Q2 2020 Agree Realty Corp Earnings Call
[music].
Good morning, and welcome to the acreage LP second quarter 2020 conference call.
All participants will be in listen only Matt.
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I would now like to turn the conference over to claim Deylen Chief Financial Officer.
Please go ahead clay.
Thank you operator, good morning, everyone and thank you for joining us for you agree Realty second quarter 2020 earnings call.
Joey will of course be joining me this morning to discuss our second quarter in first half results.
Please note that during this call will make certain statements that maybe considered forward looking under federal Securities law.
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 cobot 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.
And on our tenants.
Please see yesterday's earnings release, and our FCC filings, including our latest annual report on form 10-K, and subsequent reports for a discussion of various risks uncertainties and underlying our forward looking statements.
In addition, we discuss non-GAAP financial measures, including core funds from operations are core FFO adjusted funds from operations are epicel 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 FCC filings.
I'll now turn the call over to Joy.
They do quite a big you all for joining us. This morning, I hope that all of our listeners and their families are staying healthy insane. During these challenging times.
Before providing or standard update I'd like to start by outlining the additional steps that we've taken to further strengthen our position I missed this ongoing crisis.
As mentioned on last quarter's call. We created a cross functional Kobin response seem to consist of asset management legal accounting and tenant relations they've done an outstanding job biggest navigate through this pandemic.
The beginning of the year, we've raised more than $825 million in gross equity proceeds positioning our company to execute on the high quality opportunities there are emerging throughout this crisis.
At quarter end pro forma for outstanding, Florida Outstanding forward equity, our fortified balance sheet stood at 1.6 times net debt to recurring EBITDA.
Our balance sheet in nearly $1 billion and liquidity provides us with an unparalleled optionality as we continue to execute on the numerous opportunities that we uncovering.
Given our record investment activity at more than half a billion dollars during the first half of the year, our fortress balance sheet and liquidity.
We have continued to amass an incredibly high quality and robust pipeline I'm pleased to announce we've increased our acquisition guidance to a range of 900 million to $1.1 billion.
As evidenced by the best in class nature of our year to date activity rest assured we will maintain our disciplined underwriting standards that are focused on the premier premier retailers in the country.
The quality of our carefully constructed portfolio is reflected in our second quarter in July rent collections data, which continue to lead the retail sector.
We received April may and June rent payments from 90, 289 in 89% of our portfolio respectively. In the aggregate, we receive second quarter rent payments for approximately 90% of our portfolio entered into limited deferral agreements, representing approximately 3% of total rats.
For the month of July or collection data has continued on its positive trajectory. Today. We have received July rental payments from 94% of our portfolio well also entering into limited deferral agreements with tenants representing an additional 3% of July rats.
What do we have confirms that quality and disciplined count.
Tenant credit real estate fundamentals and sound balance sheet management, having a mainstay of our strategy before cobot, and we'll continue to drive or activities activities during and after this pandemic.
Our company is positioned to emerge stronger than ever with best in class collections, a fortress balance sheet and organizational momentum they'll allow us to execute on a myriad of high quality opportunities that we exceed we see accelerating in this environment.
With that allow me to run through our standard update.
I'm very pleased to report the despite the ongoing disruption caused by Cobot 19, the second quarter represented a record quarter for a realty.
During the quarter, we invested a record $276 million and 78 high quality retail net lease properties across our three external growth platforms.
75 of these properties were originated through our acquisition platform representing record acquisition volume of approximately $272 million.
While achieving a record volume during these unprecedented times, we remain extremely disciplined in our approach as demonstrated by approximately 80% of acquisition volume being derived from investment grade retailers.
The 75 properties acquired during the second quarter leased to 16 tenants operating in 11 distinct sectors, including best in class operators in the off price general merchandise Autoparts tire and auto service grocery dollar stores and convenience store sectors. The properties were acquired at a weighted average cap rate of six and.
A half percent and had a weighted average lease term of 10.9 years.
Most notably during the quarter, we acquired seven additional walmartstores comprising more than one quarter of total acquisition capital deployed.
I'm very pleased to report that Walmart remains our largest tenant at 7.6% of annualized base rents representing a year over year increase of roughly 320 basis points. We continue to enjoy a very productive and strong relationship with the world's largest retailer.
Through the first six months of year, we've invested a record $507 million into 132 retail net lease properties spending 33 states across the country.
Oh that 507 million invested approximately half a billion was VR acquisition platform.
