So I tell you, it will be interesting to see how cap rates. I would hope we’ll see more of those types of instances here. But a lot of it is driven, frankly, by sellers’ hesitancy to transact in a market when they were hoping for a March cut. Now they’re hoping for a June cut or a September cut. And so, there’s obviously murkiness to the overall environment from a seller’s perspective, at least.
Operator: Thank you. Next question comes from Ronald Kamdem from Morgan Stanley. Please go ahead.
Ronald Kamdem: Hey, two quick ones. Just on starting with the guidance, just what are you guys thinking in terms of bad debt, what’s baked into that number, and how does that compare to historical?
Peter Coughenour: Yes. So, Ron, this is Peter. Last year, when we came out with the do-nothing scenario of over 3% AFFO per share growth, we talked about embedded in that scenario about 50 basis points of credit loss, which at the time we framed as a conservative assumption. I think that is still a conservative assumption today. And this guidance range contemplates 50 basis points of credit loss. I think, as I’ve talked about historically, our longer-term average is closer to 25 basis points. And particularly with visibility here through April, we view 50 basis points as a conservative level in our guidance range today.
Ronald Kamdem: Great. And then just my second quick one on the acquisitions. I think you talked about the cap rates, but can you talk about sort of sale leaseback activity in the ground lease market? How are things sort of reacting on a cap rate basis with the recent interest rate move?
Joey Agree: Sale leasebacks, most tenants, unless they need the money, are very reticent to enter into the sale leaseback. We’ve had a couple of market today, given the rising rates. We’ve had a couple of discussions in the last week with tenants that are in a holding pattern. We’re working on a potential couple opportunities in Q2. We’ll see if those materialize. But I think sale leaseback activity outside of private equity sponsors here is going to be fairly muted until we get some stability in base rates. And then most of these are IG issuers, right? And so they’re comparing where they can issue in the unsecured market to the sale leaseback market. I think, most importantly, we’re not going to transact with any tenants that need our capital. And so I think they’re being patient and we’re being patient. But there are a couple opportunities out there that we’re looking at.
Ronald Kamdem: And the ground lease market?
Joey Agree: The ground lease market, like I’ve always said, is essentially the same sourcing methodologies and the same ownership pool and the same seller pool as the traditional net lease market. I would note that this quarter, our second largest acquisition was a ground lease to Home Depot in Joliet, Illinois. Everyone can go take a look at it. It’s a dominant retail corridor with 700 feet of frontage. It only has about four years remaining of lease term, paying approximately $600,000 in rent. So to the questions out there that may be forthcoming and for anyone who’s wondering if we’re going up the risk curve in terms of WALT, weighted average lease term, just look at the underlying real estate on your own Google Maps. This is a high-performing store with significant frontage subsidized by a Dunkin’ Donuts sublease on one outlet.
So we’re finding those opportunities in the ground lease space, but it’s the same sourcing methodology, and they’ve got to make sense for us in the confines of our underwriting.
Operator: Thank you. Next question comes from Ki Bin Kim from Truist. Please go ahead.
Ki Bin Kim: Just going back to your guidance, just trying to gauge how much conservativeness is built into the midpoint, basically trying to see how fast you have to run to achieve it, given that it’s your first time.
Joey Agree: I think our guidance is realistic. It’s something that we’re obviously confident that we’re going to be able to achieve. As the year plays out, we’ll hopefully have the opportunity to narrow that guidance and give it even more visibility. Peter, anything you would add there?
Peter Coughenour: No, I would just add in April, obviously, we have some visibility into the year, just in terms of timing of when we’re introducing guidance. It’s a relatively tight range from 410 to 413, and I think that speaks to the confidence we have in hitting that range.
Ki Bin Kim: Okay. And I guess what’s changed over the past couple of months? Last quarter, you were talking about, I don’t want to put words in your mouth, but more of a kind of pencils down approach, that there was unclarity in the market and maybe the deal flow wasn’t there. What’s basically changed in the past quarter?
Joey Agree: Well, if we hearken back to the fourth quarter, we saw the 10-year Treasury go from 4 to 5 down to 385 in a combined 80 days or so, plus or minus. Then we’ve had some stability. Obviously, the 10-year has been on a march upward since then, we’ve had some stability. But I think more important to that, again, I’ll reiterate, the team here, led by the leadership team, has recalibrated our approach. We are not wasting time on sellers that are in 2022 still. We are focused on the opportunities that are readily available to transact with real sellers, and that in conjunction with ramping our outbound efforts, rolling our sleeves up, and that in conjunction with ramping our outbound efforts, rolling our sleeves up, and leveraging our tenant relationships, which are very deep, gives us proprietary access to deal flow.
And so we’re creating opportunities. I referenced manufacturing transactions on the last call. I apologize if that was taken incorrectly. When I referenced the manufacturing transactions, finding short-term opportunities and doing early extensions, finding high-performing stores, and working with retailers, working with retailers to reduce their occupancy costs on stores or the landlords that are no longer fit within their profile or framework. So it’s a value creation exercise, but this is hand-to-hand combat. This isn’t wholesale buying like most people were accustomed to with 12 years of declining interest rates and cap rates. And so the team’s done a tremendous job refocusing, recalibrating in a wholly different environment.
