Earnings Call
Agree Realty Corp (ADC)
Earnings Call Transcript - ADC Q1 2020
Operator, Operator
Good morning and welcome to the Agree Realty First Quarter 2020 Conference Call. Today, all participants will be in a listen-only mode. Operator instructions were provided. After today’s presentation, there will be an opportunity to ask questions. Operator instructions were provided. Please note that today’s event is being recorded. At this time, I would like to turn the conference over to Clay Thelen, Chief Financial Officer. Please go ahead, Clay.
Clay Thelen, Chief Financial Officer
Thank you. Good morning everyone and thank you for joining us for Agree Realty’s first quarter 2020 earnings call. Joey will, of course, be joining me this morning to discuss our first quarter results. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities laws. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons, including uncertainty related to the scope, severity and duration of the COVID-19 pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures on us and on our tenants. Please see yesterday’s earnings release and our SEC filings, including our latest annual report on Form 10-K and subsequent reports, for a 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 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, Chief Executive Officer
Thank you, Clay and good morning everybody, and thank you for joining us. First off, I would like to wish all of our listeners and their families health and safety during these difficult times. I’ll start our call today, broadly speaking about Agree Realty’s response to this current pandemic. The most significant lessons that I’ve learned from 2008 and the Great Recession uniquely positioned ADC to not only survive but thrive after this current crisis. That experience made us battle-tested and has applied the experiences gained through that recession to all aspects of our company, most importantly, our balance sheet and our portfolio construction. Our fortified balance sheet at approximately 0.7x net debt-to-EBITDA, pro forma for outstanding forward equity, gives us complete flexibility and the unquestioned ability to pursue opportunities which we feel will be even greater this year and into the future. This was further validated by the receipt of an investment-grade credit rating from S&P in the midst of this pandemic, which I know was prior to equitizing our balance sheet with over $500 million in additional capital. Given the market dislocation, strong visibility into our extremely high quality pipeline and lack of capitalized competition, we are increasing our acquisition guidance to $700 million to $800 million for the year. Rest assured that we will maintain our historic discipline and that the quality of our pipeline is of the utmost importance and we will further enhance our already stringent acquisition criteria. Before I provide some data for the month of April, let me please take a moment to express my sincere gratitude to our finance, asset management, accounting, legal and lease administration teams for all their efforts, closing the quarter remotely during a pandemic, including an ATM filing and two equity offerings, truly a remarkable effort. Regarding the month of April, our collections for the month demonstrate the thoughtful portfolio construction we have undertaken and the resiliency of our tenant base. I am very pleased to report that over 87% of total outstanding rent has been received and that 100% of our investment-grade tenants paid their April rent. We have created a cross functional COVID response team that consists of asset management, legal, accounting and tenant relations that will manage any short-term challenges while also seeking to create long-term value. Retailers that are opportunistic and choose not to pay rent will be met with full resistance and full recourse. Longer term, this crisis is a significant opportunity that our company is poised to take advantage of. We have begun to see additional high quality investment prospects and given the macro environment and our balance sheet and tenant relationships, I anticipate this to further accelerate. We expect a long, hard economic recovery for our country with relative winners and absolute losers and Agree Realty is positioned to emerge stronger than ever. Now excluding our strategic capital markets execution, I’ll get into what is probably the least important reporting quarter of our careers. I’m pleased to report that the first quarter represented a strong start to the year as we continued to capitalize on our opportunities across all phases of our business. During the quarter, we further strengthened our portfolio through strategic investment activity and proactive asset management while taking significant steps to offensively fortify our industry-leading balance sheet. During the quarter, we invested $231 million into 55 high quality retail net lease properties across our three external growth platforms. 51 of these properties were originated through our acquisition platform representing total acquisition volume of nearly $228 million. While we achieved another strong quarter of acquisition volume during these uncertain times, most notable, again is our discipline, evidenced by a record 89% of annualized base rent acquired being derived from investment-grade retailers. The 51 properties acquired during the quarter leased to 17 tenants operating in 14 sectors including off-price, general merchandise, auto parts, tire and auto service, dollar stores, and home improvement. The properties were acquired at a weighted average cap rate of 6.4% and had a weighted average lease term of 11 years. The acquisitions were marked by a number of unique opportunities. Most notably during the quarter, we acquired six Walmart Supercenters comprising more than one-third of total acquisition capital deployed. Today, I’m very pleased to report that Walmart is our largest tenant at 6.3% of annualized base rents and growing. We believe that the world’s largest retailer is going to continue to thrive post-pandemic while the majority of their competition will either struggle, go away or contract significantly. We continue to work with all of our retail partners to identify additional opportunities to