Joey Agree: Not really from a category perspective. We saw something very specific with Walgreens in context of the pharmacy space, the degradation of the front end, the constant need and desire to do M&A to increase store count which didn’t make sense to us the failure of Walgreens to repurpose the front end of the store with their attempts at beauty and fragrance — their attempt to — we saw that very specifically. And frankly, we had an overabundance of Walgreens exposure. I mean it was 45% Walgreens exposure in 2012, I think, approximately. In 2013, we were 45% Walgreens exposure and — we had a lot of intimate experience developing approximately 40 to 50 of them in 6 states. And so that was abundantly clear to us watching those stores erode.
I’ll tell you to the retailers in our portfolio are generally doing really well and are really healthy. Now we stayed away from the casual dining space. We’ve stayed away from the experiential stuff and we’ll continue to. But if you look at our portfolio today, the retailers are really doing well. The bigger getting bigger, they’re getting stronger. They’re investing in price, labor and distribution and then figuring out how to drive EBITDA in this omnichannel world.
Operator: The next question comes from Linda Tsai of Jefferies.
Linda Tsai: Regarding what you referred to as manufactured cap rates in 1Q being up 40, 50 bps through the auction process. Any more color on how you drive that level of expansion and how easy or difficult it is to achieve this?
Joey Agree: Yes. Just to clarify, those cap rates are effectively us creating value out there, seeking off-market opportunities, blend and extend opportunities. These aren’t highly marketed glossy brochure through national brokers. We’re working with our retail partners to find opportunities where they want to be there long term and we want to be their [indiscernible]. Will you repeat the second part of that question?
Linda Tsai: Just how easy it is to — or difficult to achieve this and its sustainability?
Joey Agree: Not easy. Look, this is — I don’t think anything is easy in this world today. It takes grid. That’s 1 of our core values here. Greatness requires grid. It takes grid. We leverage our relationships. The team here has tremendous relationships and credibility with retailers. We aren’t in the wholesale buying process anymore out there that’s going — given where cost of capital are. But I’m 100% confident that the team will continue to be able to uncover opportunities across all 3 external growth platforms that provides outsized returns relative both to the market and hopefully, our own internal expectations.
Linda Tsai: And then if sale leaseback was 1/3 of the acquisition volume, what can it grow to in ’24? And similarly, where can DFP grow to as a percentage of the volume?
Joey Agree: From a sales perspective, any tenant that doesn’t need capital and those are the only tenants that we typically do business with, we don’t want to become a large unsecured creditor to any retailer that’s private equity sponsors. So if you looked at the retailers, we did sell lease, they’re on pause, right? Their CFOs, their real estate departments are watching the volatility. They know where they can issue paper, in the unsecured market today, they’re waiting for things to settle down here as well. And so I wouldn’t anticipate given today’s status quo, that number approaching 1/3. It’s fully possible if we get stabilization later in the year. In terms of DFP, every day, it changes. We have built that team out. We’ve built that system out in context of ARC.
We have improved and made our processes more efficient. Again, it’s just a question of pricing. And the pricing is both with the developers as well as the retailers, the returns they’re willing to accept and ultimately, the rents they’re able to pay on those specific sites. And if it works in context of our — obviously return profile.
Operator: The next question comes from Ronald Kamdem of Morgan Stanley.
Unidentified Analyst: I just have 2 quick questions. The first is, can you talk a little bit on the competition environment today for the IG focused market? And you mentioned like transaction volume is kind of low, like this year. But if you compare on a year-over-year basis, is that like getting worse or it’s actually better than last year?
Joey Agree: Competition in our specific sandbox is really hit or miss, right? There are the random and infrequent [ph] or high net worth individuals. They tell you the competition is very similar to what it was historically, except the amount of competition. The composition is similar but the amount of competition, given just the transactional slowdown, the slowdown is very de minimis. And so I often say our largest competitors are sellers’ expectations themselves. Would you repeat the second part of that question?
Unidentified Analyst: The second is the transaction volumes. You mentioned like the transaction volume this year is kind of low but if you compare on a year-over-year basis, it’s actually better than last year or actually worse than last year?
Joey Agree: Well, the transaction [indiscernible] closed acquisitions?
Unidentified Analyst: Of the pipelines and just overall?
Joey Agree: We’re still early. Look, we have visibility into the Q1 pipeline. We’re just starting to build transaction volume for Q1 will be down year-over-year relative to Q1 undoubtedly. But as I mentioned, our focus is on improving those cap rates very significantly on a relative year-over-year basis. So I think looking forward, again, we’ll see what type of normalcy we get or stabilization we get in the underlying macro — it’s — it’s very difficult to predict and possible for us.
