Agree Realty - Earnings Call - Q1 2025
April 23, 2025
Executive Summary
- Q1 2025 delivered resilient growth: Core FFO per share rose 3.1% to $1.04 and AFFO per share rose 3.0% to $1.06, while GAAP diluted EPS was $0.42. Revenue grew 13.2% year over year to $169.16M.
- ADC raised FY2025 investment guidance to $1.3–$1.5B (from $1.1–$1.3B) and lifted AFFO/share guidance to $4.27–$4.30 (from $4.26–$4.30), reflecting a stronger pipeline and ample liquidity.
- Earnings beat Wall Street: Primary EPS of $0.459 vs $0.427 consensus and revenue of $169.16M vs $166.53M; beats driven by portfolio expansion and stable credit performance; treasury stock method dilution of ~$0.02 remains a headwind to full-year AFFO per share.
- Balance sheet and funding catalysts: ~$1.9B liquidity, commercial paper program (up to $625M), and ~$920M forward equity provide visibility into cost of capital and support accelerated investment activity; monthly dividend increased to $0.256 for April.
What Went Well and What Went Wrong
What Went Well
- “We invested over $375 million across our three external growth platforms,” the largest quarter since Q3’23; acquisitions of $358.9M at a 7.3% cap rate and 13.4-year WALT, supporting durable cash flows.
- Liquidity and hedges underpin growth: ~$1.9B total liquidity; $325M forward-starting swaps fixing a contemplated 10-year base rate ~3.9%; ~$920M forward equity, enabling execution despite volatility.
- Active asset management: re-leasing Big Lots boxes to stronger tenants with material rent lifts (e.g., +50% at Cedar Park to ALDI; >150% net effective lift on Virginia site), reducing vacancy risk.
What Went Wrong
- Occupancy dipped temporarily to 99.2% due to remaining Big Lots, though management expects resolution by end of Q2.
- Treasury stock method dilution estimated at ~$0.02 for FY2025 AFFO/share, constraining the upside from increased investment volume.
- Macro tariff uncertainty persists; while ADC’s necessity retail exposure is structurally advantaged, higher input costs can pressure certain categories and create episodic volatility.
Transcript
Joey Agree (CEO)
Good morning and welcome to the Agree Realty first quarter 2025 conference call. All participants will be in a listen-only mode. Should you need assistance, 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. Please limit yourself to two questions during this call. Note this event is being recorded. I would now like to turn the conference over to Reuben Treatman, Senior Director of Corporate Finance. Please go ahead, Reuben.
Reuben Treatman (Senior Director of Corporate Finance)
Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's first quarter 2025 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, including statements related to our updated 2025 guidance. 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-Q, 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 AFFO, and net debt to recurring EBITDA.
Reconciliations of our historical 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 (CEO)
Thanks, Reuben, and thank you all for joining us this morning. We are extremely pleased with our performance in the first quarter of 2025 as we invested over $375 million across our three external growth platforms while further strengthening our best-in-class portfolio. This represents the largest quarter of investment volume since the third quarter of 2023 and is characteristic of the accelerating activity that we're seeing across our three platforms. While the macroeconomic environment remains volatile and unpredictable, our company remains a bastion of stability and poised for growth. Our liquidity, bolstered by our outstanding forward equity and swaps, combined with our preeminent cost of capital, position Agree Realty to again take advantage of market dislocations and disruptions. Year to date, we have added over a dozen team members, initiated several systems improvements, and sequenced multiple process improvements to accelerate our investment activities.
This growing investment activity is supported by a fortress balance sheet with $1.9 billion of liquidity and over $1.2 billion of hedge capital. During the quarter, we raised another $181 million of forward equity via our ATM program, effectively replenishing amounts settled in the first quarter and maintaining an ample runway to execute our growth strategy. With no material debt maturities until 2028 and pro forma net debt to recurring EBITDA of just 3.4x the quarter end, our fortified balance sheet provides significant flexibility and protection against capital markets volatility. Our balance sheet is paired with what we view to be the country's leading retail portfolio. We launched the acquisition platform in 2010 with a focus on recession-resistant retailers that have adapted to a comprehensive omnichannel strategy.
Although we have yet to experience a traditional recession since its inception, our portfolio has proven to be pandemic-proof, and we remain confident it will be tariff-resistant. We have and will remain focused on the country's biggest and best retailers that sell necessity goods and services. Many of these retailers benefit from the trade-down effect during tougher economic times, and they have the scale and balance sheet strength to mitigate higher input costs and withstand margin pressure. While tariff headlines continue to evolve and dominate the news flow, ultimately, we believe the big will continue to get bigger in this environment, further validating our investment philosophy over the past 15 years. Given our robust investment pipeline across our three external growth platforms, we've increased our investment guidance range from $1.1 billion-$1.3 billion to $1.3 billion-$1.5 billion for the year.
At the midpoint, this represents a 47% increase over last year's investment volume. As I mentioned, all three of our investment platforms continue to find compelling opportunities that hurdle both our qualitative and quantitative analysis. While increasing our investment guidance for the year, we will remain disciplined and thoughtful in our approach to asset underwriting and portfolio construction during these volatile times. In addition, we are raising the low end of our full-year AFFO per share guidance by a penny to a new range of $4.27-$4.30, representing over 3.5% growth at the midpoint and demonstrating the durability of our cash flows. As a reminder, this number includes realized the potential treasury method dilution due to our significant forward equity position. Peter will provide additional details on our guidance range and the input shortly.