add value. Identifying unique real estate opportunities with our tenants has been a hallmark of our approach for years. I am very pleased to report that we acquired the HomeGoods store in East Hampton, New York this past quarter. This store took several years for the developer to entitle, permit and construct. Its addition represents another trophy-like net lease asset to our portfolio. Additionally, we executed on a 12-property sale leaseback transaction with National Tire & Battery, raising TBC Corporation to our ninth largest tenant at 2.7% of annualized base rents. As you may recall, we added TBC, a leading investment-grade tire and auto service operator to our top tenant list in 2019 through a similar transaction. Given the recessionary environment, I anticipate that tire and auto service as well as auto parts will continue to thrive. The average age of cars on the road is already approaching 12 years, a record in the contemporary United States, with new car sales grinding to a halt. This sector is poised to further strengthen. We added two more assets to a ground lease portfolio during this past quarter, including the Lowe’s in Toledo, Ohio and ALDI in Minnesota. This ground lease portfolio stood at 8.5% of annualized base rent as of 3/31 and continues to derive nearly 90% of base rents from leading investment-grade retailers. Moving on to our development and Partner Capital Solutions platforms, we had four development and PCS projects either completed or under construction during the quarter that represented total committed capital of more than $15 million. Three of those projects were completed during this past quarter representing total investment volume of $12 million. The completed projects include the company’s redevelopment of the former Kmart in Frankfort, Kentucky for ALDI, Big Lots and Harbor Freight Tools; our first development with Tractor Supply in Hart, Michigan; and our fifth development project with Sunbelt Rentals in Converse, Texas. Construction continued during the quarter on our first development project with TJ Maxx in Harlingen, Texas, immediately adjacent to a Target, and rent is anticipated to commence there in the third quarter of this year. You have all heard me speak about our full service real estate capabilities before. Yet another tool that we have been working to deploy for several months is the screening of current national vacancies and the ability to quickly review them using our comprehensive software for potential backfill candidates that are within our proverbial sandbox. It’s very rewarding to see our team’s efforts come to fruition on such projects. Subsequent to quarter-end, we commenced construction on our first redevelopment for O’Reilly Auto Parts in Mayflower, Arkansas on a former box tenanted by Fred’s. This project follows in the path of our Sunbelt Rentals projects and our Tractor Supply in Hart where we redeveloped a formerly vacant, now Shopko. We will continue to work with our retail partners to evaluate market vacancies and redevelop these buildings at a very attractive cost basis for both ADC and these growing retailers in our sandbox. I strongly prefer this approach to ground-up development given the current GLA and vacant GLA that we anticipate seeing nationwide accelerate. While we’ve strengthened our portfolio through record investment activity, we’ve also diversified our portfolio through strategic asset management and disposition efforts during the year. Our first quarter was very active on the disposition front as we sold six assets for gross proceeds of approximately $25.1 million. Notable disposition activity during the first quarter included the sale of an Academy Sports, our only JOANN Fabrics, four franchise restaurants and another Walgreens. Subsequent to quarter end, we’ve sold three additional assets for approximately $7.7 million, including a franchise Buffalo Wild Wings and two franchise Taco Bell assets, thus further reducing our total franchise restaurant exposure to 1.9%. I would also note that one of our three Dave & Buster’s is currently under contract to sell. This purchase agreement was entered into after the rise of COVID-19 at a very attractive cap rate. The contract purchaser is now fully non-refundable with a $100,000 deposit and closing of course is subject to customary conditions. Given the current year-to-date disposition activities, we are raising the bottom end of our disposition guidance to $35 million for the year, which we will evaluate as the year progresses. Our asset management team has also been diligently focused on addressing our upcoming lease maturities. As a result of these efforts, our 2020 lease maturities stand at only five remaining lease expirations and represented just 0.2% of annualized base rents at quarter end. During the first quarter, we executed new leases, extensions or options on approximately 180,000 square feet of gross leasable space. In addition to several notable transactions being exercised, we are very pleased to announce that Ulta will be joining Hobby Lobby in Mount Pleasant, Michigan at the site of our former Kmart development. This is yet another testament to our decision to hold this asset for redevelopment and frankly was a pleasant surprise. As of March 31, our growing retail portfolio consisted of 868 properties across 46 states. Our tenants comprised primarily of industry-leading retailers operating in more than 31 retail sectors with almost 60% of annualized base rents coming from investment-grade tenants. The portfolio remains nearly fully occupied at 99.3% and has a weighted average lease term of 9.8 years. The minimal drop in occupancy was related to the now vacant Art Van flagship store. I’d like to take a moment to thank all of our loyal stakeholders for their support during these unprecedented and trying times. Recent events have validated the methodical portfolio construction that we embarked on almost a decade ago and we remain more focused than ever on continuing to improve what we believe is the highest quality retail portfolio in the country. Thank you for your patience. Happy to answer any questions after Clay provides an update at our balance sheet and discusses our financial results for the first quarter. I’ll turn it over to you, Clay.
