Agree Realty Corp (NYSE: ADC) Q1 2020 Earnings Call Transcript

Agree Realty Corp (ADC) Q1 2020 earnings call dated Apr. 21, 2020

Corporate Participants:

Clay Thelen — Chief Financial Officer

Joey Agree — President & Chief Executive Officer

Analysts:

Simon Yarmak — Stifel — Analyst

R.J. Milligan — RW Baird — Analyst

Collin Mings — Raymond James — Analyst

Christy McElroy — Citi — Analyst

Nate Crossett — Berenberg — Analyst

Robert Stevenson — Janney — Analyst

Ki Bin Kim — SunTrust — Analyst

Todd Stender — Wells Fargo — Analyst

Linda Tsai — Jefferies — Analyst

Chris Lucas — Capital One Securities — Analyst

John Massocca — Ladenburg Thalmann — Analyst

Michael Bilerman — Citi — Analyst

Presentation:

Operator

Good morning, and welcome to the Agree Realty First Quarter 2020 Conference Call. [Operator Instructions] 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 — President & 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 to 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 did approximately 0.7 times 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 investment-grade credit rating from S&P in the midst of this pandemic, which I know, it 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, and 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 of construction we have undertaken and the resiliency of our tenant base. I’m very pleased to report that over 87% of total outstanding rent has been received and then 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 in 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 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 leased 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% 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. The store took to several years for the developer to entitle, permit and construct. I’m sure many of our listeners are familiar with the store, 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 our ground lease portfolio during this past quarter, including a Lowe’s Toledo, Ohio and ALDI in Minnesota.

This ground lease portfolio stood at 8.5% of annualized base rents 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 and 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’ve 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 in 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 strengthened our portfolio through record investment activity, we’ve also diversified our portfolio through strategic asset management and disposition efforts during the year. The 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 are only JOANN Fabrics, four franchise restaurants and another Walgreens.

Subsequent to quarter end, we sold three additional assets for approximately $7.7 million, including a franchise Buffalo Wild Wings and two franchised Taco Bell assets thus even further reducing our total franchised 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 purchase through 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 maturity 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 options being exercised, we are very pleased to announce that ALFA [Phonetic] 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 with a pleasant for 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 and 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 would 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 on 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 the 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 in common equity with yesterday’s announcement.

In addition to capital raise, we also generated almost $35 million through our disposition activity and free cash flow after dividend during the quarter. In addition to $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 forward sale agreements 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 offering 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 rates 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 activity, 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 stood at a company record 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, administrative expenses in the quarter totaled $4.7 million. G&A expense was 8.3% percent of total revenue or 7.8% excluding the non-cash amortization of above and below-market lease intangibles. 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 a conservative 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 — President & Chief Executive Officer

Thank you, Clay. At this time, operator, we will open it up for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Simon Yarmak of Stifel. Please proceed.

Simon Yarmak — Stifel — Analyst

Good morning, everyone.

Joey Agree — President & Chief Executive Officer

Good morning Simon, how are you?

Simon Yarmak — Stifel — Analyst

Hopefully, you guys are doing well and that your families are safe.

Joey Agree — President & Chief Executive Officer

Thank you very much.

Simon Yarmak — Stifel — Analyst

Congratulations on a solid quarter, strong April rent collections and the recent capital market activity. Over the last couple of years, you 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 — President & Chief Executive Officer

Well, I appreciate the question. I mean, 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 add that in the disposition efforts with the subsequent to quarter-end with the three franchise restaurants as I mentioned. So, our pipeline and 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 are not imputing shadow investment grade credit ratings to Tractor Supply or [Indecipherable] or the publics or Hobby Lobbys of the world.

And so, as I always say, and it is probably repetitive. Investment grade is a data point for us, it’s an output of our strategy, but there is 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 to surpass 60% in Q2 here — at the end of Q2.

Simon Yarmak — Stifel — Analyst

Thank you. I mean, you touched in your prepared remarks, you’ve 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 weeks — here, 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 — President & Chief Executive Officer

Look, I think it’s still early. I would tell you, 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 believed 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 increase what we already saw and that’s the stronger survive and the weak obviously disappearing, I think that’s emblematic of the of the tens of millions of dollars and the six Walmart Supercenters we acquired during the quarter and Walmart as I said, is our top tenant.

And so, I would defer until after I would tell you, I’m not thrilled to own five movie theaters today, obviously but that’s a minority of our portfolio and 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 — the only sector in my head that I think that could potentially — we could have more actively avoided, but again, we haven’t acquired a movie theater and I believe over 3.5 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 — Stifel — Analyst

Sure. Just the last question, in terms of the competitive landscape that’s been changing over the last six, seven weeks, most of your peers are going to take down acquisition activity to a halt with the loss of cost of capital, and how has that environment changed and how competitive is that today. How strong is the 1031 market in the current environment, and then lastly, what is the spread between the portfolio market and one off transactions?

Joey Agree — President & Chief Executive Officer

So, to your first question, most people think of our peers as our competition. We very, very, very rarely ever run into our peers. Most of them have differentiated business model. And so, we very rarely run into our peers. Our traditional competition, in the net lease space — in this highly fragmented net lease space, which I’d tell you, our average price point of just over $4 million is generally financed purchasers, either from the 1031 market that will be a larger 1031 transaction or a private-party purchaser.

And so, I would tell you with the lock up in the CMBS market and frankly the unavailability of bank debt that is very — that’s taking a significant amount of competition offline. Now, you didn’t ask this directly, but I think we will hopefully see cap rates rise accordingly. Your second question Simon was what?

Simon Yarmak — Stifel — Analyst

The spread between portfolio sales, and one off transactions?

Joey Agree — President & Chief Executive Officer

Right. I’ll be honest, I think we have not actively reviewed any diversified portfolio. Is there any portfolios that are embedded in our Q1 activity or Q2 pipeline? So, I would tell you it’s a little earlier. It’s a little too early to see if that spread what happens with that historic spread that — really our guidance I would mention, our increased guidance of $700 million to $800 million includes no portfolio activity, no M&A activity, no sale leaseback activity. Just regular way [Phonetic] 150 or 170 or so $4 million plus [/Phonetic] transactions. So, I think we’re going to see a lot of this continue to materialize, as obviously a dynamic and fluid environment, and I want to be very careful on this call, not to frankly set any expectations that we don’t frankly have visibility or transparency into.

