietary ARC database with the rollout of an updated module for development and construction.

These investments are paying significant dividends, they've increased automation, and significantly reduced manual entry. This has created thousands of hours of time savings that have enabled us to strategically reallocate resources to further bolster our sourcing, underwriting, and relationship management capabilities. In addition, these savings and our continued top-line growth are anticipated to bring G&A as a percentage of revenue down at least 50 basis points to 6% or lower this year. Looking ahead, we have ambitious plans for our IT environment and we look forward to sharing more with you in the coming months.

Moving on to our results, I'm very pleased to report that we continued our strong start to the year deploying significant capital across our three external growth platforms, maintaining near full occupancy and further solidifying our balance sheet. During the quarter, we invested approximately $324 million in 120 high quality retail net leased properties across our three external growth platforms. This includes the acquisition of 92 assets for approximately $305 million. The properties acquired during the second quarter are leased to leading retailers operating in sectors, including off-price retail, farm and rural supply, dollar stores, auto parts, and tire and auto service.

Our closed transactions to date in current pipeline include a myriad of different transaction structures, sale leaseback with leading operators, blend and extend opportunities, new and repeat sellers, as well as distressed developers. We continue to be the first and last call in a highly fragmented and fatigued market. Cap rates continue to move in our favor as demonstrated by our second quarter results. The acquired properties had a weighted average cap rate of 6.8%, a 10-basis-point expansion relative to the first quarter and 60 basis points higher than full year 2022.

The weighted average lease term was close to 10 years and approximately 73% of annualized base rents are derived from investment grade retailers. We acquired three ground leases during the quarter representing approximately $26 million or 8% of total acquisition volume for the quarter. Given our acquisition volume year to date with increased visibility into our growing pipeline, we are raising our acquisition guidance from at least 1.2 billion to at least 1.3 billion for the year. I anticipate the third quarter to be our largest volume quarter to date this year as our pipeline has grown significantly.

As always, we remain disciplined to our underwriting criteria and avoid moving up the risk curve or deviating from our strategy. Our fortress balance sheet enables us to execute on many exciting opportunities while most of our competition is sidelined. As mentioned on prior calls, there continues to be a lack of competition within our targeted sandbox and our ability to move quickly and with certainty makes us the buyer of choice in today's market. As seller fatigue continues to settle in, we've been able to execute in extremely high quality opportunities while pushing cap rates 60 basis points above last year's average.

Through the first half of this year, we've invested $638 million across 189 retail net lease properties spanning 36 states and 22 retail sectors. Approximately 607 million of our investment activities originated from our acquisition platform. Close to three quarters of the annualized base rent acquired in the first six months of the year comes from leading investment grade retailers. These metrics demonstrate our continued ability to execute in opportunities with best-in-class retailers across multiple different avenues, including one-off acquisitions from both individual and institutional counterparties, sale leaseback with our retail partners, diversified portfolios, development, and our Partner Capital Solutions program.

In light of the increased interest in that program and to more clearly define it for future prospective developers, we are renaming the program, a Developer Funding Platform, or DFP. Increased activity, we're seeing across our development and DFP platforms as evidenced by the 31 projects completed or under construction, representing a record capital commitment of approximately $126 million. As of June 30th, we incurred approximately $78 million of costs related to the 31 completed or ongoing projects. During the quarter, we commenced two new projects with total anticipated costs of approximately $10 million.

Construction continued during the quarter on 20 projects with over $87 million of anticipated total costs. Six projects were completed during the quarter, including a HomeGoods in South Elgin, Illinois; a Sunbelt Rentals in Saint Louis, Missouri; and three Gerber Collision developments. Moving on to leasing, we executed new leases, extensions or options on over 280,000 square feet of gross leasable area during the second quarter, including a Walmart in Lansing, Michigan and a Hobby Lobby in Mount Dora, Florida. Through the first six months of the year, we executed new leases, extensions or options on approximately 793,000 square feet of gross leasable area.

We are in excellent position for the remainder of the year with just 10 leases or 30 basis points of annualized base rents maturing. As I mentioned earlier, our best-in-class portfolio now spans more than 2,000 properties across 49 states, including 210 ground leases representing 11.9% of total annualized base rents. Occupancy this quarter remained very strong at 99.7% and our investment grade exposure is approaching 68%. With that, I'll hand the call over to Peter and then we can open it up for questions.

