Q3 2020 Agree Realty Corp Earnings Call

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I would now like to turn the conference over to Clay <unk> Chief Financial Officer. Please go ahead.

Thank you operator, good morning, everyone and thank you for joining us for <unk> agree Realty third quarter 2020 earnings call Joy of course will be joining me. This morning to discuss our third quarter and year to date 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 <unk> 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 ratio fell and net debt to recurring EBITDA reconciliations.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release web site, an FCC filing.

I'll now turn the call over to Joey.

Thanks Clay. Thank you all for joining us this morning.

First off I'd like to wish all of our listeners and their families health and safety. It's continued to navigate a very challenging year, we've gotta.

We've got a lot to cover as to what to get down to our many accomplishments of the quarter and a summary of our year to date activities.

We had a truly outstanding third quarter that began to materialize early in Q2 during the depths of the pandemic.

During the quarter, we invested a record $471 million in 97 high quality retail net lease properties across our three external growth platforms.

91 of these properties were originated through our acquisition platform, representing record acquisition volume of more than $458 million well.

Well once again achieving record volume during these challenging times, we remain intensely focused on finding best in class opportunities with our leading retail partners. This way.

This was once again demonstrated by 16% third quarter acquisition volume being comprised of ground leases and approximately 72% of third quarter acquisition volume derived from investment grade retailers.

The 91 properties acquired during the quarter or at least the 26 tenants operating in 15 distinct sectors, including best in class operators in the off price home improvement Autoparts General merchandise dollar store convenience store grocery and tire and auto service sectors.

The acquired properties at a weighted average cap rate of 6.4% and had a weighted average lease term of 11.5 years.

We executed on a number of notable acquisitions during the quarter, including our first target in Phoenix, Arizona.

Occasion, as a high performing small format store located on Camelback Road.

We also acquired our first Wegman Chapel Hill, North Carolina, Wegmans is subject to a 20 year ground lease and is currently completing construction of their new store.

In addition, during the quarter, we closed on two unique TJX combo stores in high barrier to entry markets first and.

First in Eugene, Oregon, near the University of Oregon campus, where we acquired a TJ Maxx and Homegoods combo, and then in Napa Valley Cat Napa Valley, California, where we purchased the marshals and home goods combo store.

We continue to source and execute on several unique ground lease opportunities include.

Including the Chapel Hill weapon Wegmans, we acquired five ground lease properties for a total purchase price of $83 million during the quarter due.

Additional ground lease acquisitions included a Walmart and home depot in Pittsfield, Massachusetts, a home depot, and Paterson, New Jersey, and a Walmart in Maine, Arkansas today, our ground lease portfolio spend 73 assets are nearly 9% of our total annualized base rents.

At quarter end over 91% of our ground lease rents were derived from investment grade retailers, including Costco Walmart Wegmans, all the home depot Lowes and Wawa.

Less than 1% of these rents is derived from sub investment grade operators and the remaining 8% of the ground lease portfolio is least deleting unrated retailers, we continue to uncover exciting ground lease opportunities and I look forward to updating you further next quarter.

Through the first nine months of the year, we've invested a record $977 million across 227 retail net lease properties spanning 36 states across the country.

Well, the 977 million invested approximately $958 million was via our acquisition platform although.

Well the 217 properties acquired year to date and unparalleled 78% of the annualized base rent acquired comes from investment grade operators, while nearly 10% of rent acquired year to date are derived from ground leased assets.

Given our record year to date acquisition volume, our strong pipeline and fortress like balance sheet. We are increasing our 2020 acquisition guidance to a range of 1.25 billion to 1.35 billion from a previous range of 900 million to 1.1 billion.

Notably through the first nine months of the year, we've already surpassed last year's acquisition volume of $701 million by approximately 37%.

At quarter end, our portfolio is investment grade exposure stood at more than 62% representing a year over year increase of more than 500 basis points at an impressive two year stacked increase of 1500 basis points as we.