Raising our investment and earnings guidance amid the current macroeconomic uncertainty demonstrates that our company is built for all markets. We thrive in periods of uncertainty where we can leverage our speed, relationships, exceptional team, balance sheet flexibility, and superior cost of capital. We launched the acquisition platform on the heels of the GFC in 2010, doubled the size of the company during the depths of the pandemic, and are always positioned to take on the next challenging economic period. Turning to our external growth activity, we had an active start to the year, leveraging our unique market positioning and deep relationships with retail partners to uncover opportunities across all three platforms. During the first quarter, we invested over $375 million in 69 properties across all three platforms. This includes $359 million of acquisitions across 46 assets.
Acquisitions during the quarter included a lender-owned Home Depot in California, a sale-leaseback with a leading national grocer, an Albertsons-backed Acme grocery store in Bronxville, New York, an off-market portfolio from a relationship seller, a CarMax ground lease in Colorado, as well as approximately 40 one-off transactions. Our acquisition activity remains focused on industry-leading necessity-based retailers. The properties acquired in the first quarter leased to operators in sectors including grocery, off-price, auto parts, convenience stores, and tire and auto service. The acquired properties had a weighted average cap rate of 7.3% and a weighted average lease term of 13.4 years. Nearly 69% of base rent acquired was derived from investment-grade retailers, and we continued to add to our ground lease portfolio during the quarter. We continue to see increased activities across our development and DFP platforms as well.
During the first quarter, we commenced four new development or developer funding projects with total anticipated costs of approximately $24 million. Construction continued on 14 projects during the quarter with aggregate anticipated costs of approximately $80 million. We also completed six projects during the quarter representing a total investment of approximately $27 million. These projects are with several leading retail partners, including TJX Companies, Burlington, 7-Eleven, Boot Barn, Starbucks, Gerber Collision, and Sunbelt Rentals. Our development and DFP pipeline continue to grow with several upcoming starts to be announced in the near future. Our asset management team continues to proactively address upcoming lease maturities. We executed new leases, extensions, or options on over 584,000 sq ft of gross leasable area during the first quarter.
This included a Walmart Supercenter on Rancho Cordova, a Home Depot in Farmington, New Mexico, and 16 geographically diverse AutoZone leases comprising over 100,000 sq ft. We remain well-positioned for the remainder of the year with only 30 leases or 90 basis points of annualized base rents maturing. Quarter-over-quarter, our pharmacy and dollar store exposure declined 20 and 30 basis points respectively. We have been clear that our exposure to both of these categories peaked within our portfolio before their challenges had become newsworthy. As of quarter end, our best-in-class portfolio comprised 2,422 properties spanning all 50 states. The portfolio includes 231 ground leases comprising nearly 11% of annualized base rents. Our investment-grade exposure stood at 68.3%, and occupancy remained solid at 99.2%. This number represents a temporary dip as we continue to resolve the former remaining Big Lots in our portfolio.
Our second former Big Lots in Cedar Park, Texas, was successfully re-leased to Aldi at a net effective rental lift of nearly 50% during the quarter, while an additional store was acquired during the bankruptcy process for Variety Wholesalers. Rent has already commenced on both of these locations. We anticipate further announcements on the next call about the remaining Big Lots in our portfolio. With that said, I'll hand the call over to Peter to discuss our financial results for the quarter.
Peter Coughenour (CFO)
Thank you, Joey. Starting with the balance sheet, we remained active in the capital markets during the first quarter, raising approximately $181 million of forward equity via our ATM program. We also settled 2.7 million shares of forward equity for net proceeds of approximately $183 million. Additionally, we established our inaugural $625 million commercial paper program during the quarter. The program allows us to tap into another pool of short-term capital and further diversifies our balance sheet. We anticipate that we will be able to efficiently fund our short-term capital needs on the program at rates that are substantially lower than our revolving credit facility today. Since the end of last quarter, we have taken further steps to hedge against interest rate volatility by entering into $125 million of forward-starting swaps.
In total, we now have $325 million of forward-starting swaps, effectively fixing the base rate for a contemplated 10-year unsecured debt issuance at roughly 3.9%. Combined with approximately $920 million of outstanding forward equity, we have over $1.2 billion of hedge capital, which provides critical visibility into our intermediate cost of capital, particularly during this uncertain period. At quarter end, we had liquidity of approximately $1.9 billion, including the aforementioned forward equity and availability on our revolving credit facility. Pro forma for the settlement of all outstanding forward equity, our net debt to recurring EBITDA was approximately 3.4x. Excluding the impact of the unsettled forward equity, our net debt to recurring EBITDA was 4.9x. Our total debt to enterprise value is under 26%, and our fixed charge coverage ratio, which includes the preferred dividend, remains very healthy at 4.3x.
Our only floating rate exposure was comprised of amounts outstanding on the revolver at quarter end, and as Joey mentioned, we continue to have no material debt maturities until 2028. Our balance sheet is extremely well-positioned to execute on our accelerating investment activity across all three external growth platforms. Moving to earnings, core FFO per share was $1.04 for the first quarter, which represents a 3.1% increase compared to the first quarter of last year. AFFO per share was $1.06 for the quarter, representing a 3% year-over-year increase. As Joey highlighted, we have updated our full-year 2025 outlook to reflect our strong start to the year. We raised the low end of our full-year AFFO per share guidance to a new range of $4.27-$4.30, which implies year-over-year growth of more than 3.5% at the midpoint.