Simon Yarmak — Stifel — Analyst

Sure. Thanks and stay safe.

Joey Agree — President & Chief Executive Officer

Thank you Simon. Appreciate it.

Operator

The next question comes from RJ Milligan of RW Baird. Please proceed.

R.J. Milligan — RW Baird — 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 — President & 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. I mean the Governor of the great state of Georgia is opening everything up, it looks like this weekend. So, I was talking to a friend of mine in Atlanta, I’m not sure if anyone is actually going to go to any of these places, besides the required haircut, but it’s going to be a function, frankly of how quickly one, retailers are actually able to reopen and potentially at the secondary level drive actual sales, if people reopened businesses that don’t drive sales, I’m not sure if that helps. Second, it’s going to be a function of choices and I mentioned in my prepared remarks of retailers, and we see retailers and many of them have gone public saying they are not paying rent that is a unilateral choice to breach a contract which will right to an eventual default, but it will be a choice of retailers.

I would tell you, most of these data points I think are very misleading. I think April is helpful, so people can see the resiliency and strength of our portfolio in terms of the investment grade, but I would hope that no one was overly surprised or taken aback given the 60% investment grade portfolio plus the shadow rated portfolio if you want to run those on your own, plus the ground leases. So, all of these data points are very fluid. I’ll tell you what I’m very confident in.

We have not breached quiet enjoyment. This is not a force majeure event, and these retailers that do not end up insolvent — any retailer excuse me that does not end up in a restructuring and reject a lease or a liquidation, which we think we have very of, we’ll pay their rent. And so, whether they pay April or whether they pay May, we will collect those dollars and we have reminded some retailers, hopefully in a friendly way that they are accruing late fees, interest and penalties along the way.

So, short-term cash preservation now — short-term cash preservation methods on the retailer side will be longer term cash collected for us absent a bankruptcy scenario.

R.J. Milligan — RW Baird — Analyst

Okay, that’s helpful. And Joey, you mentioned the ground lease portfolio, which is a sizable part of acreage portfolio. Were there any ground leases in which you didn’t receive rent in April?

Joey Agree — President & Chief Executive Officer

Yes. Great question. We have two very small ground leases where we did not. I believe, one we received 50% of the rent the other one, we did not receive rent. We have — we have or will be putting them into default and we look forward to taking those buildings for free. I will tell you they are two casual dining operations, very small in terms of — or de minimis in terms of the total rent. I would tell you, it’s about $125,000 approximately off the top of my head, but frankly, I was hoping we would even see more of those tenants frankly default. Again we have no bases in the building, and we would own that building for free if they fail to cure. So, I would expect them to cure fairly quickly.

R.J. Milligan — RW Baird — Analyst

Okay. And 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 — President & Chief Executive Officer

I would tell you it is — it is effectively the same as our historic investment criteria. And so, we have avoided “experiential” we’ve avoided restaurants, absent ground leases, we’ve avoided movie theaters, which I’ve mentioned in sporting goods we’ve avoided those discretionary goods that are easily replaceable online and frankly more and more goods are becoming easily accessible online to more and more demographics and participants. So, our focus and I think to your question, our greatest emphasis now is doing our best to project what the world looks like post pandemic in that recessionary environment.

And so, I spoke to National Tire & Battery and new car sales are going to go from 17 million to somewhere in the single-digit millions. So, then what are the impacts — secondary impact of new car sales going — dropping to such a degree? Well, I spoke to the National Tire & Battery and 12 years approaching average duration of car on the road. And so, how does that then disseminate into our retail portfolio and our future portfolio of construction? Well, tire and auto service for older cars is going to be required. More auto parts for older cars AutoZone, O’Reilly, we have over 100 and they’re great relationships in our portfolio, are going to be required — used car sales, will most likely right, accelerate on a relative basis to new car sales.

We do that, the same thing for grocery. Deep discount grocery is going to accelerate. Now,that’s a challenging sector because we’ll see what the online participation rate does from historic 1.5%, but those will accelerate. At the end of the day here, off-price retail is going to have a field day, right. The TJ Maxx, the Marshalls, the HomeGoods the Ross’ and most likely the Burlingtons are going to have a field day because the department store space is all but effectively dead.

And so, I look at the apparel space and I say where are people going to buy apparel, it’s either Walmart, Target, off-price and maybe Nordstroms makes it or maybe Coles’ makes it. And so, I think our — what my biggest challenge is and what our biggest opportunity is, is to be at the forefront. We were at the forefront, I believe we are at the forefront at least I will say. We were at the forefront of omni-channel. Now, we have to be at the forefront of a post pandemic recessionary environment with consumer behaviors that are structurally going to change for the rest of our lives.

Operator

The next question comes from Collin Mings of Raymond James. Please proceed.

Collin Mings — Raymond James — Analyst

Thank you. Good morning Joey and good morning Clay.

Joey Agree — President & Chief Executive Officer

Good morning Collin, how are you.

Collin Mings — Raymond James — 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 that you expect to close near term. In the past Joey, you’ve touched on having visibility on activity for, call it 60 days to 70 days.

So, particularly in the current environment it would seem you have pretty good visibility on near-term opportunities to actually go out there and raise guidance?

Joey Agree — President & Chief Executive Officer

You are correct. I won’t get into any details — too many details on the pipeline. I’ll tell you, it is not dissimilar from the closed in terms of Q1. I did mention that our Walmart activity will continue, we are very focused there. The composition of that pipeline is very similar in terms of credit quality, we do have some time for some movement, both fallout and inclusions into that pipeline. But, it does give us full confidence that we will — we will hit that $700 million to $800 million absent a second pandemic wave or something atypical hitting this country.

So, again, it’s focused on the retailers, you would expect that we’ve talked about, frankly on this call, plus a few other ones, but it is very similar to Q1 at its current state.

Collin Mings — Raymond James — Analyst

Got it. Okay, that’s helpful. And then, as far as the request 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, just given the pandemic. You are pretty clear, again on this call on your view about the obligations your tenants have, but to clarify, if anything have you formerly granted anything on the relief front yet? And then, maybe how would you quantify the mix of request that you actually view as valid?