The 126 properties acquired in the first half the year leads to 24, leading tenants operating in 17 distinct sectors and unparalleled 84% of the annualized base rent acquired in the first half year comes for investment grade operators by almost one third of acquisition capital deployed in the first half the year was invested into 30.
He Walmart stores.
As previously mentioned given a record acquisition volume today, and our robust pipeline, we're increasing our 2020 acquisition guidance to a range of 900 million to 1.1 billion <unk> previous range of 700 $800 million.
Although ended this range would represent a record acquisition volume for our company easily surpassing the $700 million acquired last year.
We continue to source a number of ground lease opportunities with leading retailers, adding 13 assets during the past year to this portfolio.
Today, our ground lease portfolio spend 69 properties, comprising 8% of total annualized base rents.
Our current pipeline includes several significant ground lease opportunities that we anticipate closing during the upcoming quarter.
At quarter end, nearly 90% of our ground lease rents were derived from investment grade retailers, including Costco Walmart all the home depot lows National Tyron battery and Wawa only 1% is sub is leased to sub investment grade operators and the remaining 10% of the ground lease portfolios lease to unrated.
Pillars.
At quarter end, our portfolios investment grade exposure stood at 61% representing a substantial year over year increase of nearly 700 basis points.
On a two year stack to basis, our investment grade exposure has been improved by more than 1400 basis points.
As we continue to focus on best in class operators that are poised to thrive in an omni channel environment I anticipate are investment grade concentration to continue its upward trajectory.
Moving onto our development and partner capital solutions platforms, we had six development in Pcbs projects, either completed or under construction. During the first half of the year that represent total committed capital of more than $19 million.
One of those projects was completed during this past quarter, our first development with family dollar and Grayling, Michigan and a vacant rite aid that we acquired.
Construction continued during the quarter on our first project with TJ, Max and Harlingen, Texas immediately adjacent to a high performing target rent is anticipated to commence in the third quarter of this year.
We commenced construction on one new project during the quarter, our second development with harbor freight tools and WEX Wesco, Texas. The project is subject to a 15 year net lease upon completion with rent anticipated to commence in the fourth quarter. This year.
These recent project to the result of our team's effort to screen vacancies utilizing our software to identify potential backfill candidates within our sandbox a meeting omnichannel retailers, we continue to work with retailers to evaluate market vacancies and redevelop buildings at a very attractive cost basis for both AIDC as well as our retail.
Partners. Our pipeline consists of a number of projects that I anticipate announcing in conjunction with best quarters earnings.
Well, we fortified our portfolio through recent investment activity, we are getting quite active on the disposition front during the quarter as we sold eight assets for proceeds of approximately $19 million at a 6.3 cap rate.
Notable disposition activity during the quarter, including the sale of seven franchise restaurants further reducing our total franchise restaurant exposure to a mere 1.5%.
This represents a decrease of approximately 230 basis points in the past 18 months.
Dispositions for the first six months of the year have told a 14 assets for proceeds of just more than $44 million with the weighted average cap rate of approximately 7.2%.
Given our disposition activity through the first half of this year, we're raising the bottom end of our disposition guidance to 50 million for the full year 2020.
Our asset management team has also been diligently focused on addressing upcoming lease maturities as a result of their efforts are 2020 lease maturities stands at only three remaining lease expirations and represent just 0.1% of annualized base rents.
Similarly made significant progress at our 2021 upcoming maturities with additional announcements that anticipate during our next quarterly call.
During the second quarter, we executed new leases extensions or options on approximately 92000 square feet of space. We're very pleased to have executed a new 20 year net lease of loves furniture to backfill the former art van flagship store in Canton, Michigan, We anticipate recovering 100% of the prior art van rent upon loves rent coming.
It's been during the latter half of the third quarter.
During the first six months to the year, we executed new leases extensions or options and approximately 272000 square feet of gross leasable space.
As of June Thirtyth are growing retail portfolio consisted of 936 properties across 46 days, we anticipate surpassing the 1000 property milestone in this upcoming year.
Our tenants are comprised primarily of industry, leading operators operating in more than 31 retail sectors again was 61% of annualized base rents coming from investment grade has the portfolio remains fully occupied at 99.8% and as a weighted average remaining lease term of 9.7 years before.
Handing the call over to clay I would like to thank all of our loyal stakeholders for their continued support during these difficult in drying times. Thank you for your patience happy to answer any questions. After clay provides an update on our balance sheet and reviews, our financial results for the second quarter Clay.
Thank you Joe I'll start with a balance sheet update and highlights from our capital markets activities over the past quarter, some of which we discussed on last quarter's call. We had another very active quarter in the equity capital markets raising more than $400 million of common equity for the second consecutive quarter. In addition to capital raised we also generated approximately 25.