Clay Thelen, Chief Financial Officer
Thank you, Joey. I’ll start with a balance sheet update and highlights from our recent capital markets activities. We had a very active quarter in the equity capital markets, raising more than $400 million of common equity and an additional $370 million of common equity with yesterday’s announcement. In addition to capital raises, we also generated almost $35 million through our disposition activity and free cash flow after dividend during the quarter. In addition to yesterday’s $370 million transaction, we commenced an overnight equity offering on March 30, totaling $175 million. Additionally, we are very active on our ATM during the first quarter and entered into a forward sale agreement to sell 3.3 million shares of common stock at an average gross price of $69 per share for anticipated net proceeds of more than $228 million. At the end of the quarter, we settled forward offerings totaling approximately $105 million. Given this settlement and combined with the company’s 2019 forward equity activity, we had approximately $267 million in unsettled forward activity available to us at quarter end. And as announced yesterday, we will be settling these remaining forward offerings this week. This capital raising activity provides us with tremendous optionality and puts us in a very strong liquidity position. Pro forma at quarter end for the settlement of our overnight equity offering and previously raised forward equity, we have full access to our $500 million credit facility, over $250 million in cash on hand and the $370 million in gross forward equity proceeds from yesterday’s announcement. Further, our balance sheet remains in its most fortified position in the history of our company. As of March 31, our net debt to recurring EBITDA was approximately 4.8 times. And as Joey mentioned, pro forma and inclusive of all equity activities, our net debt to recurring EBITDA was 0.7 times. Total debt to enterprise value at quarter end was approximately 26.5%, while fixed charge coverage, which includes principal amortization, set a company record at 4.4 times. Core funds from operations for the first quarter was $0.82 per share, a 10.7% year-over-year increase. Adjusted funds from operations per share for the quarter was $0.81, an increase of 13% year-over-year. General and administrative expenses in the quarter totaled $4.7 million. G&A expense was 8.3% of total revenue or 7.8% excluding the non-cash amortization of above and below market lease intangibles. We continue to anticipate G&A as a percentage of total revenue to be an approximate 50 basis point improvement from 2019 or in the lower 7% range for 2020, excluding the impact of above and below market lease intangible amortization in total revenues. Income tax expense for the quarter totaled $260,000. For 2020, we continue to anticipate total income tax expense to be in the range of $1 million to $1.2 million. The company paid a dividend of $0.585 per share on April 9 to stockholders of record on April 27, 2020, representing a 5.4% year-over-year increase. This was the company’s 104th consecutive cash dividend since our IPO in 1994. Our payout ratios for the first quarter were conservative at 72% of core FFO and AFFO per share and we continue to believe we have a well-covered dividend. With that, I’ll turn the call back over to Joey.
Joey Agree, Chief Executive Officer
Thank you, Clay. At this time, operator, we will open it up for questions.
Operator, Operator
We will now begin the question-and-answer session. Operator instructions were provided. Today’s first question comes from Simon Yarmak of Stifel. Please proceed.
Simon Yarmak, Analyst
Good morning, everyone.
Joey Agree, Chief Executive Officer
Good morning, Simon. How are you?
Simon Yarmak, Analyst
Hopefully you guys are doing well and that your families are safe.
Joey Agree, Chief Executive Officer
Thank you very much.
Simon Yarmak, Analyst
Congratulations on a solid quarter, strong April rent collections and the recent capital market activity. Over the last couple of years you’ve made a pretty conscious effort to increase your exposure to investment-grade tenants, approaching 60% at the end of the first quarter. Obviously, with the April rent collections, investment-grade tenants have essentially paid. How do you think about going forward? Where you want to take that number over the next couple of years?
Joey Agree, Chief Executive Officer
Well, I appreciate the question, Simon. I would tell you, given the trajectory of our pipeline and what we closed in Q1, there’s no doubt that number will continue to increase. You’d also have to add in the disposition efforts with the subsequent to quarter-end with the three franchise restaurants as I mentioned. So our pipeline in close to date are very similar. I would tell you in terms of tenant credit quality, the 89% in Q1 obviously is elevated. Again, I would remind everybody, we’re not imputing shadow investment-grade credit ratings to Tractor Supply or Chick-fil-A or the Publixes or Hobby Lobbys of the world. And so, as I always say, it’s probably repetitive, investment-grade is a data point for us. It’s an output of our strategy, but there are still a number of retailers in this country that for whatever reason, they may be private or may not have debt at all, don’t carry an investment-grade credit rating. So I wouldn’t put a ceiling on that number. I would fully expect it to continue to rise and I would anticipate it surpasses 60% at the end of Q2 here.
Simon Yarmak, Analyst
Thank you. You touched in your prepared remarks, you built this portfolio essentially over the last 10 years and you’ve done a great job at that. When you think about what we’ve been going through over the last couple of months, is there anything that you would do differently in constructing your portfolio going forward after learning lessons from the pandemic?
Joey Agree, Chief Executive Officer
Look, I think it’s still early. We will no doubt do an after-action review hopefully sooner rather than later after this pandemic. I would tell you this pandemic from my perspective has accelerated what we already believe to be the trends in retail, what we saw from retailers in a brick and mortar perspective or an e-commerce perspective going to an omni-channel world. We always avoided experiential and discretionary goods. And so that was already part of our strategy. I think what this has done is exponentially increased what we already saw. That’s the stronger survive and the weak obviously disappearing. I think that’s emblematic of the ten of the millions of dollars in the six Walmart Supercenters we acquired during the quarter and Walmart to set into their top 10. So I would defer until after the review. I’m not thrilled to own five movie theaters today obviously, but that’s a minority of our portfolio at approximately 1.5%. We haven’t touched the movie theater space in a number of years. But I would tell you that is the only sector in my head that I think that potentially we could have more actively avoided. But again, we haven’t acquired a movie theater I believe over three and a half years. So ask me, hopefully, by the third quarter call this will all be over and we’ll have time to do an after-action review, but we will certainly undertake one.