Joey Agree — President & Chief Executive Officer

To answer your first question, we have executed single digit deferral request, predominantly with small operators — the few small operators that we have in our portfolio. Those are deferral. They are not abatements, they are deferrals those deferrals will be paid back very quickly, and at times we have credit enhancement on top of them. In terms of the 33% Collin, I’ll be honest with you, I did not want to even include it in this release and in our remarks. It was required by council, and we have fantastic council.

I think the 33% I would warn all market participants and everybody on this call that the 33% ranges from the — frankly absurd retailers that have no debt that are open and operating and a couple that are even thriving frankly in this environment. To a retailer, that is a small operator that really needs help. And so, the spectrum there ranges from a email request can you help us, are you willing to offer us any help in the general form. Two, can we not pay April rent and defer it to later or abate? And so, it is such a wide spectrum I think it’s frankly a data point that everyone should be very wary of. Through the opportunistic I can’t quantify that for you. I will tell you there are a few retailers we have had harsh discussions with, they are not considered long-term partners for us, they were made — we made them quickly aware of our remedies in those leases, and I would tell you some paid, some didn’t they will pay and they — we have made them — put them on notice of the late fees, the penalties, the interests and our ability to either subject to the lease evict them and take possession or not evict them, and we’ve also reminded them that we are not a shopping center REIT or a mall REIT that has co-tenancy implications or traffic flow implication.

So, net lease is very unique in that context. But, we will vigorously pursue immediately default remedies upon any retailer that acts opportunistically. That said, we are willing to partner with a very minority piece, a Planet Fitness franchisee or — we’ve got a small tenant in a legacy shopping center, it’s a Chinese buffet restaurant that my father developed 30 years ago and has been there literally since inception. We’re willing to be partners there for retailers that really need it. But, I think it’s very important for people to understand; in net lease, we have fixed returns. We don’t get percentage rent, we don’t get upside, we can’t ask for more rent in the future and we are not willing to grant unilateral request to retailers that have the ability to pay.

Collin Mings — Raymond James — Analyst

Just on that last point Joey, recognizing it’s a handful of request. Can you maybe just expand upon what you’re asking Foreign Exchange for providing short-term relief, again you touched on, it’s generally deferment as opposed to some sort of forgiveness, but just maybe expand on I think you touched on credit enhancements and it sounds like there is maybe some other options that’s maybe long term since we’ve been official, since you work with some of these…?

Joey Agree — President & Chief Executive Officer

Yes. No, and I think that’s the most important thing. So I want to be clear, we have not abated $1. We don’t intend to abate $1 of obligations here. Those would — the ones, the single digits are deferrals. I think the opportunity and I spoke in the prepared remarks is for us to work with our retail partners and that is a true partnership to help them potentially during this period of closure, in exchange for consideration for long-term value and the menu of options there is significant and we’ve created and just preliminarily engaged in discussions like that.

We have the balance sheet and obviously the liquidity profile which Clay spoke to, and the ability to be a long-term partner and take short-term pain for long-term value creation for our shareholders. That menu of options include exercises; that menu of options for us in consideration include exercise current options, we could be your preferred developer, we can acquire short term stores working in concert. We can do a sale leaseback if you have real estate on balance sheet, we can do all types of different things given the unique full service nature and the capabilities that this fantastic team in Agree Realty has.

That said that retailer has to pass a few thresholds. Number one, they have to be a partner. Number two, they have to be solvent or they have to — we have to frankly be very confident in their future in that post pandemic recessionary world, and number three, they have to be willing to come to the table to frankly make a new deal because that’s what this is, it’s not within the four corners of the document, we’re willing to work with our partners, but that is a new deal and it’s a new document.

Collin Mings — Raymond James — Analyst

Thanks Joey.

Joey Agree — President & Chief Executive Officer

Thank you RJ.

Operator

The next question the next question comes from Christy McElroy of Citi. Please proceed.

Christy McElroy — Citi — 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 are 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 that don’t generally run through your P&L? To what extent could landlords to be on the hook for those, whether temporarily or permanently?

Joey Agree — President & Chief Executive Officer

Yeah, I’ll speak to it generally to what our COVID response team has done. Number one, our — and then I’ll let Clay talk to some of those details where they are obviously in our P&Ls. Number one, our COVID response team has confirmed has gone open occupancy. We’ve been confirming property taxes were paid and utilities predominantly water bills, that is just standard practice for us has been paid. And so that, it’s an important question, you’re right and it’s an obligation that they have.

Obviously a net lease, some of those pieces run through our expenses and then will get reimbursed or sometimes tenants pay direct. Clay, you want to talk to — you want to speak to the details of that question, they’re over my head, frankly.

Clay Thelen — Chief Financial Officer

Yeah, of course. So, in terms of what’s — what comes through our P&L in terms of real estate taxes and property operating expenses that’s approximately half of those expenses, Christy, just to provide a little — provide some — try to quantify that a little bit.

Christy McElroy — Citi — Analyst

Okay. But presumably, if they are not paid by the tenant you’re obligated to pay those correct?

Joey Agree — President & Chief Executive Officer

That’s correct. If the tenant does not pay that would be an event of default similar to not paying rent, and we would have the full remedies in the lease.

Christy McElroy — Citi — Analyst

Okay. And I know, you don’t normally give FFO guidance, but just sort of how should we be approaching Q2 in terms of potential FFO impact, in regard to the deferrals, but also as you think about tenants that still haven’t paid, how would you — how are you thinking about potentially assessing the collectability probability?

Joey Agree — President & Chief Executive Officer

What are the collectability? I think and I will turn again the details over to Clay. I’ll tell you, that going into Q2 right now in a dynamic and fluid situation, we’re not even into May obviously is very difficult for us to provide any short-term guidance. I would encourage again, people especially in the portfolio with the credit quality such of ours — such as ours to frankly to ignore some of these short-term; take them as data points, but don’t let them be drivers. Clay, I’ll let you take the details of her question though.