Peter Coughenour -- Chief Financial Officer

Thanks, Joey. Starting with earnings, core FFO per share for the second quarter was unchanged compared to the same period last year at $0.98. AFFO per share for the second quarter increased 1.1% year over year to $0.98. In April, we increased our monthly cash dividend to 24.3 cents per share, representing a 1.3% month-over-month increase.

We subsequently declared monthly cash dividends of 24.3 cents per share for each of May, June, and July. The monthly dividend represents an annualized dividend amount of almost $2.92 per share and is 3.8% higher than the annualized dividend from the comparable periods in 2022. Our payout ratio for the second quarter was below our stated range at 74% of AFFO per share. Our growing dividend continues to be supported by our strong payout ratio and continued earnings growth.

General and administrative expenses totaled $8.4 million in the second quarter. G&A expense was 6.1% of revenue adjusted for the non-cash amortization of above and below market lease intangibles or 6.5% of unadjusted revenue. As Joey mentioned earlier, we continue to gain leverage. For the full year, we still expect G&A to decrease at least 50 basis points as a percentage of adjusted revenue.

Income tax expense was approximately $709,000 during the second quarter. For the full year, we now expect income tax expense to be between $2.5 million and $3.5 million, down from the previous range of $3 million to $4 million. Moving to our capital markets activities, we further fortified our balance sheet during the quarter with commitments for a $350 million 5.5 year term loan with strong support from our key banking partners. We closed the term loan on July 31st and drew the full $350 million, which was used to pay down all amounts outstanding on our revolver.

Today we have no variable rate debt outstanding and no material debt maturities until 2028. This was a market leading financing and the 5.5 year term allowed us to extend the maturity into 2029, which fits nicely into our debt maturity schedule. In advance of closing the term loan, we entered into $350 million of forward starting swaps to fix SOFR over the 5.5 year period. Including the impact of the swaps, the interest rate on the term loan is fixed at 4.52% based on our current credit rating.

The term loan also includes an accordion option that allows us to request additional lender commitments up to a total of $500 million. We settled approximately 3.1 million shares of outstanding forward equity during the second quarter, realizing net proceeds of over $205 million. As of June 30th, we still had approximately 2.9 million shares remaining to be settled under existing forward sale agreements, which are anticipated to raise net proceeds of $202 million upon settlement. At quarter end, our net debt to recurring EBITDA was approximately 4.1 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. Our total debt to enterprise value at quarter end was approximately 25%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend, remained in a very healthy position at 5.1 times. We had total liquidity of over $910 million at quarter end, including nearly $700 million of availability on the revolver, over $200 million of outstanding forward equity and more than $12 million of cash on hand. Pro forma for the recent closing of the $350 million 5.5 year term loan.

Total liquidity is bolstered to approximately $1.3 billion. Lastly, I want to thank our ESG Steering Committee for issuing our third annual ESG report during the quarter. The report outlines the significant progress that we've made on ESG initiatives in the past year, including earning gold level recognition from the Green Lease Leaders program and introducing reporting on greenhouse gas emissions. In addition, the report highlights our new headquarters, which as Joey mentioned earlier, is anticipated to receive LEED certification.

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

Joey Agree -- President and Chief Executive Officer

Thank you, Peter. The opportunity set in front of our company is truly exciting. We are uniquely positioned to execute within a distressed environment with a lack of competition. At this time, operator, we will open it up for questions.

Questions & Answers:

Operator

[Operator instructions] And our first question today comes from Joshua Dennerlein of Bank of America. Please proceed with your question.

Unknown speaker

Hi. This is Sal Grant on behalf of Josh Dennerlein. And I just had a quick question about if you can make a comment on your choice of issuing the term loan and your view of cost of capital and maybe how that's transpiring, especially with your forward equity also outstanding.

Peter Coughenour -- Chief Financial Officer

Sure. Thanks for the question. This is Peter. First, I want to thank our bank group for their continued support and participation in the term loan.