Simon Yarmak, Analyst
Sure. Just last question, in terms of the competitive landscape, that’s been changing over the last six, seven weeks. It was your peers really are going to take down acquisition activity to a halt with the loss of cost of capital. How has that environment changed? How competitive is that today? How strong is the 1031 market in the current environment? Then lastly, what is the spread between the portfolio market and one-off transaction?
Joey Agree, Chief Executive Officer
To your first question, most people think of our peers as our competition. We very, very rarely ever run into our peers. They most of them have differentiated business models. And so we very rarely run into our peers. Our traditional competition in the net lease space and the highly fragmented net lease space, which I tell you our average price point of just over $4 million is generally financed purchasers, either from the 1031 market that would be a larger 1031 transaction or a private party purchaser. And so I would tell you with the lockup in the CMBS market and frankly the unavailability of bank debt, that is taking a significant amount of competition offline. I think we will hopefully see cap rates rise accordingly. Regarding the spread between portfolio sales and one-off transactions, I’ll be honest, we have not actively reviewed any diversified portfolios or any portfolios that are embedded in our Q1 activity or Q2 pipeline. So it’s a little early to see if that historic spread changes. Our increased guidance of $700 million to $800 million includes no portfolio activity, no M&A activity, no sale-leaseback activity, just regular-way $150 million or $170 million of $4 million plus transactions. So I think we’re going to see a lot of activity continue to materialize; it’s a dynamic and fluid environment. I want to be careful on this call not to set expectations that we don’t have visibility into.
Simon Yarmak, Analyst
Sure. Thanks, and stay safe.
Joey Agree, Chief Executive Officer
Thank you, Simon. Appreciate it.
Operator, Operator
The next question comes from RJ Milligan of RW Baird. Please proceed.
RJ Milligan, Analyst
Hey, good morning, guys. Joey, looking into obviously good rent collections in April, but looking into May, do you expect to get more or less rent collected in the month of May?
Joey Agree, Chief Executive Officer
Again a good question. I wish I had transparency and visibility. We thought it was important for market participants to understand where our April collections were. I would tell you again, the Governor of the great state of Georgia is opening everything up soon. It’s going to be a function, frankly, of how quickly retailers are actually able to reopen and potentially drive actual sales. Second, it’s going to be a function of individual choices. Many retailers have publicly said they are not paying rent. That is a unilateral choice to breach a contract, which may rise to an eventual default, but it will be a choice of retailers. I would tell you most of these data points can be misleading. April is helpful as evidence of the resiliency and strength of our portfolio in terms of the investment grade tenants. But I would hope that no one is overly surprised given a 60% investment grade portfolio plus the shadow-rated portfolio and ground leases. All of these data points are very fluid. I’ll tell you what I’m very confident about: we have not breached quiet enjoyment. This is not a force majeure event. Any retailer that does not end up in bankruptcy or in a restructuring and rejects a lease or liquidates, which we think will be very few, will pay their rent. Whether they pay April or whether they pay May, we will collect those dollars and we have reminded some retailers that they’re accruing late fees, interest and penalties along the way. So short-term cash preservation methods on the retailer side will be longer-term cash collected for us absent a bankruptcy scenario.
RJ Milligan, Analyst
Okay, that’s helpful. And Joey, you mentioned the ground lease portfolio, which is a sizable part of Agree’s portfolio. Were there any ground leases in which you didn’t receive rent in April?
Joey Agree, Chief Executive Officer
Yes, great question. We have two very small ground leases where we did not receive full rent. I believe one we received 50% of the rent; the other we did not receive rent. We will be putting them into default and we look forward to taking those buildings if they fail to cure. They are two casual dining operations, very small and de minimis in terms of total rent — about $125,000 approximately, off the top of my head. Frankly, I was hoping we would even see more of those tenants default, because we have no basis in the building and we would own that building if they fail to cure. I would expect them to cure fairly quickly.
RJ Milligan, Analyst
Okay. My last question is, obviously we’re dealing with the impacts of COVID, but what’s to follow is probably a deep recession. As you think out into 2021 and 2022, are there any categories, industries that you’re more concerned about versus less concerned about, not necessarily to deal with the shutdown, but the economic impact and longer-term impact?
Joey Agree, Chief Executive Officer
I would tell you it is effectively the same as our historic investment criteria. We have avoided experiential retail and discretionary goods. We’ve avoided restaurants absent ground leases. We’ve avoided movie theaters, sporting goods and those discretionary categories that are easily replaceable online. Our focus now is to project what the world looks like post-pandemic in a recessionary environment. For example, Tractor Supply and Chick-fil-A are strong. National Tire & Battery and auto parts operators are positioned well given the aging fleet of cars — the average car age approaching 12 years — and new car sales dropping significantly. Tire and auto service and auto parts operators like AutoZone and O’Reilly should be in a good position. Grocery and deep discount grocery will be more important. Off-price retailers like TJ Maxx, Marshalls, HomeGoods, Ross and Burlington are likely to benefit as department stores contract. Our biggest challenge and opportunity is to be at the forefront of this structural change in consumer behavior post-pandemic.
Operator, Operator
The next question comes from Collin Mings of Raymond James. Please proceed.