As we maintain our focus on leading retailers that are positioned to thrive in an omni channel environment I anticipate our investment grade concentration will continue its upward trajectory.

Moving on to our development and partner capital solutions platforms, we attend development and PCGS projects, either completed or under construction. During the first nine months of the year that represent total committed capital of more than $37 million Ria.

Three of those projects will commence during the quarter with total anticipated cost of just over $10 million.

Construction continued during the third quarter and the company second development with Harbor freight tools, and Wesbanco, Texas, which is expected to be completed in the fourth quarter of this year.

The company completed two development piece, yes projects during the quarter, including the company's first development with TJ Maxx at Heartland in Texas adjacent do a high performing target and a Burlington in tractor supply in Columbus, Ohio.

Our growing pipeline or is the result of our teams effort to work with our retail partners. The screen vacancies do identify potential backfill candidates as well as partner with developers looking for a new source of capital. During these uncertain times, while we strengthened our portfolio through record year to date investment activity. We've also diversify.

Right our portfolio through strategic asset management disposition efforts during the third.

During the third quarter, we sold two more assets, including a franchise restaurant and a bank branch under a very short term lease for gross gross proceeds of approximately $3.5 million at a 5.6 cap rate.

Franchise restaurant exposure is now down to a mere 1.3% of our portfolio.

Dispositions for the first nine months of the year totaled 68 assets for gross proceeds of approximately $48 million with a weighted average cap rate of approximately 7%.

Since the beginning of the year, we sold 12 franchise restaurant, reducing our exposure by approximately 130 basis points.

Our asset management team continues to intently focused on addressing upcoming lease maturities as a result of their efforts are 2020 lease maturities stood at only four remaining lease expirations that represent just 0.2% of annualized base rents we.

We have also made material progress on our 2021 lease maturities, reducing our exposure roughly 160 basis points over the course of the year to only 1% of annualized base rent at quarter end.

Notably I'm extremely pleased to announce that we executed three new 20 year leases with worldwide during the quarter that extended the lease maturities from 2021 to 2041 for all three locations.

All three leases were set to expire in 2021 and represented our largest remaining 2021 lease maturity.

At the time of the acquisition the wise were acquired with limited term remaining these three extension serves as a testament to our acquisition underwriting and market intelligence capabilities.

As of September Thirtyth, our growing retail portfolio surpassed 1000 properties and now contains 1027 properties across 45 States. This represents a 25% increase in our total property count through only the first nine months of the year and impressive feat when you consider the quality of the assets in credits Weve added.

The portfolio remains effectively fully occupied at 99.8% and has a weighted average remaining lease term of 9.8 years.

Our balance sheet remains in a very strong position at quarter end pro forma for outstanding forward equity are fortified balance sheet stood at approximately 3.2 times net debt to recurring EBITDA.

More than $850 million and liquidity, we have tremendous flexibility as we look to continue to execute on very high quality investment opportunities.

During the quarter, we of course completed our inaugural public bond offering raising $350 million of 2.9% senior unsecured notes. The offering was extremely well received and provides a new source of capital for our rapidly growing company.

We've received July August and September rent payments from 90, 697, and 99% of our portfolio respectively. In the aggregate, we receive third quarter rent payments from approximately 97% of our portfolio entered into deferral agreements, representing approximately 2% of third quarter rents I will.

I will highlight that our collections data includes both base rent and recurring operating cost reimbursements. In addition, we include base rents and operating cost reimbursements charged tenants in bankruptcy and have not made any cobi co bid related adjustment the denominator when making these calculations. Our goal is to provide 100 per se.

And transparency to our investors on actual collections data.

Our collections that it demonstrates the importance of portfolio quality and a disciplined underwriting approach we have been focused on credit quality and strong real estate fundamentals since the inception of our acquisition platform in 2010, our discipline has paid dividends. During these most stressful times.

I'd like to take a moment to welcome Craig Ehrlich as our Chief investment officer. After his invaluable contributions as a director of the company I'm thrilled to have Greg join our growing organization as we continue to scale and develop our talent seek to constantly improve our systems and processes and position our company for future growth Craig.