In terms of our process, we evaluated all options prior to moving forward with the term loan and considered the term of market pricing to be most attractive. In addition, we were able to issue a five and a half year term loan and there have not been many if any five and a half year deals in the REIT market recently, which allowed us to push the maturity into 2029, where we had a window in our debt maturity schedule. So this accomplished our goal of issuing attractively priced fixed rate debt that fits well into our well-laddered debt maturity schedule and allowed us to maintain no material debt maturities until 2028. In terms of our cost of capital today, as you mentioned, we have the $350 million term loan at 4.5% that we just closed.

We have $200 million of outstanding forward equity in the high fives and our cost of equity today is in a fairly similar range. And when you take those inputs and combine them, that puts our weighted average cost of capital roughly in the mid fives today.

Unknown speaker

Great. Thank you so much.

Operator

Thank you. Our next question will come from Eric Wolfe from Citi. Please proceed with your question.

Eric Wolfe -- Citi -- Analyst

Hey, good morning. In the past you've talked about merchant developers that hadn't really made any profit on their development and would need to find liquidity eventually. Just curious how much of that inventory has been worked through at this point? And then as you look forward for Dollar General and others that merchant development was a big part of their store openings, how are they satisfying their need to open stores and what solutions are they looking for?

Joey Agree -- President and Chief Executive Officer

Hey, good morning, Eric. It's Joey. It's very topical. We continue to have conversations and constructive conversations with retailers that have historically relied upon merchant builders to deliver net new stores.

Frankly, the development market and the developers in particular are significantly -- face significant challenges and headwinds today. Not only have obviously rates and cap rates gapped out, but with the regional banking crisis and the lending constraints that they're seeing from primarily the regional lenders that local and regional lenders that supported those developers through construction loans and facilities have really pulled back. So we're in conversations with developers, we're in conversations with retailers. We heard Tractor Supply's commentary, I believe it was last week in their earnings call, how they anticipate moving to more of a -- really either a fee or on-balance sheet program.

This is going to be a topic of conversation for the next couple of years. Where and when we can provide solutions, whether they're, whether through our developer funding platform or organic development and/or sale leasebacks, we're looking at all of those opportunities, but it's a significant point of disparate distress. I'll tell you during the second quarter specifically, our acquisition volume did not have an abundance of merchant developer programs. We see merchant developer transactions.

We were really more focused in the second quarter and some unique opportunities from third party sellers and stabilized assets.

Eric Wolfe -- Citi -- Analyst

Understood. And then just I guess it's probably kind of different for every single tenant, but like in terms of the sort of percentage, if you will, of stores that they typically source through this, I'm just trying to say, is it 20%, was it 60%? And then looking forward, I mean I assume that that pipeline has gone to zero or maybe I'm wrong in that because I'm trying to say and I think you would need at least a north of an eight yield to develop today. But curious on your thoughts there as well.

Joey Agree -- President and Chief Executive Officer

I think it's the first part of it, we broke ground on two projects during the quarter. We'll break ground on additional projects this year. We're going to continue to be selective. You mentioned that eight yield, I think that's probably appropriate obviously given term credit underlying real estate here.

But again, duration equals risk. We're not going to be take speculative risk, of course, but we're also not going to take duration risk without the appropriate risk-adjusted returns through either a development funding platform or true organic development. But I think, look, we're going to see more and more challenges. I feel the number of phone calls personally from large developers that are out there looking to fill that major gap in their capital stack and we're going to continue to see retailers change their operating strategies for new store growth.

Eric Wolfe -- Citi -- Analyst

All right. That's helpful. Thank you.

Joey Agree -- President and Chief Executive Officer

Thanks, Eric.

Operator

Our next question comes from Brad Heffern with RBC. Please proceed with your question.

Brad Heffern -- RBC Capital Markets -- Analyst

Hey, good morning, everybody. Joey, can you talk about your expectations for cap rates and if they've largely settled out or if the acquisitions in the pipeline have some additional upward pressure?