Collin Mings, Analyst
Thank you. Good morning, Joey. Good morning, Clay.
Joey Agree, Chief Executive Officer
Good morning, Collin. How are you?
Collin Mings, Analyst
Hanging in there. First, I wanted to go back to your discussion with Simon as it relates to the upward revision to acquisition guidance. Can you maybe just expand on what you’ve closed quarter-to-date or quantify a little bit more your pipeline as far as what you’d expect to close near-term? You’ve touched on having visibility on activity for roughly 60 to 70 days, so particularly in the current environment, it would seem you have pretty good visibility on near-term opportunities to actually close. That helped you rate guidance.
Joey Agree, Chief Executive Officer
You are correct. I won’t get into too many details on the pipeline. It’s not dissimilar from what we closed in Q1. I mentioned that Walmart activity continues and we are very focused there. The composition of that pipeline is very similar in terms of credit quality. We do have some movement in and out of the pipeline, but it gives us full confidence that we will hit the $700 million to $800 million range absent a second pandemic wave or something atypical. So again, it’s focused on the retailers you would expect that we’ve discussed on this call plus a few others, but it is very similar to Q1 at its current state.
Collin Mings, Analyst
Got it, okay. That’s helpful. And then as far as the requests for rent relief, I mean, in yesterday’s release, you noted about a third of your tenants are asking for short-term rent relief or other considerations given the pandemic. You’re pretty clear, again on this call, about the obligations your tenants have. But to clarify, have you formally granted anything on the relief front yet? And then maybe, how would you quantify the mix of requests that you actually view as valid?
Joey Agree, Chief Executive Officer
To answer your first question, we have executed single-digit deferral requests predominantly with small operators, the few small operators that we have in our portfolio. Those are deferrals, they are not abatements. Those deferrals will be paid back very quickly and at times we have credit enhancement on top of them. In terms of the 33% count, I’ll be honest with you, I did not want to even include it in this release; it was required by counsel. The 33% ranges from the frankly absurd — retailers that have no debt, that are open and operating and are even thriving — to retailers that are small operators that really need help. The spectrum ranges from an email request asking for help to requests to defer or abate rent. It’s a wide spectrum and a data point people should be wary of. To opportunistic retailers, we have had harsh discussions. They are not considered long-term partners for us. We made them aware of our remedies in those leases. Some paid, some didn’t; they will pay. We have reminded tenants that they are accruing late fees, penalties and interest and our ability to evict or pursue remedies under the lease. That said, we are willing to partner with the very minority that truly need help — a Planet Fitness franchisee or a legacy small restaurant. We will partner with retailers that really need it, but this is new deal-making. Any concessions we provide will be formalized in new agreements with consideration to ADC.
Collin Mings, Analyst
Just on that last point, recognizing it’s a handful of requests, can you expand upon what you’re providing for short-term relief? You touched on deferral as opposed to forgiveness and mentioned credit enhancements and other options. Could you expand on the menu of options and whether any of these create longer-term benefits for you as landlord?
Joey Agree, Chief Executive Officer
Yes. We have not abated any rent — zero dollars abated. We will not abate rent. The limited deferrals we’ve given are deferrals to be repaid, often with credit enhancement and quick amortization. Where there is an opportunity to partner with a retailer for long-term value creation, the menu of options includes exercising current options, being the preferred developer for the retailer, acquisition of short-term stores in concert with the tenant, sale-leaseback transactions if they have real estate on the balance sheet and other creative solutions. We have full-service capabilities and the balance sheet and liquidity to be a long-term partner and take short-term pain for long-term value creation. However, the retailer needs to be a partner, solvent or have a credible path post-pandemic, and be willing to execute a new agreement. These are not within the four corners of existing documents; they are new deals.
Operator, Operator
The next question comes from Christy McElroy of Citi. Please proceed.
Christy McElroy, Analyst
Hi, good morning guys. For the tenants that have not paid in April, and for those that you don’t expect to pay in May, understanding that they’re in default, but how should we think about the other expenses that are typically paid directly by the tenant, like utility costs and property taxes, which don’t generally run through your P&L? To what extent could landlords be on the hook for those, whether temporarily or permanently?
Joey Agree, Chief Executive Officer
I’ll speak generally to what our COVID response team has done. Our team has confirmed property taxes were paid and utilities, predominantly water bills, have been paid as standard practice. So far, those obligations have been met. In net lease, some of these expenses run through our P&L and we get reimbursed, and sometimes tenants pay directly. Clay, do you want to speak to the details?
Clay Thelen, Chief Financial Officer
Yes. In terms of what comes through our P&L, in terms of real estate taxes and property operating expenses, approximately half of those expenses are reflected. To quantify a little, those amounts vary by property, but it’s important to note our discussions with tenants have focused on deferrals, not abatements. Regarding collectibility, we apply the new lease accounting that became effective in 2019. Under these rules we must assess the probability of collecting rents from a tenant and write off receivables to the extent those receivables aren’t collectible at a probability of at least 75%. That assessment is something we’ll be very focused on going forward. Our COVID response team is actively managing this and we are monitoring collectibility closely.
Operator, Operator
Our next question comes from Nate Crossett of Berenberg. Please proceed.