We provide parameters on several other inputs in our earnings release, including investment and disposition volume, general and administrative expenses, non-reimbursable real estate expenses, as well as income tax and other tax expenses. In addition to those inputs, our earnings guidance for 2025 includes anticipated treasury stock method dilution related to our outstanding forward equity. As a reminder, if ADC stock trades above the net price of our outstanding forward equity offerings, the dilutive impact of unsettled shares must be included in our share count in accordance with the treasury stock method. Provided that our stock continues to trade near current levels, we anticipate that treasury stock method dilution will have an impact of roughly two pennies on full-year 2025 AFFO per share. That said, the impact could be higher if our stock moves materially above current levels or if we were to issue additional forward equity.
Our growing and well-covered dividend continues to be supported by our consistent and durable earnings growth. During the first quarter, we declared monthly cash dividends of $0.253 per common share for January, February, and March. The monthly dividend equates to an annualized dividend of almost $3.04 per share and represents a 2.4% year-over-year increase. Our dividend is very well covered with a payout ratio of 72% of AFFO per share for the first quarter. We anticipate having almost $120 million in free cash flow after the dividend this year, up approximately 15% from last year. We view this as another source of cost-efficient capital while maintaining a robust and growing dividend. Subsequent to quarter end, we announced an increased monthly cash dividend of $0.256 per common share for April.
The monthly dividend equates to an annualized dividend of over $3.07 per share and also represents a 2.4% year-over-year increase. With that, I'd like to turn the call back over to Joey.
Joey Agree (CEO)
Thank you, Peter. Operator, at this time, let's open it up for questions.
Operator (participant)
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Ki Bin Kim at Truist. Go ahead.
Ki Bin Kim (Analyst)
Thank you. Good morning. Joey, you guys raised investment guidance by $200 million. You guys also mentioned the treasury stock dilution method. Were there other detracting items? Because I would have thought you guys raising that much of your investment guidance that the AFFO guidance would have been more than half a cent. Thank you.
Joey Agree (CEO)
Yeah, good morning, Ki Bin. No other detractors. Obviously, we've included, as Peter mentioned in the prepared remarks, approximately $0.02 of treasury method, anticipated treasury method dilution that's already hit the P&L, but also throughout the year. Obviously, we can't predict the stock price on a daily or for an annual basis here, but we've been conservative, we think, and appropriately included that treasury method dilution as it incurs and what's incurred to date. Peter can talk about any other puts and takes in there, but that's really the only offset to the investment increase.
Peter Coughenour (CFO)
Ki Bin, yeah, this is Peter. In terms of other puts and takes, to Joey's point, really no other offsets. If you think about the incremental $200 million of investment spend this year, subject to timing of that investment spend and spread, we think that that should translate to about $1 million or so of incremental earnings or about a penny. Obviously, at the low end of our guidance range, we took up the range by a penny. We did not touch the top end. That is really a reflection of the fact that we do anticipate treasury stock method dilution will be closer to that two pennies rather than one to two pennies, given where we are trading currently. Obviously, that remains subject to where we trade for the remainder of the year and any other capital markets activity throughout the year as well.
Ki Bin Kim (Analyst)
I guess it's a high-class problem that your stock price goes higher and creates treasury stock dilution. When does the kind of calculus start to work out so that we can start to get to a plus like 4% type of AFFO per share growth rate or more from Agree?
Joey Agree (CEO)
I think in the near term, obviously, subject to macroeconomic conditions, which are outside of our control, this business is built for that. We made the decision to pre-equitize the balance sheet, put hedges in position in terms of the swaps this year in anticipation of increased volatility. We think that algorithm kicks in there outside of just balance sheet protection and treasury method dilution.
Ki Bin Kim (Analyst)
Okay, thank you.
Joey Agree (CEO)
Thanks, Ki Bin.
Operator (participant)
Thank you. The next question comes from Smedes Rose. Please go ahead.
Smedes Rose (Analyst)
Hi, good morning. I just wanted to ask you a little bit about some of your tenant exposure. It looks like grocery exposure went up by about 90 basis points. Within that, your name tenants Kroger was up. I was just wondering, is that any specific change in your strategy around groceries, or is that more just sort of a one-off opportunity that you found during the quarter?
Joey Agree (CEO)
Good morning, Smedes. That was a one-off opportunity predominantly in the quarter. I also mentioned the Acme in Bronxville, New York, that we acquired as well. We'll continue to find dominant grocers across the country. There's a number in the pipeline already for the second quarter. We continue to believe that dominant grocers will gain share here, given the macro, obviously, but also just the challenges for small grocers to operate in a 2% margin business, ex tariffs and all the other noise out there.
Smedes Rose (Analyst)
Okay. Maybe just touching on tariffs, given your tenant exposure, is there anyone that you are particularly maybe concerned about or watching more carefully, particularly given the higher tariffs with China specifically, which I realize is kind of a moving, a very fluid situation, but what's on your radar?