Million dollars through our disposition activity and free cash flow after dividends during the quarter.
On April 22nd we closed an underwritten public offering of 6.2 million shares in connection with a forward sale agreement in which the shares were sold to Cowen and stairs.
Mentor it with the Cohen <unk> Steers transaction, we settled all of our then outstanding ATM forward equity offerings, realizing net proceeds of approximately $267 million.
Following the cone and Sears transaction, we were again active on our ATM program entering into forward sale agreement to sell more than 740000 shares of common stock at an average gross price of $66.61 for approximately $48 million of anticipated net proceeds.
To date, we have not settled any of the cone and stairs or second quarter ATM Ford offerings and have approximately $411 million anticipated net proceeds available to us upon settlement.
This capital raising activity further bolsters, our balance sheet and provides the company in nearly $1 billion and liquidity. In addition to the $411 million of net proceeds available to us upon settlement of our outstanding forward equity we ended the quarter with full availability on our $500 million revolver and approximate $336 million of cash on.
Hand.
As of June Thirtyth, our net debt to recurring EBITDA was approximately 3.5 times pro forma for the settlement of our outstanding forward equity offerings, our net debt to recurring EBITDA was approximately 1.6 times.
Total debt to enterprise value at quarter end was approximately 18.2% while fixed charge coverage, which includes principal amortization stood at a company record 4.6 times.
Moving to earnings core funds from operations for the second quarter was 76 cents per share a 2.1% year over year increase adjusted funds from operations per share for the quarter was 76 cents, an increase of 3% year over year.
During the quarter, we elected to treat cobot 19, deferrals as delinquent receivables and our FFO measures include this revenue. Please refer to the supplemental disclosures in the FFO table of our press release and 10-Q that provide enhanced disclosure regarding the amount of rent subject to deferral.
On quarterly and year to date basis core FFO per share and AFFO per share were impacted by dilution required under GAAP related to recent party forward equity offerings.
Treasury stock is be included within our diluted share count in the event that prior to settlement our stock trades above the deal price from the offerings.
The aggregate dilutive impact related to these offerings was roughly a penny to both FFO and AFFO per share for the second quarter and the six month period.
General and administrative expenses in the second quarter totaled $4.6 million gene expenses, 8% of total revenue or 7.5%, excluding the noncash amortization of above and below market lease intangibles. We continue to anticipate GNS 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 and total revenues.
Income tax expense for the quarter totaled approximately $260000 for 2020, we continue to anticipate total income tax expense to be in the range of 1 million to $1.2 million.
The company made it dividend of 60 cents per share on July 10th to stockholders of record on June 26, representing a 5.3% year over year increase.
This was the company's 105th consecutive cash dividend since our IPO in 1994.
For the first six months of the year, the company declared dividends of $1.18 and a half cent per share a 5.3% increase over the comparable period in 2019.
Our quarterly payout ratios for the second quarter were 79% of core FFO per share and AFFO per share respectively.
For the first six month to month of 2020, our payout ratios were 75% of core FFO per share and 76% of after FFO per share respectively.
These payout ratios at the mid to low end of the company's targeted Rangers ranges and continue to reflect a very well covered dividend with that I'd like to turn the call back over to Joey. Thank you Kelly operator at this time, we will open it up for any questions.
Thank you.
And we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you're using speakerphone, please pick up your handset before pressing the keys.
At any time. Your question has been interested you would like to withdraw your question. Please press Star then.
Then too.
At this time, we will pause for a moment to assemble a roster.
My first question today will come from Rob Stevenson of Janney. Please go ahead.
Hi, Good morning, guys Kelly, what's the discussion like with tenants that are not paying and not under deferral agreements. These days is there just an inability to come to an agreement or does come into any agreement with you limit their options going forward can you give us an idea what's really going on behind the scenes there.
The total terms good morning.
Good first good morning, Rob I think it spans the full spectrum there I think there's a inability obviously to come to an agreement.
We have tenants that are obviously in cash conservation mode.
And then there tenants that continue to be opportunistic in terms of seeking abatements deferrals or other types of concessions and so obviously the minority of our portfolio today, but we we continue to make progress there, but at the same time, you've been very clear that we're not going to give up any contractual rights.
Without consideration.
Okay, and so does that statements sort of lead you to just waiting it out rather than.
Any benefit to moving now on these tenants in locations versus waiting for the bankruptcy filing if that's the indeed, what the sort of end results are just let it play out at this point positions that are bankruptcy.