Unidentified Analyst: Yes, it makes sense. If you talk about dispositions, I think you mentioned you’re expecting to dispose more this year. And based on your target cap rates, do you think — just maybe talk a little bit more about like the disposition cap rate is trending in the overall environment?
Joey Agree: Yes. We’re looking for those opportunistic areas where we can sell an asset generally in the plus or minus in the 6 cap range and then redeploy it north of 100 basis points, minimally above that in assets that we don’t think long term necessarily have the growth potential profile that within the portfolio.
Operator: Next question comes from Alex Hagan of Baird.
Unidentified Analyst: First off, where are the current yields on the new development funding deals?
Joey Agree: When you say new development funding deals, I mean, generally, we’re targeting new — net new in terms of approvals and starting now, we’re targeting the DFP transaction that is let’s call it, 6 months until rent commencement, approximately 50 to 75 basis points over like time cap rates in the acquisition. If it’s an overall project that takes entitlements, we’re significantly wide of that just because of the duration risk.
Unidentified Analyst: Okay. And I guess, second, you kind of put on your macro had earlier said you think the chance of a rate hike is — might be higher now than a rate cut kind of curious what’s the most attractive source of debt today? And does the company have any plans on issuing long-term debt to reduce the revolver anytime soon?
Joey Agree: Yes. Just, I’ll let Peter answer the second question. I said just to repeat, the change of rate hike is probably better than this year is probably better than the chance of a rate cut in March. We’ll see more data, obviously, tomorrow. But I think that rate cut expectation that the market had for March is clearly off the table and we’ll see if we get any more hot prints that come out. Peter, in terms of the debt market, I’ll let you take that.
Peter Coughenour: Yes. I think — we came into this year with $1 billion of total liquidity available to us. And so there’s no near-term need to access the debt markets. We have no material debt maturities until 2028. And so we can continue to be opportunistic in terms of how and when we access the debt capital markets. We have access to both the unsecured markets as well as the bank debt markets where we continue to have strong support from our bank group. I think our preference is typically for longer-term fixed rate unsecured financings that match the underlying lease duration of our portfolio. And to that end, as disclosed in the 10-K, we entered into $150 million of forward starting swaps during the fourth quarter. Those swaps contemplated a future 10-year unsecured debt issuance and they’re swapped at an effective rate just under 4%.
So we have optionality in terms of when we use those swaps. They have a mandatory termination date in June of ’25 but contemplates us coming back to that market at some point in the future.
Operator: The next question comes from Eric Borden of BMO Capital Markets.
Eric Borden: Just a quick one on the watch list. What’s the mark-to-market on the assets in there today? I think you mentioned Big Lots expiring or taking back space in the mid-single digits. Just curious about the rest of the portfolio?
Joey Agree: The Big Lots expiration that I mentioned which was now at least within auto parts, that mark-to-market is approximately [indiscernible] on a new 15-year lease in reference to where we think the remainder of the overall portfolio is?
Eric Borden: Just the remainder of the — the portion of the portfolio that is on the watch list or [indiscernible] that you anticipate taking back?
Joey Agree: I’d tell you, we’re extremely comfortable given the rental rates that we’ve acquired across those, we’re extremely comfortable. Again, these are mid-single-digit rental rates today to even build a box like that is [indiscernible] vertical a foot. These are mid-single-digit rental rates that we feel extremely comfortable that if we were to get any of these boxes back that we’ll have no challenge here marking them to market where market is, it varies across the board but to find any box today that has any merit to it in mid-single-digit range is almost impossible.
Operator: The next question comes from Connor Siversky of Wells Fargo.
Connor Siversky: Just in your conversations with tenants, can you offer a temperature check on the willingness for some of these retail operations to continue to expand in this current macro backdrop?
Joey Agree: Yes, as I touched on earlier, the retailers that we talk to want to continue to expand and continue to expand aggressively. I don’t remember a time when Home Depot, Walmart and Lowe’s before except it prior to the GFC, we’re expanding the large-format C-stores, the auto parts operators, the off-price retailers, it’s all the TJX concepts, Ross, Burlington, 5 below. These operators are have the desire to continue to expand across all of their different flags. And again, the challenge today is construction costs and ultimately, what they can pay on a per square foot rental rate. But there is voracious demand in the discount space, again, we’re focused in the necessity-based arena here. It is a voracious demand to continue to expand and open stores.
We’re seeing that really across the board, whether it’s all the way from O’Reilly and AutoZone to tracker supply to Walmart to ALDI which is obviously making a large acquisition and opening net new stores. I think you see that across the area in terms of discount-oriented operators.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.
Joey Agree: Well, thank you, operator and thank you all for joining us this morning and we look forward to seeing you at the upcoming conferences. We appreciate everybody’s time.
Operator: The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.