Operational business development sales and marketing expertise has made an immediate impact on our organization and I look forward to his many contributions in the future.

Im equally pleased to welcome Mike Coleman to our board of directors as many of you are familiar with Mike. He currently serves as the senior Vice President Treasurer to Hilton prior to his time at Hilton, Mike held multiple roles in investment banking and management consultant.

We're very excited to have Mike finance capital markets and read industry experience to our board.

To sum it up our company is incredibly well positioned with one of the strongest and fastest growing retail portfolios in the country and unparalleled balance sheet and the people processes and systems will enable us to capitalize on the innumerable opportunities that we continue to uncover in this environment.

Before handing the call off the clay I would like to thank our entire AGTC team I couldn't be more proud of the challenges that this team has overcome and the outstanding accomplishments that they have achieved thank you for your patience and I'll turn it over to you. Please.

Thank you Joe I will start with the balance sheet update and highlights from our capital markets activities over the past quarter.

We had another very active quarter in the capital markets completing our inaugural public bond offering of $350 million of 2.9% senior unsecured notes due in 2013.

As Joe mentioned this transaction provides us with meaningful near term liquidity and a new source of capital as our company continues to grow.

We were again active in the equity capital markets entering into forward sale agreements through our ATM program to sell more than 885000 shares of common stock at an average gross price of $67.47 for more than $58 million of anticipated net proceeds.

On September 28, we settled 1.5 million shares from the forward equity offering completed with Cowen and steers in April of this year. Upon settlement, we received net proceeds of approximately $88 million.

At quarter end, we had approximately 6.3 million shares remaining to be settled under the Conan Sears transaction and our ATM forward offerings, which in total are anticipated to raise net proceeds of approximately $376 million upon settlement.

In addition to our capital markets activities, we also generated roughly $13 million through our disposition activity and free cash flow after dividends during the quarter. This cap.

This capital raising in combination with nearly full access to our $500 million dollar revolver provides the company with more than $850 million and liquidity.

As of September Thirtyth, our net debt to recurring EBITDA was approximately 4.7 times pro forma for the settlement of our outstanding forward equity offerings, our net debt to recurring EBITDA was approximately 3.2 times.

Total debt to enterprise value at quarter end was approximately 24.6% while fixed charge coverage ratio, which includes principal amortization stood at a company record 4.8 times.

Moving to earnings core funds from operations for the third quarter was 81 cents per share a 3.5% year over year increase adjusted funds from operations per share for the quarter was 80 cents, an increase of 4% year over year due.

During the past two quarters, we have elected to treat COVID-19, deferrals as delinquent receivables and our FFO measures include this revenue.

On a quarterly and year to date basis core FFO per share and AFFO per share were impacted by dilution related under GAAP related to our recent forward equity offerings Treasury.

Treasury stock has to 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 core FFO and FFO per share for the third quarter and approximately two cents for the nine month period.

General and administrative expenses expenses in the quarter totaled $4.8 million gene.

DNA expense was 7.5% of total revenue or 7%, excluding the noncash amortization of above and below market lease intangibles.

Given the recent changes to the leadership team and new and recently amended employment agreements. We now anticipate GNC as a percent percentage of total revenue to be in the upper 7% range for 2020, excluding the impact of above and below market lease intangible amortization.

Given the sheer level of investment activity and the expectation of adding approximately 300 properties. This year, we continue to invest in the platform and our team to support our current and anticipated growth we enter.

We anticipate GNS expense as a percentage of revenues to continue to decline in future years.

The company paid a dividend of 60 cents per share on October nine to stockholders of record on September 25th representing a 5.3% year over year increase this was the company's 106 consecutive cash dividend since our IPO in 1994 for the firm.

For the first nine months of the year, the company declared dividends of $1.78 and a half cents per share a 5.3% increase over the comparable period in 2019.

Our quarterly payout ratios for the third quarter was 74% of core FFO per share and 75% of AFFO per share respectively for the first.