Well I think it's a case I think it the case by case basis, I think I think the majority of our holdouts aren't near or I would tell you are not near term bankruptcies threats. So.
Is there are covered response team Devaluates every lease and every tenant with a different options here in terms of legal options and different remedies and we can pursue but I.
I would tell you we will we will we will pursue a litigation and collections and or even action in certain circumstances at the same time will work toward a a a mutually acceptable conclusion in others.
But will remain flexible there with all our options on the table.
Okay, and then clay the uncollected contractual rents not subject to deferrals I think it's like 3.5 to 7 million on page 14 is that the amount that's fallen below the sort of 75% Collectability test and had to be moved to cash accounting or is that sort of buckets somewhere else or another number.
No. So the three and a half million dollars you're highlighting on page 14 is included in revenues and was still.
Accrued for purposes of FFO and FFO.
Have you had to move anybody into cash accounting, because they've fallen below the collectability standards.
We did we moved three tenants to.
Cash basis in the quarter I had an immaterial impact on our financials after the quarter roughly $500000.
It was three tenants in total.
Okay, and then Joey I mean, you guys have been.
So scooping up a bunch of Walmart and obviously there are great tenant in grade credit quality.
When you look at the portfolio just from a risk management standpoint, what's the you know what's the sort of ceiling in terms of the amount of Walmart exposure, that's sort of prudent you guys are willing to take meaning if we keep going.
Seven eight walmarts a quarter on your last few quarters trend you're going to be getting up there are pretty high pretty soon.
Yeah, we're we're cognizant of all of any dependent exposure in the aggregate, obviously, Walmart supercenters were extremely comfortable with we started.
Really pursuing Walmart supercenters aggressively in Q4, which led to the Q1 acquisitions earlier this year I I mean, I'd remind everybody that many of these are ground leases so beyond even the Walmart credit here there ground lease structures and then we're targeting high performing stores, we enjoy a fantastic relationship with.
Walmart as I mentioned, the prepared remarks, and we'll continue to target high performing stores with great underlying real estate and frankly, a low basis.
Terms of rental rates as well as our cost basis. So.
Where we are extremely comfortable, especially given the circumstances of the macro environment that we're in today with Walmart being in that mid upper single digit range.
Okay. Thanks, guys appreciate it.
Thanks, Rob.
Our next question today will come from Christy Mcelroy with Citi. Please go ahead.
Hey, good morning, guys I'm, just a quick follow up on Rob's question. So just thinking about the three and a half million that was a credit remains unresolved nattymac. Let you wrote off Richie segments are material about 500000, as you think about sort of that collectibility assassinate going forward and you don't keep a general reserve I guess the question is that.
And a half million is there risk that more could be written off in future quarters right.
Well I think yes, there is a risk I'll tell you that the bulk of that is head into one of the health and fitness industry in one of the entertainment retail you can see in terms of the collection data on page seven of our release and I think you can imagine who those two are.
So yes, there is a risk I'd tell you that both are leading operators in the spaces I think the risk here is truly only probably maybe dr. FAOD. She knows the risk it's really how long this ongoing health crisis goes on and then a their ability to reopen and so you'll see we did have some rent collection, specifically and how.
In fitness sector. This.
In Q2, 20% the entertainment retail sector, specifically at zero percent is our is our three David rosters.
And I guess you know what's the risk that you know any of those tenants might fall outright how should we be thinking about potentially modeling.
I get an occupancy as we move forward later anywhere.
Yes, Chris I again, I think it really comes down to the health crisis here right now really comes down to the underlying coded 19 pandemic in the ability for these operators, who opened their doors and or get alternative financing when we've seen Dave and busters raise I think it was $200 million an equity.
And so.
Our sporadic openings, obviously sporadic closings now we're re closings and so I would.
I would hate to a dip to predict here the underlying health crisis I'll tell you obviously the July collections at 94% were stronger.
We believe we all know when we see states municipalities counties.
Closing doors on certain types of establishment hearing and those two types of establishment still are in that wheelhouse for doors being shot.
Okay, and then just a bigger picture question on you know acquisitions I guess.
Got to the transaction market and I understand that you're buying high quality investment grade stuff, you're sticking with a narrow band of tenants. Just as you think you know more broadly about the next year and you have significant dry powder to invest do you anticipate further changes to the investment landscape any sort of big changes in terms of pipeline in pricing what do.
You see is the biggest opportunity to take advantage of here in terms of disruption that that is occurring our credit card.