Joey Agree (CEO)
I appreciate you acknowledging the moving and fluid situation. It seems to be day to day. I'll be honest, there really is nobody that we're overly concerned with tariff inputs in the portfolio today. Now, all retailers subject to carve-outs and exclusives. Obviously, the electronics carve-out for the Truth Social post or whatever it was last week alleviated concerns for computers and televisions. That could all obviously change. We think this portfolio is in tremendous position to continue to benefit from the trade-down effect. As you mentioned, grocery, obviously, with the economic conditions where they are, people will stop eating out. Auto parts, you've seen that accelerate in our portfolio. Obviously, new cars will be impacted significantly by tariffs. The average new car in this country is already approximately $45,000. That's pre-tariff. Tire and auto service, another category we highlighted during the prepared remarks.
Off-price retail, where when a TJX is in Burlington's largest landlord, we continue to think they'll gain from any tariff implications. We think this portfolio, as I mentioned in the prepared remarks, was built to be recession resistant. We haven't heard it hit a traditional recession since 2010 upon its inception, but it proved to be pandemic resistant, and we're very confident it will be ultimately whatever way, shape, and form tariffs pan out will be tariff resistant as well.
Smedes Rose (Analyst)
Okay. Thank you. Appreciate it.
Joey Agree (CEO)
Thanks, Smedes.
Operator (participant)
Thank you. The next question comes from RJ Milligan at Raymond James. Please go ahead.
R.J. Milligan (Analyst)
Hey, good morning, guys. Joey, I was wondering, as you are having conversations with your development partners, what's their current appetite for opening new stores? Has there been a pause? Just trying to get a broader market read there.
Joey Agree (CEO)
Yeah, good morning, RJ. We have not seen any pause to date, albeit this is a volatile and fast-moving environment. The team was with a number of retailers this week and will be again with two or three in the upcoming couple of days here. We haven't seen a pause. We've actually seen announcements. Sam's Club has announced that they're opening net new stores. Kroger's made announcements in terms of remodels and net new stores in the past two weeks as well. We have not seen that pause. We haven't had any deals, frankly, tabled or put on hold either yet.
Obviously, again, this is a fluid situation, which is out of our control. Again, I think when you have a discount-oriented, necessity-based tenant roster, those tenants today, I don't think, are overly scared by tenant tariffs. I think a lot of them see this as an opportunity. As I mentioned in the prepared remarks, the big are getting bigger. This is what we've effectively built this portfolio and constructed around, to invest in price if they have to, to invest in labor and invest in omnichannel fulfillment. Tariffs will require retailers to effectively invest in price unless they're going to pass that entire tariff on to the end consumer.
R.J. Milligan (Analyst)
Thanks. That's helpful. I wanted to move over from a portfolio standpoint. Is there any tenants out there?
Obviously, this is not really tariff-related where you're just keeping a watch on them and saying, "X the tariffs," there might be some fundamental issue?
Joey Agree (CEO)
No new entrants into that. Obviously, what are the three movie theaters total in the portfolio? We continue to watch. We have been proactive in reducing, as I mentioned, the prepared remarks, dollar store and pharmacy exposure since 2023. That was prior to the headlines in 2024. There are really no changes to our watch list here.
R.J. Milligan (Analyst)
Just one last follow-up. In terms of cap rates, where do you think we end the year in terms of Agree's acquisition cap rates? Is it going to be higher or lower? And sort of how do you think about the inputs there?
Joey Agree (CEO)
RJ, to be frank, I have no idea.
The volatility in the 10-year Treasury, which has been historically, obviously, the base rate for the world, the fear-greed spectrum continues to vacillate. Obviously, we're on the fear side. We are just starting effective Monday, building our Q3 pipeline, just given our 66 days-67 days letter of intent to close. I think this is going to be a volatile world. I think it's going to change. I think the volatility doesn't effectively move cap rates as a secondary impact. I think the volatility that we were, frankly, accustomed to, all of us are accustomed to, inclusive of real estate owners, or when you have 10%-15% swings in the 10-year Treasury, these used to be aberrations. They seem to happen on a monthly basis now, if not a daily basis with 3%-5% swings. None of this volatility effectively moves cap rates.
Ultimately, I believe that owners of real estate and perhaps those that have secured interests in real estate ultimately make disposition or investment decisions based upon the fear-greed spectrum. The 10-year going sub 4 or the 10-year piercing 5 can move cap rates. With the 10-year moving between 4.2 and 4.6 and just using a band here, I do not think that ultimately moves cap rates in any material way just because of the, frankly, people being accustomed to that volatility. Great.
R.J. Milligan (Analyst)
That is it for me. Thanks, guys.
Joey Agree (CEO)
Thanks, RJ.
Operator (participant)
Thank you. The next question comes from Michael Goldsmith at UBS. Please go ahead.
MIchael Goldsmith (Analyst)
Good morning. Thanks a lot for taking my question. Maybe a similar question that was just asked, but from a different angle. Have you seen any changes in the transaction market post the April 2nd tariff announcement? Maybe not directly from the tariff, but just from the overall uncertainty. You sort of touched on the cap rate environment, but are you seeing any changes in competition or any deals pulled just given the uncertainty?