Clay Thelen — Chief Financial Officer

Sure, of course, it’s important to note as Joey mentioned that our discussion with tenants have been focused on deferrals. So, not rent relief and specifically deferral, so I’ll focus on that. And, in terms of deferrals, it’s really an impact in terms of the timing of when we collect cash, and so not the total amount of cash received. And so, since FFO reflects straight line, it will not be impacted by deferrals, however, on the other hand AFFO is essentially a cash measure, and therefore it will reflect when the rent is due under the deferral agreements.

I’d highlight you mentioned collectability a little bit Christy, we apply the new lease accounting that came effective in 2019. Under these rules, it’s determining when it’s probable or the probability of us collecting rents from a tenant, and we must write-off any receivables to the extent those receivables aren’t collectible at a probability of at least 75% chance of — or probability of collection. And so that assessment is something that we’ll be very focused on going forward. It’s something our COVID response team is very focused on and we’ve obviously had a number of conversations certainly too, across the organization and continuing to monitor that.

Operator

Our next question comes from Nate Crossett of Berenberg. Please proceed.

Nate Crossett — Berenberg — Analyst

Hey, good morning guys.

Joey Agree — President & Chief Executive Officer

Good morning.

Nate Crossett — Berenberg — Analyst

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 kind of changing the threshold band you want to be in, or is this just kind of a temporary opportunistic type of leverage level?

Joey Agree — President & Chief Executive Officer

I appreciate the question. I think these equity raises are clearly offensive for us. The equity we have raised has, I am hesitant to use it, but I’ll say it has effectively built a war chest that enables us to go execute on the investment front. I think longer term, which is an important question during this pandemic, and outside of this pandemic I would tell you it is — I think it is inappropriate to run a balance sheet at 5 times to 6 times levered for a net lease company. I would tell you that we will, not most likely surpassed 5 times levered, absent having a forward equity option, outstanding to us.

I think during — we can always raise debt. Raising debt is very easy. We have an unsecured, we have access to the unsecured public bond market today. The private placement market, the term loan market that is always easy, and so now what we have the ability to do is delever which we have executed delever this balance sheet in offensive manner, add in debt when we feel appropriate and in opportunities where it is obviously accretive to our portfolio, run a conservative balance sheet that gives us the offensive capabilities.

But to your — I think the most important part of your question is, I would tell you our stated pre-pandemic range of 5 times to 6 times is now out the window, given the current environment.

Nate Crossett — Berenberg — 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 is the pricing look like today versus pre COVID I guess?

Joey Agree — President & Chief Executive Officer

I’ll let Clay speak to that. Generally, I’ll tell you, we are not actively in the debt markets, we’ve obviously seen a number of companies access, so the market is open, it opens and shuts in windows, as you would expect. Pricing spreads have to have gapped out significantly. I think frankly, our credit quality is only improving in this type of situation. But Clay, do you want to give any specifics in terms of anticipated spreads? I know, we haven’t been active in the market looking.

Clay Thelen — Chief Financial Officer

No. Look, I’d say, it’s tough to say just given the current market and we’re certainly watching closely. There just haven’t been a lot of data points. There are a few investment grade deals, prior to earnings blackouts, but that’s really been it. In those deals, obviously pricing spreads were much wider than they were six weeks ago, but just not a lot of data points currently and it’s certainly something we’ll continue to monitor very closely.

Nate Crossett — Berenberg — 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 — President & Chief Executive Officer

I’ll speak to the second question. We believe we would have been eligible to tap the PPP program. I don’t think it is — we did not think it was appropriate for us to tap the PPP program. We’ve made — we are obviously quite solvent. We have a balance sheet that we’ve spoken about pretty extensively here. We aren’t going to do opportunistically tap any government programs at Agree Realty, frankly, that would defy our core values. Second, to your first question, the government programs, the ability to our tenants are really subject. I’ll tell you, we have not done a lot of research or spent our time in our tenants’ ability to tap government programs.

The only one that I’ve really seen that could be applicable with some of the fallen angel stuff in terms of the bonds for former investment grade companies. I haven’t spent any time on it personally. Clay, I don’t know if you want to speak to it. I know you’ve been too, a little bit too busy, but we don’t have a bunch of small tenants or small businesses in our portfolio that are reliant upon government loans right now.

Clay Thelen — Chief Financial Officer

Yeah, I would just add specific to the PPP program, our tenants having above over 500 employees would eliminate them from being eligible, and so we don’t really view that as real option given our tenant base.

Nate Crossett — Berenberg — Analyst

Okay, thanks guys.

Joey Agree — President & Chief Executive Officer

Thank you.

Operator

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

Robert Stevenson — Janney — 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 sort of back-fill the pipeline into the third and fourth quarters when you start looking out? Is that even a consideration, considering that 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 — President & Chief Executive Officer

Yeah, no that’s honestly a great question. I would tell you, number one, most of the tenants that we’re looking at, just because of the nature of their business. So, if you look at our portfolio and the statistics that we released and again I think our property managers specifically who spent so much time and calling every tenant and talking to them. I would tell you, I don’t have an exact number but approximately 80% I would tell you are open at least that was emblematic of our current portfolio.

Now, whether or not they’re currently paying rent, there is mechanisms to structure around that. Again, I think as Colin mentioned earlier, our average duration to closing is 60 days to 70 days. So, I mean we have some time to watch and see how they pay rent, if they ask existing sellers for deferrals. I’ll tell you, again, it’s not a big consideration for us, given the long-term nature and duration of those leases. The price point, frankly the price per square foot and the basis we access these properties and acquire them at and then our relationships with the tenant. I’ll tell you, there is one acquisition in the first quarter, which we closed that was not open and in that case, we’ve looked to the seller to provide an escrow for any deferral that was structured pre-closing.

And in that case, that could be a mechanism for any considerations in future acquisitions, if we feel it’s warranted.

Robert Stevenson — Janney — Analyst

Okay. And then, you talked about some of your non-long-term partners that are healthy and choosing not to pay. Have you had conversations with them about that you would consider disclosing their names? I mean, certainly if they’re public companies that would be a problem for them and sort of shaming them publicly, is that a consideration for you guys, if that continues?