Well I I think we're investing in the 99 percentile of retail from my perspective, 99% of retailers almost on investable are very difficult to underwrites, if you're willing to invest in and so we're playing the top 1% that is what we call our sandbox to 20 to 30 tenants, we acquired living 17 different 10.
This quarter.
My expectation frankly is the cap rates could arguably lease remain stable for that one percentile for that 99, percentile, I should say or or even potentially compressed so and I'm sitting here looking at the 10 year unsecured bonds for many of the retailers that we are acquiring and it reminds me very similarly, the great recession.
Different interest rates different cap rates, but if we if we think back to the great recession over 10 years ago. The 10 year Treasury was approximately 3% we requiring.
And high credit quality were trading at approximately 8%.
On a transactional basis, so basically about a 500 basis points spread today. When you look at the landscape a Walmart tenure paper today is trading at 112 or Costcos at one three TJ Maxx, a 165, we're acquiring again into 500 basis points spread too.
Where their unsecured tenure papers trading so it's a very similar situation, obviously, a much lower interest rate environment, a different cost of capital for for us specifically, but for some acquirers out there in the marketplace and so I think we're going to see a high credit demand for high credit quality the unique capabilities that we bring that.
Tables, obviously, our balance sheet, our cost of capital liquidity, but most importantly, I would stress to everybody is the relationships, we have with our retail partners and our ability I'm from our team, which has done a fantastic job to source opportunities that fit within their long term strategy.
Thanks, Joe.
Thank you.
Our next question is from make cross said of Baron Burn. Please go ahead.
Hey, Good morning, guys I was wondering if you did touch on competition over the last three months.
Obviously your cost to capital as a lot better than most of that appears in the state So no any color on.
No competition.
Over the last month it would be helpful.
Well I.
I appreciate the questions made I mean undoubtedly there is less competition right now given that many many potential purchases purchases are on their heels are dealing with.
Defensive oriented.
There is due to koby 19.
This is a broad broad fragmented space is a huge space as we talked about before.
65% of U.S. retail Jio is net lease and so we face competition that said our the team here is second to none are relationships as I mentioned Christys question are second to none.
And frankly, we are Ah, we're not having trouble finding opportunities to strike.
Okay, and just you know just on the more challenged tenants.
We're obviously falling all of those in some of those guys have got in funding from either the public markets are PE. So I'm. Just wondering have you noted kind of a change in the dialogue once that funding is carried.
It's a good question. It's a broad question I tell you there's such a range of conversations that are co with response team is happening.
The led by late term as our COO and see our general counsel that it's tough to paint with a broad brush.
I think that isn't the case for many of our tenants where private equity has stepped in.
Or a outside the Dave and Busters equity raise I think though the block trade that isn't the case, so I'd be hesitant to really draw any conclusions. Therefore there.
Okay and I'm just wondering on the DNA, you, guys, obviously, acquiring and quite a bit and thats ramping up.
In terms of the workforce do you see many addition next year you kind of offset.
No we will continue to grow the team and all in all aspects as I mentioned will will surpass 1000 properties.
In short order here, we'll continue to grow.
We were very pleased to be they wanted to one of the best places and real estate to work recently and we'll continue to attract and retain talent them. We're very focused on the full tailing management cycle that said in terms of Genie. We have also spend several hundred thousand hours and we'll continue to invest in IP in our systems.
That is theyve been a huge push for us over the last three years.
And probably will never end, but we're obviously we are we are seeing a lot of efficiencies from our improvements, we anticipate seeing additional efficiencies and capabilities from them, but there, but there's no. There's no question. This team will continue to grow.
As the platform continues to grow.
Okay, great quarter, Thanks, guys.
Thank you appreciate it.
Our next question is from London Sigh of Jefferies. Please go ahead.
Hi, Thanks for taking my question, there's three tenants you moved into cash accounting totaling $700000.
What industries, where those three tenants.
Gladly.
The vast majority was related to a tenant in the health and fitness sector. The other two were pretty pretty small.
Got it maybe the sensors. The next question is 3.5 million of uncollected rents not subject to deferral in your view.
She does no entertainment fitness tenants today far more in the category of inability to pay or unwillingness to pay.
[laughter].
Good question, Linda I would tell you.
I would tell you it's more unwilling necessarily at this time to pay.
We've had different and very proposals, which included partial payment.
Included deferred payment or partial abatement and so this isn't binary where they are unable to pay.
That said are they conserving cash definitely.
But I think we'll continue to see as we didn't July additional collections and then we're just dealing with effectively arrears unless they are re shut down and that again decide not today.