Joey Agree (CEO)
No deals pulled. Competition remains extremely limited. Obviously, the 1031 buyer has effectively been cut in over half just due to commercial real estate transactional volume being down by half, the lack of liquidity in investment markets, just frankly, in the lending markets. We see very limited competition. I often make the analogy I did during fourth quarter of a door versus a window. We see a door here. Our balance sheet, our cost of capital, as I mentioned, as well as our portfolio and the tremendous team here we have, is going to take advantage of that opportunity. We took advantage of the opportunity during the GFC. We took advantage of the opportunity during COVID, obviously, when we doubled the size of the company.
We see a like-kind opportunity potentially on the horizon, obviously subject to the next Truth Social post here and changes in the macro. With limited competition across all three investment platforms and with our core strengths here, this is a tremendous opportunity for our company to continue to grow this portfolio in a creative manner and solidify it as the preeminent and at least portfolio in the country.
MIchael Goldsmith (Analyst)
Thanks for that. As a follow-up, on slide 22 of your presentation, you highlight what you're investing in or what you're not, and you call out the avoidance of private equity sponsorship. Just given where we are in the cycle and the uncertainty, what's been your experience with private equity sponsorship at this point in the cycle, just given some of that uncertainty? Thanks.
Joey Agree (CEO)
Ultimately, and this isn't for this part of the cycle, we seek to work and partner with retailers that have a long-term perspective on the operations of their business. Special dividends, levering up the balance sheet, OpCo-PropCo structures, sale-leasebacks to improve liquidity and, frankly, in order to special dividend it out, probably. Those just aren't things that we believe work in a 21st-century omnichannel world, which is hyper-competitive. We'll continue to focus on our sandbox as the 30-35 biggest and best retailers in this country, rated or unrated, and a few sub-investment grade rated retailers that are selling essential goods and services that have long-term sponsorship and ownership. Frankly, private equity doesn't match that duration for us.
MIchael Goldsmith (Analyst)
Thank you very much. Good luck in the second quarter.
Joey Agree (CEO)
Appreciate it.
Operator (participant)
Thank you. The next question comes from Linda Tsai at Jefferies. Please go ahead.
Linda Tsai (Analyst)
Hi. The temporary occupancy dip from Big Lots, would that be resolved by year-end?
Joey Agree (CEO)
Oh, yeah. I would anticipate that would be resolved much sooner than year-end, most likely by the end of the second quarter. We've resolved a number of them. The off-price retailer in Manassas, Virginia, was the first one where we have a net effective lift, Peter, to jump over 150%. A net effective lift of over 150%. Cedar Park, Texas, is released with a net effective rent lift of approximately 50% to a large German-based grocer. Then Fuquay-Varina was acquired in the bankruptcy by Variety Wholesalers, and we're working through those others to have optimal solutions here, but we think they will be favorable and not a concern.
Linda Tsai (Analyst)
For the 50%-150% rent uplift, is there CapEx involved?
Joey Agree (CEO)
That's a net effective basis, not same-store NOI. The lease that we purchased in bankruptcy, we purchased for a couple hundred thousand dollars, and that was the only truly expense on that. It was an as-is basis. Same with the grocery in Cedar Park, Texas, with that approximate 50% net effective rent lift. The Variety Wholesalers, they came current, and so that's just the same rent as Big Lots was paying prior. We continue to work on leasing a number of these assets and have letters of intent in hand from large national retailers predominantly. That's our focus there, our first order of business. We hope to further expand upon it on the Q2 call.
Linda Tsai (Analyst)
The comment about drug and dollar stores peaking in your portfolio before it became newsworthy, what were you looking at to recognize this trend? Was it shifts in traffic or rent coverage?
Joey Agree (CEO)
Different perspectives on each sector. Pharmacy, we've been pretty adamant about Walgreens exposure. We were pretty adamant about Rite Aid's future, that bankruptcy and liquidation will occur any day, most likely now. Obviously, that's been a theme through the past 15 years of our history in terms of Walgreens dispositions going from over 40% to sub 1%. Most importantly, as we talked about on other calls, 13,000-14,000 sq ft boxes with approximately 11,000 sq ft of front-end space paying $20-$30 per sq ft that really isn't relevant in today's world. It isn't something that we're overly attracted to. That said, we'll continue to work on unique pharmacy opportunities where we think the basis is rental basis is appropriate or high store sales or barriers to entry.
I'd remind everyone, our largest two pharmacy exposures in terms of asset size are Greenwich, Connecticut, on Greenwich Avenue, the CVS, and the Walgreens on the corner of the Diag, the best piece of real estate, and the University of Michigan. The pharmacy space, we've obviously made a considered effort to reduce. Dollar stores, we just saw them being overbuilt, frankly. We took advantage in 2023 of merchant developers that were stressed and took some of those properties out. We've never engaged in a sale-leaseback with a dollar store operator. Very different themes running through Dollar General and Dollar Tree Family Dollar, but we saw the space is overbuilt. We were having challenges getting our arms around the pricing in conjunction with the residual. You'll see, and I mentioned in the prepared remarks that they fell year-over-year, quarter-over-quarter.
They peaked in 2023, and we were pretty clear on the Q3 2023 call that that would be the case.
Linda Tsai (Analyst)
Thanks for that helpful context. Just one last one. The dozen team members you added, what departments were they located in, and has AI reduced the need to staff up in other areas?