Joey Agree — President & Chief Executive Officer

I hesitate. I will tell you that we have made tenants. We have made tenants aware of our rights and our remedies, and I think that there are considerations for tenants here about their public — the public perspective, frankly. I think there are those considerations for them and I think they should take them into account. I think one other piece on that when tenants say we’re not paying rent, what many people forget, and I think it was kind of flint [Phonetic] that I actually mentioned it. What many people forget is, a lot of the rent is amortized TI across the space, not necessarily a net lease, but in shopping centers as well as the mall space.

So, landlords have effectively in that case been lenders to these tenants. They have built tenant specifics, they have either provided tenant TIA or landlords work that have effectively financed the tenants’ operation in advance, and part of the rental rate that’s amortized into is, frankly the repayment of those obligations. And so it’s, we don’t have the option as to not pay our lenders. We don’t have the option, frankly we have the option, I guess, but we’d never consider it right now, to not pay our dividend.

And so, what I’ve told our tenants is if you are considering not paying your rent, on a unilateral basis, I will tell you that we will be paying all of our employees, we will be paying all of our lenders, we will be paying our dividend and many of our shareholders, our senior citizens or 70-year-olds that rely upon us to pay their rents, their mortgage and for frankly income. And so your unilateral decision not to pay your rent, even though you’re able to has a cascading effect that frankly is not tolerable to us.

Robert Stevenson — Janney — 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 some sort of 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

So, just make sure I understand the question Rob, I think you’re asking what — given the cash on hand, what capacity, what total volume and acquisitions are we able to close, and that’s — it’s, again, given the slightly lower leverage range and kind of where we’re comfortable running the balance sheet. It’s, north of $1 billion. It’s between $1 billion and $1.5 million in terms of what our capital available, including forwards outstanding would allow us to acquire and still stay at a very low leverage point.

Joey Agree — President & Chief Executive Officer

And Rob this is Joey. Let me just jump into kind of — because I know there’s a lot of numbers here, and there is the additional disclosure that’s posted for the walk here that we posted to our website. But, I think it’s important for everybody to just a high level, and I’m going to use round numbers so details will be forthcoming, obviously as we move through the year. For us to achieve the upper end of our acquisition guidance this year, net of dispositions plus development — anticipated development PCS spend, obviously, net of free cash flow after the dividend. We basically, prior to the Cohen & Steers transaction would have ended the year at approximately without any additional equity at 5 times, so again, I’ll just repeat that.

Hitting the high end of our acquisition guidance, we would end the year without the Cohen & Steers transaction at approximately 5 times net debt to EBITDA without any additional equity. What the Cohen & Steers transaction allows this company to do is, number one, hopefully, and as the year progresses, we’ll get more visibility; number one, exceed that guidance given the market dislocation and the opportunities that we see, without exceeding that 5 times and it’s on a forward basis at our election, as I think you’re all aware.

Secondly, if we do not exceed that guidance or if we end up at the lower end or middle end of that guidance, which frankly, I don’t anticipate the lower end of that guidance today. If we don’t exceed, it basically starts funding our 2020 — our 2021 — year it is now, our 2021 pipeline. So, again, without a dollar Cohen & Steers’ equity, at the end of the year, top end of our guidance, we end up around 5%. And so, I think that’s what the transaction enabled us to do, it allows us to potentially exceed our guided base of 5 times — because that 5 times to 6 times is frankly out the window today and-or fund our pipeline, going into 2021 which frankly aggregation of that pipeline will start typically using that 70 days in mid October of this year.

Robert Stevenson — Janney — Analyst

Okay. Perfect. That was exactly what I was looking for. Thank you.

Joey Agree — President & Chief Executive Officer

Okay.

Robert Stevenson — Janney — Analyst

Thanks guys.

Operator

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

Ki Bin Kim — SunTrust — Analyst

Thanks and good morning out there. And I usually don’t do this too often, but just wanted to say, great job on having the right mentality and philosophy before all this. [Speech Overlap] So my question is, you raised your acquisition guidance, but I think we all realized cap rates tend to move slowly. So, do you have any concerns that maybe, is there a better price to be had, if you just — was there a better price to be had? I think today’s market trades as much frankly on the macro-dynamics. I mean oil has driven negative oil prices for March and April delivery or April-June — April-May deliveries. The market is so dynamic and so fluid. The last thing that we would ever do to advertise our balance sheet and enable our capabilities is wait out for another $1 or $2 or $4, whatever it is.

I mean, if you look at, it’s big picture, we effectively raised equity in the low 5 times, all right. Joey, I meant for your acquisitions not for your own balance sheet.

Joey Agree — President & Chief Executive Officer

Sorry. For acquisitions. Look, we anticipate that hopefully cap rates will move given the lack of bid, but I’ll tell you, nothing that we do on the acquisition side is on the margin, if we can buy a Walmart high-performing supercenter at a 6.5 cap or we think or we prospectively think cap rates are going to go up, let’s just use a round number of 30 basis points we’re not going to wait for that 30 basis point perspective and possible increase.

And so, nothing we do — the same thing with the home goods in the Hamptons. We aren’t going to wait for that home goods in the Hamptons for the cap rates to move. The opportunities that we hit aren’t marginal, the opportunities we hit or we look at is essential and we will execute to them. And the good news is, we continue to find more of them and we now have the balance sheet to continue to execute that on them, going into 2021.

And so, we’re not going to wait for cap rates to prospectively rise because even if they do rise, which I think you mentioned or this could be slow and cascading — even if they do rise we’re going to be there at that time, too. So, we have a fixed cost to capital. We know what that is today, we are putting it to execute.

Ki Bin Kim — SunTrust — 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, going back to these municipalities to get — to lower real estate taxes, to reflect any reality? How do you think about…

Joey Agree — President & Chief Executive Officer

Yeah. I would anticipate from everybody’s home to their commercial real estate that the — everybody — the law firms are going to do great on those. We will work with our tenants in conjunction to hopefully lower their — all of their obligations outside of their rent on a go-forward basis. I mean, we want their all-in occupancy costs to be as low as possible. And so, we will work with them — obviously this is a future consideration during the appropriate time. We will partner with our tenants, as we always do, they typically require both parties to potentially lower their real estate tax obligations, given the revaluation.