Thanks for that and then last one on filling the art. The in store I think you said in the past you're a little bit more bearish on commoditize furniture stores. So what kind of due diligence did you do for this tenant or you know what makes you comfortable about their sustainable.
Yes, so so while it was obviously took a number of the art art van stores I think given that given the difficulty in the overall leasing environment in the midst of a pandemic.
With minimal landlord costs here on our end, we felt comfortable allowing loves to take that space at 100% of the former rents now. We are we are hopeful that loves will thrive as the company, we're very confident the underlying real estate and specifically this unit this store.
And so well like I said, we're hopeful that will thrive if not this is a this is a fantastic piece of real estate, but given the overall leasing environment, given the minimal landlord costs here and investment and.
Frankly, and frankly, the 110 sound the dollar that we recovered.
We thought it made sense enter into this transaction.
Got it thanks.
Thank you and.
Our next question is from Todd Stender of Wells Fargo. Please go ahead.
Hi, Thanks, a in Joe you gave some bond coupons as some of the larger tenants with access to capital in the debt markets have been fairly open how about other tenants who may not have that kind of access how is the trajectory I guess of sale leaseback discussions gone through this covert period.
Very few and far between for US Todd I'm. The only sale leaseback. We've entered into is the national tire and battery sale lease back and so again, we're playing in a really tight sandbox here with the best and brightest retailers in the country. The vast majority of those have have access to both the debt and equity markets the debt markets throughout.
Obviously very favorable today.
And so a very few sale leaseback discussions again, it's a capability will deploy selectively more or more than happy to discuss it but it's really not our about.
Okay.
How about visibility for tenants or in or I guess for you guys with your P.C.S. platform to maybe break ground. This fall how are you feeling here your pipeline breaking ground and maybe tenants thinking about their growth.
As I mentioned in the prepared remarks, we have a number of projects that we anticipate announcing commensurate with our third quarter earnings.
They're either going through the entitlement or permitting process. Currently there are tenants in this country that continue to grow.
The dollar stores, obviously are growing the auto parts retailers the discount grocers are continuing to grow.
Tractor supply is continuing to grow amongst others and so we'll continue to work with a those retailers in our sandbox on either development or Pcls projects at the same time, we will deploy that capability very selectively given given the robust nature and high quality nature of our pipeline right now.
This is a this is a very busy team and we want to be careful where we spend our time, which is our our most precious commodity.
Right just last one from me kept pretty good acquisition volume, obviously in the quarter new raised it and the cap rate was six and a half can you discuss what the range of cap rates were in the quarter just to see how far you will go maybe into the fives and maybe how high yield go. Thanks.
Yeah, I tell you generally we're operating between five and a half in a seven and a half dependent upon lease structure term credit underlying real estate. We made some very unique acquisitions during the quarter inclusive of the walmarts, a carmax equipped clip portfolio amongst others.
So I would tell you that kinda averages out into that six and a half offerings, there and that's kind of what we see going forward now our Q3 pipe language I mentioned on the call. It is sizable it. It has some very unique qualities to what we're very excited about it.
It has a number of ground lease opportunities in it where we've been able to find.
So some really one of the kind opportunities that we're excited about so that six and a half will vacillate up and down call. It maybe 10 basis points, but again thats kind of the midpoint of our strike price.
Thank you.
Thanks Scott.
Again, if he would like to ask a question. Please press Star then one our next question is from John Masako of Ladenburg Thalmann. Please go ahead.
Good morning.
Good morning, John.
So and building a little bit on on that kind of last line of questioning.
Can you provide a little color on how much you're kind of investment opportunities today come from.
Position side come from develop developer sellers.
And is there a possibility that maybe you see some headwind in terms of that opportunity set.
And you look out maybe six to three months from now maybe even nine months from now.
Yeah, I can't you know I couldn't I can't give you an exact number I'll tell you we worked with a number of developers last repeats sellers on a direct basis I don't anticipate that that would typically those are smaller price point assets on the auto parts retailers of the world amongst them.
So I wouldn't anticipate that becoming any headwind for us.
In terms of acquisition volume.
It's a piece of its a piece of what we do but I'd remind everybody that we're acquiring from large institutional sellers all the way for the individual owners, who own a single piece of net lease real estate and so it's a it's a wide range in a myriad of transaction types.
There really has no rhyme or reason on a quarter to quarter basis.
Okay, and maybe just specifically, though with the developer sellers matter, they and they kind of bounced back pretty relatively healthy or is there a little bit of stress. There are there and they don't it doesn't affect are in place portfolio, just kind of think about that.
Acquisition vertical.