Nate Crossett, Analyst
Hey, good morning guys. Just on equity raises, clearly, a meaningful amount over the last couple of weeks. How are you guys thinking about longer-term leverage targets going forward? Are you changing the threshold bands you want to be in? Or is this just kind of a temporary opportunistic type of leverage level?
Joey Agree, Chief Executive Officer
I appreciate the question. These equity raises are offensive for us. The equity has built a war chest, enabling us to execute on investment opportunities. Longer term, it would be inappropriate to run a balance sheet at five to six times leverage for a net lease company. We will most likely not surpass five times leverage absent forward equity outstanding to us. We can always raise debt; raising debt is straightforward given our unsecured access to markets. What we have done is delever offensively, add debt when appropriate for accretive opportunities, and run a conservative balance sheet that gives us offensive capabilities. The pre-pandemic five to six times range is now out the window given the current environment.
Nate Crossett, Analyst
Okay, that’s helpful. And then just quickly on the debt. Obviously, you don’t need to raise any debt by any means right now. But if you were to go out, what does the pricing look like today versus pre-COVID, I guess?
Clay Thelen, Chief Financial Officer
It’s tough to say given the current market. We’re watching closely. There haven’t been a lot of data points. There were a few investment-grade deals prior to earnings blackouts and pricing spreads were wider than six weeks ago. We’ll continue to monitor spreads and the unsecured bond market and private placement markets closely.
Nate Crossett, Analyst
Okay. And then just one more if I could. I suspect most of your tenants are too large for the PPP program, but what about the Fed lending program? Do you think some of the more troubled tenants could tap that lending facility? And could you guys personally tap the PPP program to lower your own G&A costs?
Joey Agree, Chief Executive Officer
We believe we would have been eligible for the PPP program, but did not think it appropriate to tap it. We are solvent and have a strong balance sheet; we didn’t want to opportunistically tap government programs that would be inconsistent with our values. Regarding tenants, we haven’t spent much time evaluating their access to government programs. For PPP specifically, many of our tenants have over 500 employees and would be ineligible. We don’t view PPP as a real option for most of our tenant base.
Clay Thelen, Chief Financial Officer
Yes, just to add, specific to PPP, tenants with over 500 employees would be ineligible, and many of our tenants fall into that category. So PPP is not really a material option for our tenant base.
Operator, Operator
Our next question comes from Rob Stevenson with Janney. Please proceed.
Rob Stevenson, Analyst
Good morning guys. Joey, what percentage of your acquisition pipeline is on tenants that are currently not open for business? And how are you thinking about that mix as you backfill the pipeline into the third and fourth quarters when you start looking out? Is that even a consideration, considering the economy is likely to be open at that point in time? Or is that still factoring into any relevant attractiveness of certain tenants?
Joey Agree, Chief Executive Officer
Good question. Most of the tenants we’re looking at are open because of the nature of their businesses. If you look at our portfolio, I would estimate approximately 80% are open and paying. Whether they are currently paying rent, there are mechanisms to structure around that. Our average time to close is 60 to 70 days, so we have some visibility into how tenants will behave prior to closing. If a seller asks for deferrals pre-closing, we have mechanisms such as escrows to address that. So it’s not a major deterrent given the long-term nature of these leases and the price points at which we transact.
Rob Stevenson, Analyst
Okay. And then you got, you talked about some of your non long-term partners that are healthy and choosing not to pay. Have you considered disclosing their names? I imagine if they are public companies, that could be problematic for them. Is naming them a consideration to publicly shame opportunistic tenants?
Joey Agree, Chief Executive Officer
We have made tenants aware of our rights and remedies. Public disclosure is a consideration but we have been focused on communicating directly and taking action where necessary. I’d note that landlords in other property types have financing and TI amortization exposures; landlords often effectively acted as lenders. Tenants choosing not to pay rent have cascading effects — we still have obligations to our lenders and to our dividend-paying shareholders. A unilateral decision by a tenant not to pay rent when they have liquidity is not tolerable for us. We will exercise our remedies as needed.
Rob Stevenson, Analyst
Okay. And then one for Clay, when you factor in the forward deals and the debt capacity and the cash that you have right now while staying within a reasonable leverage level, how much of the dry powder do you have to close the incremental $500 million to $600 million of acquisitions without raising any additional capital?
Clay Thelen, Chief Financial Officer
Just to be clear, if you’re asking what our capital capacity is given cash on hand and forwards, and staying at a conservative leverage range, we have north of $1 billion in capacity and potentially up to $1.5 billion in capacity including forwards outstanding to acquire and still stay at a low leverage point.
Joey Agree, Chief Executive Officer
Rob, to add color on that, without the Cohen & Steers transaction, hitting the high end of our acquisition guidance for the year would have left us at approximately five times net debt-to-EBITDA at year-end, without any additional equity. The Cohen & Steers transaction allows us to potentially exceed that guidance given market dislocation without surpassing five times and/or fund our 2021 pipeline. If we don’t exceed that guidance, the equity starts funding our 2021 pipeline. So the transaction provides optionality — fund 2020 activity without breaching a comfortable leverage level and fund future pipeline if needed.
Operator, Operator
Our next question comes from Ki Bin Kim with SunTrust. Please proceed.