Joey Agree -- President and Chief Executive Officer

Yeah we talked about in the fall heading back all the way to NAREIT that we thought it would be an incremental increase in cap rates that they weren't going to exponentially gap out. At the same time, we were going to be prudent and disciplined, given the volatility in the market and the pre-acquisition of our balance sheet without moving up the risk curve. And I think you've seen that once again from us this quarter with our activity. Again 73% investment grade, 8% ground leases, not reliant upon Walgreen's or car washes or retailers that are in decline or have balance sheets that are, frankly, on the weaker end.

And so, look, I will tell you for Q3 our pipeline is large. It will be emblematic of 2022, The differences, it's going to be about 70 basis points higher in 2022. So 2022 Q3 was approximately $360 million. I anticipate our Q3 acquisitions to surpass that and again be about 70 basis points higher year over year.

And so we continue to see more migration more, frankly, capitulation on sellers and realization that the new normal is here and it's here to stay and it's here to stay for who knows how long, but it's going to be here for a while.

Brad Heffern -- RBC Capital Markets -- Analyst

OK. Thanks for that. And then have you been surprised that we haven't seen more credit issues that resulted in lost rent so far across the industry? And do you think that that's something that we'll continue to see going forward or do you see a change in that?

Joey Agree -- President and Chief Executive Officer

No, we've talked about it before. Think we're back to a pre-COVID world where retailers thrive and then retailers have challenges. There are a number of retailers out there today, JOANN, At Home. You can keep going down that list that are having challenges.

We're going to see additional bankruptcies across the retail space. But again, that was -- that's normal. It happens in every industry. It just didn't really happen during COVID when everybody get -- either had a stay or deferred rent or were able to access cheap capital.

So we're going to continue to see the retailers with the balance sheets and the liquidity to invest in fulfillment options, in labor and in price thrive and those that don't have that liquidity, there's a great piece in, I believe it was The Wall Street Journal last week talking about the demise of Bed Bath and Beyond, and Holly Etlin's work there, and her commentary. But I think we're going to continue to see those retailers that don't have that liquidity and balance sheet to invest in those three areas of their business continue to degrade until, frankly, they can no longer survive and can't get inventory.

Brad Heffern -- RBC Capital Markets -- Analyst

Appreciate it. Thank you.

Operator

Our next question comes from Haendel St. Juste from Mizuho. Please proceed with your question.

Haendel St. Juste -- Mizuho Securities -- Analyst

Hey, Joey, just wanted to follow up on that last question. In your remarks you talked about the lack of competition and also that your pipeline has some say leaseback and that you're in discussions with some distressed developers. So I was curious if you could talk a bit more about the range of opportunities you're looking at today within the pipeline? Does it include any portfolios, any new sectors, and how is the range of deals compared to your recent activity here in the high sixes? Thanks.

Joey Agree -- President and Chief Executive Officer

Yeah, no, thanks. Appreciate the question. It is, as I mentioned the prepared remarks, it is a wide range of opportunities. Frankly, I've never seen such a wide range of opportunities in my career, all the way from retailers trying to figure out how to get new stores in the ground for 2024 and 2025 openings to sell lease backs which will ramp here for us in Q3.

We have a number or a couple or sell lease backs that are fairly significant here in Q3. So it's a very, very wide range of opportunities. The key for us is selecting those opportunities that make sense, not only quantitatively but qualitatively within our portfolio. Again, we're just not going to go up the risk curve here.

We're seeing yield incrementally come our way again, printing a six to eight this quarter, a six, seven last quarter and I anticipate printing higher than a six to eight next quarter. Where that migration in terms of yield or expansion ends up is anybody's guess at this time. And so I think we're going to continue to be selective, but I'll tell you, we've never seen the diverse set of opportunities that we've seen. The lack of competition in the market is, frankly, stunning.

It's us and sellers expectations. And so the private 1031 buyer has vanished except the infrequent ones, the high net worth individuals. You don't hear about them overly -- too much. The non-traded REITs of course aren't playing in this space anymore and then the levered private purchasers can't get the leverage.

So we really have our choice here and it's an interesting paradigm to be in. And as I mentioned in the prepared remarks, I've never seen an opportunity so ripe and fruitful with that wide ranging spectrum of opportunities.

Haendel St. Juste -- Mizuho Securities -- Analyst

That's really interesting and helpful. Are you seeing any new capital starting to nibble or enter this space at all?