Joey Agree (CEO)
Certainly. To roll back the clock, 2024, obviously, we started with the do-nothing scenario, effectively a hiring freeze. We are more than caught up now. This is all built into our G&A forecast for the year that we've provided to the street. Those team members are strewn across the entire organization from HR to IT to acquisitions, construction, development, analyst, accounting, asset management, lease administration. We are built and poised for growth. Simultaneously, we have deployed, effective in the last month, a new AI module, which is eliminating legal costs significantly for us. We got an update actually yesterday from our general counsel that we're very pleased with the results, continue to make some tweaks there. AI will continue to be deployed throughout this company. We have been utilizing AI for lease abstraction. Again, Peter, correct me?
Peter Coughenour (CFO)
Dating back to 2022.
Joey Agree (CEO)
Yeah, dating back to 2022 when no one was talking about AI. We think there's significant opportunities both within our underwriting as we launch the next iteration of ARC in 2026 to deploy AI, but also, I would tell you, significantly in overall transactional expense.
Linda Tsai (Analyst)
Thank you.
Joey Agree (CEO)
Thanks, Linda.
Operator (participant)
Thank you. The next question comes from John Kilichowski at Wells Fargo. Please go ahead.
John Kilichowski (Analyst)
Thank you. Good morning. Joey, you touched on this briefly earlier, but how will tariffs if they stay on impact your go-forward strategy as it relates to investments? And if so, would you not expect tighter pricing on those assets?
Joey Agree (CEO)
I don't think tariffs impact our go-forward strategy really at all. I don't think tariffs ultimately impact. I think all retailers will be subject to various levels of tariffs if this continues to go down this route. I think, effectively, the biggest retailers in the country that sell necessity-based goods and services will benefit. You'll continue to see us invest in the Walmarts and Home Depots and Lowe's and O'Reilly Auto Parts, AutoZone, the dominant tire and auto service operators, dominant C stores throughout the country, off-price retail. I think all of these sectors are effectively winners in a large tariff environment. There may be some short-term pain, but long-term, they have the balance sheets, the market position to continue to thrive.
John Kilichowski (Analyst)
Got it. In a similar vein, on the bad debt and non-reimbursable side, is it just too early to change your outlook, or do you feel very comfortable with the conservatism already built in?
Joey Agree (CEO)
I'll let Peter hit it. I think it's pretty early to change the outlook. Obviously, that outlook incorporated the few Big Lots that we continue to work through. I think it's, frankly, pretty early here in the middle of April.
Peter Coughenour (CFO)
Yeah. John, just to hit specifically on credit loss and our guidance for the year, our 2025 earnings guidance, as I mentioned on the last call, includes an assumption for 50 basis points of credit loss. That included an allowance for Big Lots, as we've talked about on this call. In Q1, we experienced roughly 30 basis points of credit loss, and that compares to the 35 basis points roughly that we experienced in 2024. Based on what we have line of sight into today, we feel good about the credit loss guide embedded within our earnings guidance and how the portfolio is continuing to perform.
Joey Agree (CEO)
Just to expound upon our 50 basis points of credit loss a little bit. That 50 basis points is a fully loaded number for any lease expirations where we are carrying a vacancy, taxes, insurance, maintenance of the building, any rejections in bankruptcy, again, where we are carrying any taxes, maintenance, any expenses. That 50 basis points has no carve-outs, has no footnotes, has nothing in there. That is a fully loaded 50 basis points that we put in there that is akin to our underwriting on the acquisition side, right, to truly understand the full economic impact and to provide the street transparency into that full economic impact.
John Kilichowski (Analyst)
Just to confirm, the 40 basis points of occupancy loss, would that have been included?
Joey Agree (CEO)
Yep. That's specifically tied to the remaining Big Lots and is included in that number.
John Kilichowski (Analyst)
Okay. Perfect. Thank you.
Operator (participant)
Thank you. The next question comes from Ronald Kamden at Morgan Stanley. Please go ahead.
Ronald Kamdem (Analyst)
Hey, just two quick ones. Just going back to the development and the DFP platform, any sort of early indications of how much construction costs could be going up and how are you guys thinking about sort of your yield requirements for that channel?
Joey Agree (CEO)
Yeah. Great question, Ronald. We have done a preliminary and had third parties also do studies on tariff implications. Obviously, a moving target. The tariffs would mostly affect, obviously, the hard costs, call it the vertical costs here in terms of construction. We would anticipate a 2%-5% on the high-end increase in tariffs. Obviously, those assumptions have to be broken out by country. Some of them are indirect in terms of input costs at the final finished product here. We do not think there is any material moves in our construction costs for tariffs here. Again, these projects are effectively rectangles. We have our arms around them. Your second question, sorry, Ronald?
Ronald Kamdem (Analyst)
Yeah. Sorry. Part two. Just I don't think we've hit on sort of the dispositions yet. Just any sort of thought, indication there would be helpful.
Joey Agree (CEO)
Yeah. Didn't change the guidance for this quarter. Didn't change our annual guidance. I don't think you'll see us change that annual guidance this year unless there's some sort of change, frankly. I think we have done a tremendous job weaning out assets that we didn't think were core in the portfolio over the last several years. That said, we'll look at opportunistic dispositions. We have inbounds all of the time. We'll continue to look for opportunities to prune the portfolio as we get feedback, either on the ground level or the corporate level, or if we just think something is above market and the retentability is limited. I don't see dispositions being a major contributor in terms of capital this year.
We will continue, obviously, to be active on that front, but I do not think it is a priority as it was last year when we were focused on recycling capital.