It varies from developer right I mean, there developers that are got outside of their typical wheel house to maybe got into shopping centers are mixed use but it really varies upon individually individual developers I don't have much insight again, it's we don't we don't rely upon any single developer for a large piece of our pipeline or I'd tell you even a.
Maybe small piece of our pipeline and so I really don't have insight into their individual a financial.
Situation today.
But again its.
We continue to see those opportunities, but theyre, they're they're just a small piece of what we do.
Okay, and then switching gears a little bit to the in place portfolio can you provide some color maybe on your rent collections. The movie theater industry I just noticed because it was kind of a significant increase in a quarterly collection versus what you had collected in April.
Yeah, we had guys pay I mean, that's not the Bottomline guys decided a guys decided to pet and so I think that has a both the reopening their willingness to pay our ongoing negotiations and tactics that the gold response team is taking resulted again I'd remind everybody. We only have five movie theaters.
Sure AMC, Regal and AMC, Regal and Cinemark and so it's not a big subset, obviously of our portfolio and probably not representative of view of the overall theater industry.
But but in July you saw that payment activity definitely definitely took up there.
What was that kind of unprompted or was that may potentially giving kind of conversations you would have and relatively expected.
I would say nothing is overly unprompted were engage and active dialogue with all of our tenants.
Most notably probably the non payers or the late payers.
So it's definitely not unprompted.
In terms of expectations I think it varies across the board summer surprising.
You know these conversations to be Frank These conversations are very fluid, they're very dynamic and sometimes frankly, a checker away or just shows up out of nowhere.
And so there really is no there really isn't though no rhyme or reason sometimes for for these conversations I think.
Everyone as to remember that here. The default is that tenants are responsible for their rent. This pandemic was not a force majeure event, we have not breached quiet enjoyment their unilateral unwillingness to pay is a breach it will it will eventually turn into a default and then we have a host of remedies based upon that.
Contractual right contractual remedies in the and those leases and so there are tenants that are we had one this weekend that just decided after four months of Ah non payment in partial payment and all different types of payment that they're just going to pay everything now because frankly I think they realize that they have bigger problems the deal within our three or four stores that we.
So we anticipate the these collection numbers will continue to pick up.
And a lot of them Frank frankly, our are just a function of extended conversations here with the sense.
Okay, and then as we kind of thinking about the July collections versus.
Twoq you was there any specific industries that drove that.
There was a pretty broad based.
I think it's I think I think it's pretty pretty broad pretty broad based I think notable in there. Obviously was was the theater collections, 71%, but I think I'm just thinking.
Kind of Jim to July.
Yeah, I think it was pretty broad based I think between Jim's in theaters you you're right you have some additional collection activity in there.
And the other.
Other tenants that were either potentially either able to open in certain regions and or decided that payment was appropriate at this time, given the different pressures that they face.
Okay. That's it for me. Thank you all very much.
Great. Thanks.
Our next question is a follow up from Christy Mcelroy of Citi. Please go ahead.
Hey, it's Michael Bilerman here with Christie Kelly I was wondering if you think about sort of acquisition.
Are you willing to do any sort of larger portfolios or even a larger scale M&A.
Where you would obviously not get you know 100% of this top 1% in terms of the.
Type of assets that you normally buy but given the size of the company portfolio. Today are you willing to take on a non core properties to be able to get a larger sets a investments that fit your criteria I guess are you willing to take.
The risk of selling non core.
Q2, deploying more capital.
Yeah No I appreciate the question Michael look it we're consistently looking and larger opportunities diversified portfolios and the challenge. We always run into is again is are we willing to take on the end or have to dispose of that bottom tier and that is typically our largest challenge now.
Given the organic nature of our pipeline given the depth breadth and I would tell you the quality of the pipeline right. Now I mean this is a conservative organization to take our midpoint of our guidance of 33% people should take that with a pretty strongly.
It obviously isn't necessary for us so it's its something that we what we will look at we will continue to look at its always been a challenge my number one threshold here has always been we're not going to dilute the quality of this portfolio and we are on a significant March 14.
800 basis points in terms of investment grade exposure I think qualitatively. This portfolio is improved you're going to see a consistently approved improved quarter over quarter and and my biggest challenge with larger with larger portfolios. As you mentioned is always been taking on the the bottom quartile of assets, there or sometimes even more.
Right, but even thinking lets say, let's say you find an M&A deal or let's say, it's a billion dollars right then.
Bottom quartile be 250 million all of a sudden 250 million over a pro forma portfolio four and a half billion is not that much right, then and I would I would argue that 25% probably a high number in terms of noncore and the portfolio. So I just don't know I can understand maybe two years ago or even three.