Joey Agree -- President and Chief Executive Officer

Absolutely, zero. We are seeing a paralysis on this market and every day we get a seller or a developer who we -- who crosses the line into the 2023 new normal and says what raises the white flag. And that's our -- and that is what we're seeing daily. It is accelerated into Q3.

We have limited visibility into Q4. As I said, Q3 will be larger than last year's Q3. It will be fairly or significantly larger than Q2 or Q1 this year, but this market continues to have fatigue. Again, I'll reiterate where that goes in terms of pricing beyond Q3, anybody's guess.

I don't see a contraction there happening anytime in the near future, but it's opportunities galore. It's just questions of strike price and where, frankly, where sellers finally give in and where they realize that, 2023, it's a different world.

Haendel St. Juste -- Mizuho Securities -- Analyst

That's helpful. Thank you. And one quick one on 7-Eleven, now they're a top 10 tenant of yours. Can you discuss the availability and pricing you're seeing in the stores and if that will be an area of focus going forward as well? Thank you.

Joey Agree -- President and Chief Executive Officer

Yeah, it will be. C stores, specifically large format C stores are a major area of focus for us across all three platforms. The largest transaction of the quarter, as you mentioned, was a 7-Eleven portfolio from a third-party seller. Ten stores, nine out of 10 are in the Charlotte MSA transaction was just over $32 million.

It was a repeat seller for us. The disposition during the quarter was tied to that acquisition. It was actually a 7-Eleven that we acquired from that seller and so somewhat of a horse trade there. We are seeing significant activity across the C store space.

There are two C stores, both Sheetz and Kum & Go, which is being acquired by Maverik, entering our backyard as we speak. We're working on the sale leaseback front. We're working out with developers who, frankly, have capped out their cap rates 100 to 150 basis points on a one-off basis and then looking at some institutional level platforms that could potentially make sense for us. There's some major expansion plans with most of of the regional store operators in this country, whether it's Wawa or Sheetz or QuikTrip or Kum & Go Maverik.

Now there are a lot of C stores in the works and in the planning phases, there's not a lot of capital to fund them. So it could present even more interesting opportunities and we're in active discussions today.

Haendel St. Juste -- Mizuho Securities -- Analyst

Can you give us a sense of yields you're saying broadly?

Joey Agree -- President and Chief Executive Officer

Sorry, Haendel. Will you repeat that?

Haendel St. Juste -- Mizuho Securities -- Analyst

Can you give us a sense of the yields you're seeing there broadly?

Joey Agree -- President and Chief Executive Officer

It's across the board. I'll be honest. It's -- the one-off transactions that, frankly, depends on the level of desperation and certainty required by the developer. I'll tell you that we are in sale leaseback discussions and have some in our pipeline that are wider the institutional sellers or, frankly, the corporates themselves that want to recycle and redeploy that capital into that business.

And so there's a range, I would tell you, from six to seven that we're able to strike on those transactions.

Haendel St. Juste -- Mizuho Securities -- Analyst

Perfect. Thank you.

Joey Agree -- President and Chief Executive Officer

Thanks, Haendel.

Operator

Our next question comes from Rob Stevenson with Janney. Please proceed with your question.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Good morning. Joey, what does the ground lease market look like today? Look any different from the changes you've seen in the fee simple market over the last year or so?

Joey Agree -- President and Chief Executive Officer

No, Rob. It's really the same. I mean they're really parallel markets, similar sellers, often similar types of transactions. It's just the least structure.

During the quarter, as I mentioned, we acquired three ground leases, I believe, it was. The largest was a Lowe's ground lease in Rhode Island for just over $15 million. We're seeing a number of opportunities on the ground lease front. Q3, for us, will have a significant groundless exposure, but really, really no change there in terms of differentiation from a traditional turnkey market.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. So not harder there to get to the right price on those assets today versus a fee simple asset.

Joey Agree -- President and Chief Executive Officer

To all seller specific irregardless of the lease structure.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. And then you just talked about the one small asset that you sold year to date. How are you thinking about that over the back half of '23, not only from a portfolio pruning perspective, but also as a source of equity capital versus a low to mid 60 stock price?