Ronald Kamdem (Analyst)
Helpful. Thank you.
Joey Agree (CEO)
Ronald.
Operator (participant)
Thank you. The next question comes from Spenser Allaway at Green Street. Please go ahead.
Spenser Allaway (Analyst)
Thank you. Just one for me. As you started working through your Q2 acquisition pipeline, have you guys observed any cap rate movements or changes to the bid-ask spread in any particular retail segments?
Joey Agree (CEO)
No. Good morning, Spenser. Q2 is effectively built, right? Subject to diligence and closing, Q2 is effectively built. Just using that 65-day plus transaction timeline from letter of intent execution, we're effectively to close. We're effectively through Q2. If you look at the volatility in the 10-year Treasury during that 65 day-70 day sourcing period, obviously, the 10-year dropped, then it pulled back up. Having a hedged position in terms of both forward equity and the swaps in place allows us to be, frankly, consistent. This is not, we're not in a situation where we have to constantly be changing our targets in terms of yield hurdles. We'll see how Q3 now plays out. Again, that sourcing effectively starts on Monday or Friday of this week, just given our traditional transaction timeline.
Frankly, I have no idea what the next, again, what the next move from the administration will be, where the 10-year Treasury goes, where our stock price goes. The good news is we're locked and loaded, and we'll come into it with a running start here.
Spenser Allaway (Analyst)
Okay. Understood you have the pricing power, I guess, and you don't have to be volatile, as you mentioned, in terms of your cost of capital. Did you observe anything in terms of tenant ask or where kind of pricing expectations were on the other side of the bidding?
Joey Agree (CEO)
Not really. I tell you, the only thing we noticed is some of the larger institutions that would like to play in the space, given the dislocation in the debt markets, could be out for a little while here as spreads widened out or the 10-year Treasury yield spiked. Again, I forewarn everyone. Number one, our sale-leaseback is a minority of what we do. We're traditionally a third-party acquirer. We think we create more value there rather than being just a financier of real estate. Number two, drawing parallels or even putting threads through transactions in this massive, fragmented, individually owned market called net lease is very difficult. I gave some examples of the transactions that we executed on the acquisition front in Q1. They were wholly disparate from a sale-leaseback with a national grocer to a portfolio with a relationship seller.
It's our probably seventh or eighth transaction with that seller to a family office that owned the Bronxville Acme grocery store. The seller pool remains extremely disparate. We're seeing more institutions come to the table to recycle capital and potentially dispose of assets. We're in those types of conversations. We're also in the midst of a conversation with an 80-plus-year-old widow about a transaction who effectively owns a portfolio that her husband acquired. At the end of the day, the aggregation of those transactions comprised the quarter. I always say the most exciting part about this business is you never know where the next one's going to come from.
Spenser Allaway (Analyst)
Great. Thank you.
Joey Agree (CEO)
Thanks, Spenser.
Operator (participant)
Thank you. The next question comes from Jana Galan at Bank of America. Please go ahead.
Jana Galan (Analyst)
Thank you. Good morning. Just following up on the commercial paper program, Peter, can you quantify the spread relative to the revolver and if this benefit is included in the updated guidance, or did you already plan to launch the program with the initial guide?
Peter Coughenour (CFO)
Sure. Just in terms of pricing on the commercial paper program, obviously, we closed on the program on March 31st, dependent on the tenor of commercial paper notes that we're issuing, as well as conditions in the commercial paper market, which are subject to change. Today, we think we can issue commercial paper notes, 40-plus basis points inside of our borrowing cost on the revolver. The current borrowing cost on the revolver at quarter-end was around 5.2% for reference. To date, so far in Q2, we have been active in the CP market and use that for short-term borrowings. In our current guidance range, we have contemplated the impact of using commercial paper throughout the year as appropriate.
Jana Galan (Analyst)
Thank you. I know you think of your kind of long-term WACC, but just between this and the swaps that you have in place, I mean, I think investment spreads should be kind of at historic highs currently. Can you maybe comment to that?
Joey Agree (CEO)
I would agree, absent the depths of the pandemic when rates were at effectively zero and we were issuing 10-year paper at +2 % and perpetual preferred at 4.25%. There's no doubt that our investment spreads are wide. We'll be the beneficiary of those investment spreads and our superior cost of capital here, but we are no doubt in an advantageous position.
Jana Galan (Analyst)
Thank you.
Joey Agree (CEO)
Thanks, Jana.
Operator (participant)
Thank you. The next question comes from Jim Kammert at Evercore. Please go ahead.
Jim Kammert (Analyst)
Hi. Good morning. Thank you. Joey, obviously, you had the conviction to raise your investment volume for the year. Has that really built just expanding with your existing relationships, or have you kind of started to identify additional partners?
Joey Agree (CEO)
All over the board, Jim. It's existing relationships. It's additional partners. It's the breadth and depth of the coverage that this team has across the country. Look, we are the go-to buyer for net lease retail, high-quality net lease retail assets bar none today. I think our transactional history, the quality of the team, our marketing and e-marketing campaign, they all inure to our benefit here. Our ability to look at real estate with a different lens, our relationships with the retailers, the end users of these properties is the secret sauce, part of the secret sauce. It's all of the above and more.