Ki Bin Kim, Analyst
Thanks and good morning out there. My question is, you raised your acquisition guidance, but I think we all realize cap rates tend to move slowly. Do you have any concerns that maybe there is a better price to be had if you just wait it out a little bit more?
Joey Agree, Chief Executive Officer
We anticipate that cap rates may move given the lack of bid, but the opportunities we pursue are not marginal; they are unique and strategic. We won’t sit back waiting for another 30 basis points if we have a high-quality Walmart supercenter or a trophy asset like HomeGoods in the Hamptons available at attractive yields. The market is dynamic and fragmented; some sellers need liquidity immediately and will concede on price. We have a fixed cost of capital, liquidity and the ability to execute now. If cap rates change further, we will be active then as well. We are not going to delay executing on accretive, strategic opportunities.
Ki Bin Kim, Analyst
Okay. And on real estate taxes, what do you think the end result will be? I’m assuming not just for yourselves, but the industry will be going back to municipalities to get lower real estate taxes to reflect the reality. How do you think about that?
Joey Agree, Chief Executive Officer
I would anticipate revaluations and likely appeals in many markets. We will work with tenants where appropriate to reduce all-in occupancy costs. This will be a future consideration and potential area for partnership with tenants as the situation evolves. We will collaborate with tenants to lower taxes where possible, consistent with local rules and timing.
Ki Bin Kim, Analyst
Okay and just last one. This is just a suggestion. It would be helpful in the press release to provide a little table on your equity offerings — what’s been done and what’s left to do, since you have many different layers going on at the same time.
Joey Agree, Chief Executive Officer
Noted. We’ve posted a reconciliation of net debt-to-recurring EBITDA to our website and have expanded disclosures, including the breakdown of retail sectors on page 6 of the release. We will consider additional disclosure on equity offerings to provide clarity.
Operator, Operator
Our next question comes from Todd Stender of Wells Fargo. Please proceed.
Todd Stender, Analyst
Hi, thanks. Joey and Clay and the rest of your team, I hope everybody stays healthy and safe.
Joey Agree, Chief Executive Officer
You as well. Thank you, Todd.
Todd Stender, Analyst
Most of my questions have been answered. I wanted to ask about underwriting going forward. When you look at four-wall coverage, I would imagine that’s going to deteriorate for all retailers, whether they’re open or not. How are you looking at that for underwriting? Your acquisition guidance increased, but do you need more protection? How might underwriting change?
Joey Agree, Chief Executive Officer
Four-wall coverage has never been a primary underwriting metric for us. Most of our retailers do not report store-level EBITDA. For many of our tenants we underwrite credit at a corporate level, not store-level metrics. Our portfolio consists largely of retailer tenants that are counter-cyclical. Post-pandemic, categories like auto parts, off-price retail and discount grocery are likely to perform well. Our underwriting emphasis remains focused on durable, recession-resistant retailers and omni-channel operators. We will continue to focus on long-term credit quality rather than short-term store-level fluctuations.
Todd Stender, Analyst
Great. That’s helpful. Just one last balance sheet question: you referenced the five times net debt-to-EBITDA at the high end of your guidance, which was pre-Cohen & Steers offering. What kind of debt is assumed in there? I imagine you’d tap the unsecured bond market with your investment grade rating, but what kind of level is assumed?
Clay Thelen, Chief Financial Officer
We’ll continue to be an unsecured borrower. We have optionality now with the investment-grade rating. The sizing is ultimately dependent on timing of uses of capital. We have full optionality given our cash position and equity outstanding. Based on uses and timing we'll execute in the unsecured bond or private placement market as appropriate.
Operator, Operator
The next question comes from Linda Tsai with Jefferies. Please proceed.
Linda Tsai, Analyst
Hi, good morning. Just given a comment on the slow and cascading effect of cap rates, does that mean that you’re not seeing COVID impacts change cap rates for the deals currently in your pipeline?
Joey Agree, Chief Executive Officer
Good morning, Linda. The market is fragmented and cap rate movement will likely be slow and cascading. We have seen opportunities where cap rates have gapped out and have transacted on them when sellers needed liquidity. Other sellers with strong balance sheets are holding. Our origination team looks to find deals where spreads have moved and sellers need liquidity more quickly. So while some cap rates have widened, the overall change will likely be gradual.
Linda Tsai, Analyst
Thanks. One more, what’s the best way to think about the run rate of acquisitions from 2Q through 4Q? Do you think you’ll see larger volumes in 3Q and 4Q?
Joey Agree, Chief Executive Officer
In full transparency, I don’t know the quarter-by-quarter cadence. Our increased guidance assumes no large portfolio or sale-leaseback deals, just regular-way acquisitions at our typical price point. Larger deals can happen quickly if they come together, as they sometimes do. We’ll provide updates as visibility improves.
Operator, Operator
The next question comes from Chris Lucas with Capital One Securities. Please proceed.
Chris Lucas, Analyst
Good morning everyone. One question: Have you seen or do you operate in many locations where civil authority may have created moral hazard by prohibiting commercial evictions and therefore incentivizing tenants to withhold rent?