Joey Agree -- President and Chief Executive Officer

We've talked about it for heading into Q4 of last year. The 1031 market, I continue to believe, is an unproductive use of this team's time. We have the portfolio in a position that we really like, frankly, we're fond of unless somebody wants to buy one of our couple movie theaters and I'll mention Regal affirmed our lease officially, which we had no concern over in New Jersey or so Regal, everything's for sale. The problem is, frankly, the execution and just the human capital time and resources.

So we prune the portfolio actively for years. It was at least -- at the very least a nominal source of recycling. Every asset is for sale in the portfolio. Just show us the money in the bank and we're happy to look at some real offers.

But we're not going to go play Go Fish with 1031 buyers today and, frankly, have the inefficiency of time and resources. This team, as I mentioned in the prepared remarks, is really been recalibrated given the automation and lack of manual entry through our IT investments to be the tip of the spear. And today, transacting in the 1031 market is a difficult proposition.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. Thanks, guys. Appreciate the time.

Joey Agree -- President and Chief Executive Officer

Thanks, Rob.

Operator

Our next question comes from Ki Bin Kim with Truist. Please proceed with your question.

Ki Bin Kim -- Truist Securities -- Analyst

Thanks. Good morning. Joey, you just want to go back to the topic of the improved acquisition environment. I was wondering if you can help kind of paint the picture a little bit more.

I'm not sure if it's possible to answer it this way, but if you can try to quantify that, for example, if you were seeing a couple billion dollars worth of deals to close 300 million maybe six months ago, is it 2.5 billion that you're seeing, the 3 billion? Just trying to see -- get a better understanding of how much has improved.

Joey Agree -- President and Chief Executive Officer

Ki Bin, I don't have ARC open in front of me. I could pull that data really quickly if we had ARC. And as I mentioned in the prepared remarks, we're looking at doing something to demonstrate the enhanced IT capabilities and infrastructure that we're now -- we've achieved. I'll tell you -- and we'll pull that for you after the call.

I'll tell you from my perspective, it's the quality of the inbounds that we're now seeing, real sellers who need to really transact and want certainty, most of them have been on the market, either had a 1031 fish on the hook that dropped maybe even a second one. And finally are saying or perhaps their lender is saying it's time to move. And so we're seeing more realistic pricing. The bid/ask gap is closing on more assets quarter over quarter.

We're within striking distance and I'll tell you our reputation, the teams work here is second to none. And so we'll continue to get those first and last calls, we're not getting as many of the calls that are still asking for four handles or five handles because I think the market has come to the realization that those just, frankly, don't fit in today's world. So from a quality perspective, it is noticeable. We'll get you some actual statistics pulled from ARC after the call.

Ki Bin Kim -- Truist Securities -- Analyst

Great. And your leverage on a spot basis was four and a half times in the first quarter and the same in the second quarter. Just high level going to 2024, where do you think average leverage will settle out at?

Joey Agree -- President and Chief Executive Officer

We have no problem running leverage obviously from here as Peter did a tremendous job in his team on the term loan. We have no debt maturities, as Peter mentioned, until 2028. Our stated leverage range of four to five times was from COVID. Historically before that, I believe we're at five to six times.

Migrating to five or above five is no challenge here. We have again no near-term debt maturities, no floating rate exposure. So the balance sheet is going to remain fortified, but operating the balance sheet at five times or five -- up to five and a half times doesn't scare me in the least. We've always run the balance sheet into conservative -- obviously with a conservative approach.

We pioneered forward equity in the space will continue to monitor all sources of capital and when advantageous execute on it. But by no means do we feel the need that leverage has to run in the low fours. If you look at the composition of our portfolio, our balance sheet -- the maturity schedule of that balance sheet and the duration of the leases and quality of those leases and the underlying assets, there's absolutely no challenge running leverage higher. And you won't see us issuing equity at 64.50 or wherever we closed yesterday.

That's for sure.

Ki Bin Kim -- Truist Securities -- Analyst

OK. Thank you.

Joey Agree -- President and Chief Executive Officer

Thanks, Ki Bin.

Operator

Our next question comes from Wes Golladay with RBC Capital Markets. Please proceed with your question.