Ki Bin Kim — SunTrust — Analyst

Okay, and just last one. This is just a suggestion. But, I think it will be helpful in the press release just to provide a little table on your equity offerings, what’s been done, what’s left to do just because you have many different layers going on at the same time.

Joey Agree — President & Chief Executive Officer

I think — noted. I think, hopefully that the — a reconciliation of net debt to recurring EBITDA that is posted to our website will be helpful. We work to expand disclosures, if everybody would note on page 6, we have now disclosed all retail sectors. We used to have a significant amount. I can’t recall the exact amount, but 20% to 30% in other. We have now broken that down all the way to miscellaneous, which is $75,000 a year at the bottom, again that’s on page 6 and that’s cell towers, billboards and donation bins that are on net leased properties that frankly we own that just came with it. So, hopefully that disclosure is helpful. The reconciliation again a net debt-to-EBITDA is helpful, and we will take that into account as well, for the future.

Ki Bin Kim — SunTrust — Analyst

All right, great job guys.

Joey Agree — President & Chief Executive Officer

Thank you Ki Bin, I appreciate it.

Operator

Our next question comes from Todd Stender of Wells Fargo. Please proceed.

Todd Stender — Wells Fargo — Analyst

Hi, thanks. Joey and Clay and the rest of your team, I hope everybody stays healthy and safe.

Joey Agree — President & Chief Executive Officer

You as well, thank you Todd.

Todd Stender — Wells Fargo — Analyst

Thank you. Most of my questions have been answered, had to do with the accounting around FFO or I guess, the gap between FFO and FAD, which Clay answered. But probably an underwriting question going forward, when you look at your 4-wall coverage. I would imagine that’s going to deteriorate for all retailers, whether they’re open or not just how you’re looking at that, maybe your acquisition guidance increased, but you probably need maybe a little bit more protection. And just as a safety net, going forward, how do you think this is going to change underwriting?

Joey Agree — President & Chief Executive Officer

Just 4-wall coverage for us again, most of our retailers do not report EBITDA. If you ask Walmart what their store sales or EBITDA is on any specific location, I think they would tell you nicely to fly a kite. It’s never been a driver of underwriting. We have never thought it was a proxy for credit, you can have a — I mean, I don’t want to pick on Walmart would pick somebody else, you can have a poor performing Home Depot location but Home Depot corporate is on the lease and the credit and the performance of that retailer can change for the positive or the negative, and so I would tell you much of our portfolio.

The vast majority of which do not report EBITDA because we’re not a lender. I mean, it’s really a lender covenant we’re real estate owner. The vast majority — I would say the majority of our portfolio is counter cyclical, and so post pandemic, I would anticipate again O’Reilly Auto Parts and AutoZone and TJ Maxx and the Walmarts of the world. Frankly, their coverage to potentially go up.

So, our portfolio and everyone’s heard me say it, has been constructed with two thoughts in mind. One of them wasn’t a pandemic, I’ll readily admit that, it was counter — recession resistant and e-commerce resistant, and so, much of that recession resistance frankly Dollar General is going to thrive in a recessionary environment. So is National Tire and Battery and AutoZone, O’Reilly at least, I believe they will.

Todd Stender — Wells Fargo — Analyst

Great, that’s helpful. And just, probably just the last question, just a balance sheet question. You referenced that 5 times net debt to EBITDA. I think it was at the high end of your guidance. What kind of debt is assumed in there and that was pre-Cohen & Steers offering. So that did assume some of the remaining shares and the forward equity to be settled. But, what kind of debt expectations do you have in that number?

Joey Agree — President & Chief Executive Officer

Type or amount of debt?

Todd Stender — Wells Fargo — Analyst

You’re kidding.

Joey Agree — President & Chief Executive Officer

Todd you there?

Todd Stender — Wells Fargo — Analyst

Yeah, sure. Can you hear me?

Joey Agree — President & Chief Executive Officer

Yeah. Are you referencing amount of debt or type of debt?

Todd Stender — Wells Fargo — Analyst

Yes. What’s budgeted? I would imagine you’ll tap the unsecured bond market, now that you’ve got the investment credit rating, but what kind of level is assumed in that number?

Joey Agree — President & Chief Executive Officer

Clay, you want to take that?

Clay Thelen — Chief Financial Officer

Yeah, look, we’re looking at — obviously, we’ll continue to be an unsecured borrower Todd. And we have optionality now certainly in terms of. Now, we have the second rating. I think your question in regards to sizing ultimately this is just ultimately dependent on timing of uses of capital. We have full optionality given our current position, our cash position and certainly the equity outstanding as well, and so ultimately dependent on uses and the timing of uses, and like I said, we will closely monitor the unsecured bond market, that’s obviously the private placement market takes us lead from that market and so, we’ll continue to monitor both very closely and again based on uses execute accordingly.

Todd Stender — Wells Fargo — Analyst

Great, thank you.

Joey Agree — President & Chief Executive Officer

Thank you, Todd.

Operator

The next question comes from Linda Tsai with Jefferies. Please proceed.

Linda Tsai — Jefferies — Analyst

Hi, good morning. Just give us a comment on 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 — President & Chief Executive Officer

Good morning Linda. I think you just hit it on the head, it’s slow and cascading and it’s slow and cascading primarily because it’s such a large and fragmented market in terms of ownership. And so, I’ll tell you, we have seen opportunities where cap rates have gapped out and we are under contract or have closed or under LI [Phonetic] on those opportunities because the seller has potentially — a differentiated set of facts and circumstances, maybe they need a liquidity event immediately.

Then there are sellers that will continue to hold out and try to be opportunistic that have balance sheets and don’t need the capital. And so, I think it is very likely to be slow and cascading. Our origination team, our acquisition team’s job is to find the opportunities where frankly they move cap rates — go up faster, and I’m not sure what the opposite of cascading is right now, but frankly rise faster. And so — but I do agree with you. It will be slow in cascading in terms of macro cap rate environment.

Linda Tsai — Jefferies — Analyst

Thanks. And just one more. What’s the best way to think about run rate of acquisitions 2Q through 4Q? Do you think it will be — do you think you’ll see larger volumes in 3Q and 4Q?