Joey Agree, Chief Executive Officer
No, we have evaluated that and our legal team has reviewed the landscape. The last update I had indicated only a couple of counties, and I don’t think we have assets in those jurisdictions. It is not a current concern, but we continue to monitor it.
Operator, Operator
The next question comes from John Massocca with Ladenburg Thalmann. Please proceed.
John Massocca, Analyst
Good morning everyone.
Joey Agree, Chief Executive Officer
Good morning, John.
John Massocca, Analyst
Just building on Chris’s question a little bit and obviously hopefully doesn’t come to this with most tenants, but to the extent you have a tenant that is not paying April or even May rent, can you walk us through the general process and timeline through unilaterally rectifying any disagreement and maybe your ability to get value out of that asset?
Joey Agree, Chief Executive Officer
It’s subject to the lease terms, cure periods and landlord remedies. Generally, you must provide notice; the tenant has a period to respond and pay. If they don’t, they are in default. Leases vary: some allow acceleration of all obligations, some provide cure periods. Remedies include taking possession, evicting the tenant, or keeping the tenant in place and requiring payment. If a landlord evicts and re-leases, the tenant may be on the hook for the remainder of the rent, offset by re-tenanting proceeds, and may be liable for landlord costs including leasing commissions, tenant allowances and legal costs. The timing and outcome depend on court systems, market demand and the tenant’s financial condition. For a national tenant with capacity, often the rational choice is to pay rather than litigate across many landlords. For a small tenant, the process can be quicker and result in re-taking the premises.
John Massocca, Analyst
Broadly speaking, in that kind of situation, could recovery happen by the end of this year, or is it more of a 2021 timeframe?
Joey Agree, Chief Executive Officer
It depends on courts, the pace of reopening and each tenant’s unique situation. Some tenants may have alternative capital sources; others may restructure. Outcomes will vary. For many tenants, if they are solvent and don’t plan to restructure, they will pay. For insolvent tenants or those in bankruptcy, the timeline could extend into 2021 depending on the case.
John Massocca, Analyst
One last question: how does the 87% of cash rent received in April compare to last year’s April cash rent receipts or recent months?
Clay Thelen, Chief Financial Officer
We reported the April collections at the 21st of the month; that is the reported figure. Comparisons to prior periods are influenced by tenant mix and timing, but April collections at over 87% is strong relative to what many anticipated given the environment.
Operator, Operator
Our next question comes from Michael Bilerman. Please proceed.
Michael Bilerman, Analyst
It’s Michael Bilerman. Joey, the direct issuance you did to an institutional investor announced yesterday — 6.2 million shares, well over 10% of your share base even taking into account forwards. How did you think about executing something direct of that size and effectively not providing other institutional shareholders the ability to buy at a discounted price to maintain their ownership pro rata?
Joey Agree, Chief Executive Officer
Michael, context is important. We had other opportunities via the marketed deal and the ATM offering. Shareholders had multiple opportunities to participate through those processes and open market purchases. The Cohen & Steers transaction was a unique opportunity, essentially a reopening and was at a tighter discount than our marketed deal. Net proceeds per share to the company were approximately $0.20 higher on that direct transaction compared to a fully marketed deal. We thought it was in the best interest of all constituents given the tighter discount and higher proceeds to the company.
Michael Bilerman, Analyst
Then on the collections, the 87% figure — clearly you would have been at 100% in March — of the 13% you haven’t collected for April, how much of that do you expect to be deferred as opposed to not collected? What portion are you working on in terms of deferrals versus getting into lease remedies?
Joey Agree, Chief Executive Officer
Start with our March 19 release which outlined the four retail sectors we considered at risk; that aggregates to about 10% for us. There’s opportunism in the restaurant space which is very de minimis for our portfolio. Some tenants who have been open chose not to pay — that was their choice — and we’ve put them on notice. For many of the at-risk tenants, the outcomes depend on how the pandemic and reopening evolves. Some tenants will get liquidity from other sources; others will ultimately pay us. It’s hard to provide a precise split now. Some of the 13% are opportunistic and will pay once reminded; some are more problematic categories like movie theaters where the timeline is more uncertain. Ultimately, we will pursue default remedies where appropriate, but expect most solvent tenants to pay over time.
Michael Bilerman, Analyst
So it doesn’t sound like you’re working on any rent abatements — it’s all deferrals or trying to get the tenant to pay. And the deferral amount seems marginal in terms of how much you’re working on. Is that fair?
Joey Agree, Chief Executive Officer
Yes. We have given zero abatements. Any deferrals we’ve agreed to will be repaid — amortized into future rent — and will be short duration, often months, not years. We will consider slightly longer amortizations for higher-credit tenants, but generally these are short-term deferrals with payback provisions and credit enhancements where appropriate. Opportunistic nonpayment will be met with landlord remedies and pursuit of late fees and interest.
Operator, Operator
At this time, we are showing no further questioners in the queue. This concludes our question-and-answer session. I will turn the conference back over to Joey Agree for any closing remarks.
Joey Agree, Chief Executive Officer
Thank you everybody for joining us. Please stay safe, good luck to the rest of earnings season. I appreciate your patience. I know that was a long call. Good luck, and talk to you — hopefully, see you all soon. Bye.
Operator, Operator
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.