Wes Golladay -- RBC Capital Markets -- Analyst

Hey, I think you guys have my old dial-in programmed. It's Baird now. Just a quick question on the DFP program. It sounds like that's going to be just a lending component, but maybe can you talk about the mix of how you're going to help the developers or the retailers? Do you have any sense of the mix of actual lending that you're going to do versus the other product you offer such as the actual development yourself?

Joey Agree -- President and Chief Executive Officer

So, Wes, just for clarity purposes, we will not lend if we don't own fee simple. We're not going to have a mortgage platform here. We don't have that in place today. We're not carrying any notes payable on the balance sheet today, but that's the chasm.

I mean you've hit it on the head, it's the second question. You hit it on the head is what do retailers do relevant to merchant builders for net new store growth? And it's about a 30%, 40% gap if they can even obtain financing today and we're exploring different opportunities. The key question is what is the exit pricing when that asset comes online, whether it be in 2024 or early 2025. So that is -- that's the crux of the question here.

But what we're -- where developers are seeing credit being extended today, it is, frankly, it does not provide the capital stack to execute on their pipelines.

Wes Golladay -- RBC Capital Markets -- Analyst

Got it. And this is kind of a big shock. What's happened the last year and these companies probably take a long time to change their mindset and it sounds like they're doing it a little bit. The -- last year, you just dropped a bunch of Gerber Collision, and I imagine you have in the background a wide array of people you're talking to.

So I'm just kind of curious how big is the shadow pipeline of retailers that you're working with now?

Joey Agree -- President and Chief Executive Officer

So subject to how you're depending -- you're defining shadow pipeline, I'll tell you we've never had as many conversations with both significant developers and with retailers trying to find solutions at the asset or the programmatic level. Again, those solutions can be challenging. We see retailers changing their platforms, doing speed development, doing it on balance sheet, holding returns. Some are expanding returns for developers, but none of that resolves the underlying problem here.

And so those conversations are daily, they're ongoing, we're seeing one off. We're seeing multitude of portfolio and pipelines have developers that are short anywhere between $5 million and $250 million for their pipeline. The question is where to strike and we're just not willing to take speculative risk. That's our line.

Wes Golladay -- RBC Capital Markets -- Analyst

Got it. Thanks for the time, everyone.

Joey Agree -- President and Chief Executive Officer

Thanks, Wes.

Operator

[Operator instructions] Our next question comes from Ronald Kamdem from Morgan Stanley. Please proceed with your question.

Ronald Kamdem -- Morgan Stanley -- Analyst

Hey, just two quick ones. So one, going back to the cost of capital calculation, I think in the mid fives, I think we're sort of getting to similar numbers. So where on the -- I think you talked about not doing equity here, but where is the right level and how do you guys sort of think about it in terms of where it makes sense to press?

Joey Agree -- President and Chief Executive Officer

I won't declare a spot price, I think it's subject to the pipeline, but I think look, we came into the year saying we don't need equity. We don't need equity to hit the one, three, and stay within our current stated leverage range. And so we'll continue to evaluate all of those markets and then importantly the relative cost of capital in each and every single one of them. So Peter and his team will continue to evaluate, it.

We'll be opportunistic. We don't anticipate a preferred coming back at four and a quarter anytime soon. That's for sure. The 10-year market doesn't look overly attractive.

Hence, the term loan this quarter. The good news is, is we don't need any capital. So that's the best news is we don't need any capital. That was the plan coming into this year.

We have strong lender support from, obviously, the term loan or the five and a half year term loan and we can continue to remain opportunistic.

Ronald Kamdem -- Morgan Stanley -- Analyst

Got it. And then you guys always have sort of the lowest bad debt versus peers. Just can you remind us how much is budgeted, how much you've gone through year to date? Maybe I think you hit on the Regal, but maybe hit on the Bed Bath and Party City and what you're thinking, what's it looking like there?

Joey Agree -- President and Chief Executive Officer

Yeah, I'll hit the second question, then turn it over to Peter. Regal in Sewell, New Jersey was a firm. Bed Bath, we had three Bed Bath total entering the bankruptcy. One was purchased by Burlington, which is out there in the ecosystem already.