Joey Agree — President & Chief Executive Officer

In full transparency, I have no idea. Again, our increased guidance of $600 million $700 million anticipates no large transactions, M&A, portfolios or sale leasebacks just run of the mill, regular way Agree acquisitions aggregating $4 million plus transactions. I mean, just for reference the Sherwin-Williams transaction at the end of 2018, came together in 30 days from LOI execution or lease execution to close. And so really the bigger deals frankly typically happen faster. So, I have no idea, but they’re not currently in our guidance or frankly in our pipeline.

Linda Tsai — Jefferies — Analyst

Thanks.

Joey Agree — President & Chief Executive Officer

Thank you.

Operator

The next question comes from Chris Lucas with Capital One Securities. Please proceed.

Chris Lucas — Capital One Securities — Analyst

Good morning, everyone. It’s been a long call, so I’ll just ask one question. Have you guys 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 — President & Chief Executive Officer

No. We’ve seen — we have evaluated and reviewing — our legal team has reviewed that. The last time I was updated was I believe it was a couple of counties in California where I don’t think we have any assets. So, no, that is not really a current consideration or concern of ours, but we will — they will continue to monitor it. Obviously, it’s a pretty expansive monitoring process.

Chris Lucas — Capital One Securities — Analyst

Okay, thanks.

Joey Agree — President & Chief Executive Officer

Thank you Chris.

Operator

Our next question comes from the John Massocca with Ladenburg Thalmann. Please proceed.

John Massocca — Ladenburg Thalmann — Analyst

Good morning everyone.

Joey Agree — President & Chief Executive Officer

Good morning John.

John Massocca — Ladenburg Thalmann — Analyst

So just kind of building on Chris’ question a little bit. And obviously, hopefully doesn’t come to this with most tenants 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 kind of unilaterally rectifying any disagreement and maybe your ability to kind of get value out of that asset?

Joey Agree — President & Chief Executive Officer

Yeah, I mean, look it’s all subject to obviously leases and landlord remedies and cure periods. I would tell you, I wouldn’t use the word rectify it; there is defaults, we will put landlord — basically you have to notice a tenant, essentially generally have a period then to respond and pay rent. If they don’t, they are then in default. Some leases have cure periods to varying degrees, the random lease you have to have the second notice or a second reminder. And then, the landlord’s remedies can range from acceleration of all obligations which some leases have, so all rental obligations accelerated to taking possession, evicting the tenant. You can keep the tenant in place and make him pay rent. If you do evict the tenant, often there are responsibilities for a landlord to use reasonable efforts to re-let — commercial efforts — to re-let that premises if you evict the tenant.

The tenant is still on the hook for the rental rate, for the rental income to the landlord, offset by any rental and any re-tenanting of the property, and generally the tenant is also responsible if they are then responsible for the landlord’s costs, including tenant allowance, build outs, leasing commissions, interest, the penalties and any other cost associated with re-tenanting. So, to put that in perspective, generally speaking a national tenant or a regional tenant with a big balance sheet and a down the middle lease, needs to pay their rent.

John Massocca — Ladenburg Thalmann — Analyst

And then, just broadly speaking, in that kind of a situation and I know it’s going to vary from locality to locality. But, I mean any kind of recovery in a situation where a tenant refuses to pay rent? Is that going to be something that happens potentially by the end of this year or is it more of a 2021 type of situation?

Joey Agree — President & Chief Executive Officer

All depends. Obviously, on back to Chris’ question, the courts, the timings everything else I will tell you that if I’m a national retailer and I know I am obligated and I know I have liquidity to pay rent, and I am not filing — potentially filing bankruptcy and in cash conservation mode — I’m not sure I want to undertake the frictional costs and the risks to fight a bunch of landlords across the country. And so, again my expectation for tenants is for them to pay their full rent, on a timely basis and we will continue to remind them of that.

John Massocca — Ladenburg Thalmann — Analyst

And then, just one last quick kind of detailed question. How does the 87% of cash rent received in April compared to either last year’s kind of April cash rent receipts, or the last couple of months?

Joey Agree — President & Chief Executive Officer

I mean, Clay if you want to get into details, but generally we receive all our rent. So, I mean.

Clay Thelen — Chief Financial Officer

Yeah, that’s right Joey. We’re at the 21st of the month. The 20th of the month is going to be reported, so, everything would be fully received.

John Massocca — Ladenburg Thalmann — Analyst

Okay. That’s it from me. Thank you very much.

Joey Agree — President & Chief Executive Officer

Thank you.

Operator

Our next question comes from Christy McElroy with Citi. Please proceed.

Michael Bilerman — Citi — Analyst

Great, thanks. It’s Michael Bilerman. Joey, the direct issuance you did to institutional investor announced yesterday 6.2 million shares, well over 10% of your share base, you can take into account the other forwards. How did you think about the execution of doing something direct of that size, and effectively not providing your other institutional shareholders the ability to buy at a discounted price, to maintain their ownership — pro rata ownership levels?

Joey Agree — President & Chief Executive Officer

Yeah Michael. You’re breaking up a little bit, I understood the question, hopefully everybody heard it.

Michael Bilerman — Citi — Analyst

I am happy to say it again, if you want.

Joey Agree — President & Chief Executive Officer

I think you’re still choppy, it could just be the line generally, but I think everybody can hear and see the transcript. But the question was basically the difference between this transaction and the marketed transaction and how we perceive — what was it again, you said?

Michael Bilerman — Citi — Analyst

I mean, effectively, you took the opportunity to issue 6.2 million shares, direct to one institutional investor that’s well over 10% of your diluted share base, even when you take into account the other forwards you have outstanding. You didn’t provide that same opportunity to all your other existing shareholders to maintain their effective ownership base. And so, I think most of times you see companies do smaller transactions direct either off their ATM or direct transaction. This was quite sizable, and so, how do you sort of balance your relations with other shareholders versus one single one?

Joey Agree — President & Chief Executive Officer

Yeah, understood. I think its context is important, and then the details, I think through the market offering we did at the end of March, also the ATM activity which the vast majority comes through reverse in terms of aggregate dollars raised. I think shareholders have had hopefully significant opportunities, plus buying in the open market to establish positions that’s one. Two, I would point out with this offering I really will get at it is one, it was a unique opportunity. It was really a reopening of the last deal, it was double the amount of the last deal.