Jim Kammert (Analyst)
Great. More of a technical question. The ground leases have about a nine-and-a-half-year remaining WALT. Remind me, is that through final expiration, or is that really just a first potential extension? Because I'm kind of thinking about potential organic growth opportunities if they so any help there? Thank you.
Joey Agree (CEO)
That's exclusive of options just as WALT is for the remainder of the portfolio.
Jim Kammert (Analyst)
Got it. Thank you, guys.
Joey Agree (CEO)
Thanks, Jim.
Operator (participant)
Thank you. The next question comes from Upal Rana at KeyBanc Capital Markets. Please go ahead.
Upal Rana (Analyst)
Great. Thank you. Joey, you mentioned seeing more opportunities in the development and DFP side, and you know the increasing construction costs as well, but just wondering how big do you think the development pipeline could potentially get from here?
Joey Agree (CEO)
We have set that medium-term target of putting $250 million in the ground per year. We are on track. Again, that is a medium-term target, not for this year. We are on track. Our pipeline and our shadow pipeline are very large. They are obviously subject to diligence and closing conditions, sometimes entitlements as well. I would tell you very distinctly, our development platform and the team has done a tremendous job. We have added team members that have really hit the ground running, and Craig Erlich and his team, our Chief Growth Officer, are working with retailers all the time, has a very significant pipeline. Then our developer funding platform continues to benefit from just the lack of liquidity out there, as well as unknown exit cap rates through other third-party developers. We have used our developer funding platform as a bridge to get projects across the finish line.
A lot of them are directed to us by retailers, some sourced by the acquisition team, by our development team here. Both pipelines, they don't get a lot of headlines. Both pipelines, we think, combined with our acquisition and active asset management platform, provide really a full service value proposition to retailers. It is recognized by all of them today that we can step into any and all types of situations and, frankly, create value and provide for value in that partnership.
Upal Rana (Analyst)
Okay. Great. That was helpful. Just a quick follow-up on the commercial paper program. Does this put ADC in a position to push more on investments in the future, especially combined with your increase in team members?
Joey Agree (CEO)
No. I think the commercial paper program, as Peter mentioned, while it's priced inside of the revolving credit facility, we don't use a revolver or short-term cost of capital to impact or even in our calculus for our weighted average cost of capital. These are short-term borrowing needs. The commercial paper program effectively supplants the use of the credit facility at cheaper pricing, but that does not impact how we look at deals or impact our weighted average cost of capital.
Upal Rana (Analyst)
Okay. Great. Thank you.
Joey Agree (CEO)
Thank you.
Operator (participant)
Thank you. The next question comes from Richard Hightower at Barclays. Please go ahead.
Richard Hightower (Analyst)
Hey. Good morning, guys. Thanks for taking the question. I really just got one, but I want to go all the way back to Ki Bin's line of questioning to start the call just on equity issuance. Now, I think we all appreciate the TSM dilution conundrum and things like that, but it is sort of a high-class problem. It looks like equity issuance went down quarter-over-quarter relative to the fourth quarter. Stock price has done, obviously, very well, absolute and relative year to date. Maybe why not lean in a little more to equity issuance in this environment, especially if it seems like the acquisition pipeline is biased to get bigger, not smaller? Thanks.
Joey Agree (CEO)
I think if you look at the amount settled during Q1 of existing forward or formerly existing forward, net of what we issued, we effectively ended up neutral, right? 3.3x, 3.4x, just over $180 million each. The balance sheet, while deploying $370 million approximately, ended up effectively in a neutral position. We continue to have nearly $2 billion in hedged capital. We have significant liquidity. We are in or $2 billion in liquidity, excuse me, and $1.3 billion of hedged capital approximately. We are in a terrific position here from a balance sheet of liquidity and cost of capital perspective to execute it on our pipeline. Does that answer your question?
Richard Hightower (Analyst)
Yeah, it does. I mean, I didn't know if there was any sort of internal back and forth on if it makes sense to go any bigger in that light. Obviously, you guys are in a really great position. No one would dispute that. Actually, if I may ask a quick follow-up, just again on bad debt, I think you guys have articulated pretty clearly how that gets built up. Just to be clear, is that a, it sounds like from your perspective, given the credit worthiness of the tenant base, it really is kind of a bottoms-up, location by location, tenant by tenant situation build-up to get to that 50 basis points.
Is there any sort of general credit overlay on top of that that gets you to the 50, or is it really sort of highly, highly specific as it sounds, at least from my end?
Peter Coughenour (CFO)
Yeah. Thanks, Richard. This is Peter. I think in terms of the build-up and how we think about that 50 basis points of credit loss, I mentioned in the first quarter, we had roughly 30 basis points of credit loss. To answer your question, it is a location by location and tenant by tenant build-up that we look at as we think about credit loss. Based on what's identified or known today, I think the 30 basis points that we experienced in Q1, we anticipate more or less seeing throughout the remainder of the year. We have some level of cushion, if you will, built into that 50 basis points that allows for other potential tenants that we're monitoring, but there's not a known issue today.
Richard Hightower (Analyst)
Okay. Helpful. Thank you, guys.
Joey Agree (CEO)
Thank you.
Operator (participant)
Thank you. We have no further questions. I will turn the call back over for closing comments.
Joey Agree (CEO)
Thank you all for joining us this morning. We look forward to seeing everybody at the upcoming conferences, and we appreciate your time. Thank you.
Operator (participant)
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.