The second one is near resolution where we anticipate will execute a new lease shortly. It's tenant approved with a significant NOI and then we're working through the third one. In terms of Party City, all leases were affirmed except one, which we recaptured and have entered in or about to enter into a lease with a far vastly improved tenant. They're on a new term with a significant NOI lift as well.

Peter Coughenour -- Chief Financial Officer

And, Ron, in terms of bad debt expense, we don't guide to a specific number. Year to date, we've recorded bad debt expense of approximately $275,000. That's roughly ten basis points of revenue and roughly in line with the bad debt expense that we recorded last year as a percentage of revenue. Looking back historically, that's slightly below our longer term average.

We've been closer to to 20 or 25 basis points. But as Joey mentioned, the portfolio is in great shape and we don't expect any material deviation from those levels.

Ronald Kamdem -- Morgan Stanley -- Analyst

Helpful. Thanks so much.

Joey Agree -- President and Chief Executive Officer

Thanks, Ron.

Operator

Our next question comes from Linda Tsai from Jefferies. Please proceed with your question.

Linda Tsai -- Jefferies -- Analyst

Hi. Do you feel like the group of retailers that can do development on balance sheet is limited and presumably the ones doing this now have had previous experience?

Joey Agree -- President and Chief Executive Officer

It's a great question, Linda. It's not easy to transition to self development if you've historically relied upon merchant builders. So retailers, I'll tell you, I'll focus on the retailers that are in our sandbox, the large national operators generally or large, super regional operators. Transitioning to an internal model, while it sounds like an easy solution, if they have the balance sheet and the liquidity to do it, is very difficult.

Not only do you need to have the entitlement, the development, the construction expertise, the permitting expertise, it is a major overhaul. And so what we're seeing is retailers who had some, let's call it a fractional portion of their net new store development that were on balance sheet increasing that. Hence, tractor supply. O'Riley, I believe, has signaled the same.

Walmart, Home Depot with their net new store growth, inclusive of Sam's Club, will do it on balance sheet. The real challenge is for retailers that historically didn't have that self development experience on balance sheet, how they move that needle forward with net new store growth. That is a real challenge. That's a gaping hole in this market.

I haven't heard a solution yet for it, but we continue to listen and frankly propose solutions that will hopefully get their pipelines ramped back up. But it's a -- as I mentioned earlier, it's a daily conversation and very topical.

Linda Tsai -- Jefferies -- Analyst

Thanks for that color. And then it seems like you're seeing more of an inflection point in cap rate expansion, given the distress you're seeing today. Would you expect the spread between acquisition cap rates and your cost of capital to increase as you look forward to next year?

Joey Agree -- President and Chief Executive Officer

I hope so. Look, I hope our cost of capital goes down and I hope cap rates gap out. I can only tell you what we're seeing in about that 70-day period and that's why I've been very clear about Q3. We're just starting to build Q4 right now.

Again, we see more sellers, institutions, retailers, one-off developers, you name it, come across the line and say, all right. We're ready to do something here. Heading into 2024, I wish I had my crystal ball and I could make those predictions. But look, this is a volatile environment, but what we've seen year to date is six, seven to six, eight.

And what I've telegraphed already in Q3 is a larger volume number and a higher yield. Q4, ask me in about 60 days and we'll have full clarity.

Linda Tsai -- Jefferies -- Analyst

Great. Thank you.

Joey Agree -- President and Chief Executive Officer

Thanks, Linda.

Operator

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

Joey Agree -- President and Chief Executive Officer

Well, thank you, everybody, for joining us. I hope you enjoy the rest of your summer and we look forward to seeing everybody in the upcoming conference season. Thanks again.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Brian Hawthorne -- Director, Corporate Finance

Joey Agree -- President and Chief Executive Officer

Peter Coughenour -- Chief Financial Officer

Unknown speaker

Eric Wolfe -- Citi -- Analyst

Brad Heffern -- RBC Capital Markets -- Analyst

Haendel St. Juste -- Mizuho Securities -- Analyst

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Ki Bin Kim -- Truist Securities -- Analyst

Wes Golladay -- RBC Capital Markets -- Analyst

Ronald Kamdem -- Morgan Stanley -- Analyst

Linda Tsai -- Jefferies -- Analyst

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