We weren’t actively looking, given the opportunity set, we thought it was the right thing to do. I will note that it was at a tighter discount frankly than the marketed deal and the net proceeds to the company were approximately $0.20 higher on the Cohen & Steers transaction than the fully marketed deals. So, it was a tighter discount with higher net proceeds to the company. And so, we thought that made sense for all constituents which were taken into account.

Michael Bilerman — Citi — Analyst

And then, as you think about that 87%, so clearly, you would have been at 100% in March at this point, I think that’s what’s effectively insinuated in the last comment. So, of that 13% that hasn’t paid, I guess, what’s your expectation as we go into May, about how much of that 13 percentage points will be deferred. So, I don’t know if it’s half that you’re working on right now versus, I don’t know, is it half that you expect to take to court and use your rights under your leases. Just to give us some sense of where things stand overall.

Joey Agree — President & Chief Executive Officer

So, I think the best place so look for that — the starting point is probably I believe was our March 19 press release, which outlined the four retail sectors that people considered at risk. And then, you have to really go through — that aggregates to approximately 10% if I’m not wrong, Clay correct me. And then, you got to go through there — and there’s a lot of media reports out there firstly public statements from some of these retailers.

You have to go through and say what is the eventual outcome and that’s when we’ll have to put the 75% test now to them that Clay referenced in terms of probability of paying. Some of those retailers that are in the news, i.e, a large movie theater I think people have to really look at that test pretty closely, and so the entertainment retail portion, the movie theater portion are the biggest most significant pieces of those for us.

I think anticipation of May collection versus April collection — a greater collection in May versus April I’m not sure if that’s the most probable outcome, given their cash liquidity positions and what we read in the news.

Michael Bilerman — Citi — Analyst

But, of that 13 percentage points of rent that you haven’t collected, it sounds like the vast majority maybe up to 10 percentage points. It’s just not going to get paid because of the issues, whereas 300 basis points maybe — you’re working on deferrals. I’m just trying to get very specific in terms of how much you are actually working on, on these deferral program, so that we can start thinking about the cash impact and the cash rents collected and your ability to [Speech Overlap] on your obligations.

Joey Agree — President & Chief Executive Officer

I fully understand. It literally comes down to, what does Dave & Buster’s do. We have three, I mentioned one is under contract with $100,000 non-refundable deposit at our title company. I’m not sure if we’ll own it or not, that’s how we have to walk away from $100,000. What happens with Dave & Buster’s, frankly that’s going to be subject to how quickly this virus dissipates.

I’m just using them as an example, by the way. How quickly this virus dissipates, the reopening rate of states, the return rate of customers. There are capital providers outside of landlords’ willingness because to — willingness to frankly support them. I mean, you could be looking at — they did a recent financing, I’m just using that for example, then you take that through the movie theater space. I would tell you, I don’t think it’s the full 10% we referenced in the release, because I think a lot of those — there is some opportunism in the restaurant space, which is very de minimis for us, specifically the fast food. I mean their drive throughs and windows.

We’ve had a couple of fast food franchisees, I’ll call it the big whoppers, not McDonald’s, but we have a couple of fast food franchisees that did not pay their rent. We know they are open for drive through and pick-up, they chose not to pay their rent that is a choice, they made, they will be put in default. We anticipate that they will either pay their rent, whether they pay May or not, we’ll see that’s their choice. So, it’s hard because, again these are unilateral decisions to not pay their rent that are on our counter parties, that we can cajole and tell them what we’re going to do and telegraph the future, but at the end of the day, they got to cut the checks [Indecipherable]

Michael Bilerman — Citi — Analyst

All right. So, it doesn’t sound like from — you’re not working on any abatement in terms of rent reductions, it’s all deferrals or trying to get the tenant to pay. It sounds like the deferral amount is pretty marginal in terms of how much you’re working on, right?

Joey Agree — President & Chief Executive Officer

Yeah. We’ve given we’ve given zero abatements. We will not give any abatements — they will all be — any deferral that we gave will be amortized into a — every deferral we have given or will give, will be amortized into the rental rate and paid back over a quick period, especially subject to any credit concerns that we have, it will be paid back faster. The higher credit quality, we would potentially look out a little bit longer, but again we’re talking months here, not years. And then, I’m interested to see frankly myself with some of these retailers try to pull in May. We’ve got a lot of opportunists out there.

Michael Bilerman — Citi — Analyst

Well, that’s a [Speech Overlap] because you already — you said the 33 percentage point is for something, right and I understand that some of that, you feel is opportunistic and ridiculous. I’m trying to understand is, as we move into May is at 87% going to drop down to, I don’t know, 75% just because of the number of tenants that have decided we pay our April, but we’re not going to pay May. I’m just trying to understand the direction of where you think that’s going to come out?

Joey Agree — President & Chief Executive Officer

I think it’s — I wish I fully could tell you I knew that answer. I think it will be up to those, again, up to those retailers’ decisions and up to governors opening states and the dissipation hopefully and the elimination of this virus, which I don’t anticipate happening frankly in May. But, again I understand 100% what you’re trying to drive to. I would like to drive too, and get full visibility myself.

For us, specifically, given our balance sheet and our liquidity profile, I would just encourage shareholders to look past short-term cash flow — Clay — Clay mentioned the difference between FFO and AFFO, and you obviously ought to understand that. Short-term cash flow and tenants’ unwillingness to pay their contractual obligations versus the longer term, what’s really going to happen here, and then the longer term, this portfolio and this balance sheet and the tenants that we own the real estate under are going to survive, thrive — will we have a little bit of minimal fall off? Sure, there may be a movie theater operator that doesn’t make it, but on a relative basis, we come out big winners.

Michael Bilerman — Citi — Analyst

Yeah. Okay, thank you.

Joey Agree — President & Chief Executive Officer

Thank you.

Operator

At this time, we are showing no further questioners in the queue. And this concludes our question-and-answer session. At this time, I would like to turn the conference back over to Joey Agree for any closing remarks.

Joey Agree — President & 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. Good bye.

Operator

[Operator Closing Remarks]