The 40 years ago, and the company was a lot smaller those sorts of transactions would have a much higher hurdle rate I. Just don't know we've sort of cross the Rubicon at this point, where you would pursue those because that resulted noncore is just not a significant enough of a percentage of the pro forma total.
I agree I think it's obviously with the growth of the company in the portfolio and then the de Minimis exposure to that non core there. That's a pro forma transaction would result in gives us more ability to look at those transactions and to scrutinize them that said we have no proud.
And I'll tell you other other challenge with dealt with that these types of portfolios. The team here. The acquisition team here is the best theme in the business period. We can go assemble most of these portfolios frankly at higher cap rates when we combine them on a one off basis now we save frictional cost, obviously in time and transactional costs and everything else, but there isn't a portfolio in this country that we cannot.
Symbol I would tell you probably within 120 days that we just when new attacked it and so right.
Given everything given everything that you said and I think there isn't there I think there where we hope the size of this company now does open up different avenues for us potential avenues, I should say to grow.
What's more interesting is just the shearer.
Success, and frankly, the velocity of the success, we're having on the organic one off nature right now.
Make those transactions I think even even less attractive in the portfolio basis. That's it that's the struggled we have.
And then are you able to break down in terms of the pipeline.
Hi.
Sort of one off single asset portfolios.
Hi to retailers just to gifts and then how large it is because obviously some couple of fall out I'm just as we think about the next six to 12 months in terms of deployment.
Did you ask if we could break it down.
Yeah, just give more color around the pipeline, where you talked about the largest pipelines organic with that.
Yes.
In full transparency is the largest pipeline that we've ever had it is of subs have similar to quality to what you've seen.
From us from Q1 in Q2 over 80% investment grade.
I'd tell you there are some small portfolios typically single credit that is 234 assets for example for O'reilly auto parts or or two tractor supply's.
There are some larger pricepoint ground leases that we are very excited about.
There are some unique pieces of real estate I would tell you not overly dissimilar from the Hamptons home goods that we acquired.
So it's really a an aggregation of a very different property types, but I'd tell you.
It's it's its top tier there's no question about that.
And then just lastly, I'm I guess, if you're not willing to buy non core could get to a core portfolio.
Are you going to accelerate the disposition volumes of what remains non core today and what is that estimate in your mind is it 10 15, 20% of the portfolio I guess, if you had your druthers and were able to execute at prices that you feel comfortable with what percentage the portfolio would you seek.
Good day.
So we've been very aggressive obviously in the franchise restaurants stays space with that down to 1.5% we sold for Taco bells, a Buffalo Wild wings, a burger King and a wendy's during Q2 subsequent to quarter end, we have a couple of additional sales that are very similar I would love to sell the la fitness to Dave and Busters and.
A movie theaters, so if any would like some please give us a call I mean, that's what I truly view as non core today. The marketability goes assets. Obviously is in question, but we really pared back fairly aggressively your ended aggressive cap rate data at a fixed three in Q2, then Don core generally lower price point.
10, 31 transactions that would that we sell into that market, but.
I think the distressed attendance or the watch list that everyone is focused on is what weve effectively is our non core portfolio.
So what percentage remained.
That's a call it six 7% when you take the the three entertainment retail assets, the five movie theaters and the the health and fitness operator, we have.
Thank you.
Are you worried about the 10 31 market at all and potential changes.
No I think I think frankly, we were very aggressive we sold 30, plus restaurant franchise restaurants into the Tenthirty one market over the past call. It 50 months and so we were very aggressive I think have taking the 10 31 market or I wouldn't say taken offline, but shifting.
Turning to the 10 31 marketer it'll be interesting to see the implications, but I think those implications will be for the lower price point assets potentially like those restaurants, which we've really divested of.
I would tell you our average transaction. This year is picked up from the $4.2 million last year with intent really driven by the 13 or 14 Walmarts, we've already announced the acquisition of as well as some some home depot and those activity.
Typically ground leases and so we don't see a lot of 10 31 competition in that space that was typically dominated by more institutional purchasers.
Who we really don't see competing at the same level anywhere.
Hi, Joe Thanks for that type.
Thank you Michael.
Ladies and gentlemen, this will conclude our question and answer session.
At this time I'd like to turn the conference back over to Joey I agree for any closing remarks.
Thank you for your patience, everyone. Please be safe and good walk through the rest of earning season and we will talk to you. Shortly thank you.
The conference has now concluded we thank you for attending todays presentation.
And you May now disconnect your lines.