For the first nine months of 2020, our payout ratios were 75% of core FFO per share and 76% of AFFO per share respectively.

These payout ratios at the low end of the company's targeted ranges and continued to reflect a very well covered dividend with that I'd like to turn the call back over to Joey.

Thank you play at this time, operator, we open it up for any questions.

Thank you we will now begin the Q and a session to.

To ask a question you May press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two at.

This time, we will pause momentarily to assemble our roster.

And our first question will come from they cross it with Berenberg. Please go ahead.

Hey, good morning, guys.

Good morning.

Hey, I'm wondering if you could characterize deals slow a little bit.

Now, what's kind of causing the acceleration and year view was there some bigger boxes in.

Coronary are and it seems like every quarter I think you're going to hit and you eat it by a lot so what's kind of causing that acceleration.

Well I think as I mentioned in our prepared remarks, we acquired to upwards of almost a 100 properties during the quarter. So I don't think its necessarily bigger boxes, while there are some including the wegmans and home depot and Walmart ground leases. We acquired I think this company is positioned from a balance sheet perspective, and a capability perspective too.

To take advantage of opportunities that we see in the marketplace and obviously this quarter. We saw a significant number of those opportunities are in our increased guidance project that forward into into the current quarter here into key into Q4. So I think it's a it's our balance sheet enables it our cost of capital enabled it but right.

But really it's a testament to the team uncovering unique opportunities really across the country.

Okay, I mean, I guess my question.

Is there like an upper bound that you guys like.

Typically could achieve based on your current resources or I know you've added a few people this quarter.

I'm just trying to get it done like what that amount is.

Assuming steady throughout the entire quarter.

Yeah, I would tell you I don't see a maximum amount I mean, we were as clay mentioned, we anticipate adding 300 properties. This portfolio. This year, we surpassed the 1000 properties. We continue to invest in not only the team in terms of adding new team members, but our systems, most notably are that our processes.

So this this company is set up from all three of those perspectives to continue to execute and of course the balance sheet is there to support it. So I don't see an upper bound I think that limit is set by the number of quality opportunities that we uncover.

While we maintain our discipline and invest in best in class retail.

Okay. That's helpful. And then just one can you kind of help us size, what the ground lease opportunity is for you guys.

Obviously, the net lease market is huge but I'll be.

How big is the total addressable market for ground lease is for what you're looking at and can you kind of remind us how these deals come to you.

Yes, and your first point I really don't have any data in terms of the addressable market.

But from a dollar or property count I tell you that number constantly is fluctuating with either net new transactions entering the market or or new to the development of new sites. Now there are there are a number of ways those transactions come to us direct from developer through brokers directed by retailers and so I would tell you our traditional sourcing methodology.

These four turnkey or typical turnkey assets also apply to ground lease assets. Most notable during the quarter. Obviously, we're at about 9% ground leases now up from just the approximately 8%.

Nothing significant capital in our first wegmans, notably the home depot and Paterson, New Jersey long term home depot ground lease and then both the home depot and the Wal Mart.

In Pittsfield, Massachusetts outside of the Berkshire. So we continue to find these opportunities there are a number of them in our pipeline for Q4.

I anticipate our ground lease exposure will increase by the end of the year again.

Okay is there anything.

In the ground lease pricing versus non mall acquisitions, right now emanating because it covert that change that.

Change that or has it been pretty consistent.

I tell you, it's pretty consistent ground leases historically been values.

Between 102 hundred basis points inside of like similar turn key leases that said, we're executing on a number of fronts with our partners, whether they're short term long term direct with the developer that.

That is it materially different than our overall blended average in terms of acquisitions.

Okay. Thanks, guys.

Thank you Nate.

And the next question will come from handle St. Juste with Mizuho. Please go ahead.

Hey, good morning, Thanks for taking my question.

Good morning, how are you.

Great. Thank you hope you are too.

Hope you are too I wanted to follow up on the question here on the acquisition during the quarter certainly.

A level that surprise many of us and I guess the question is trying to figure out what the news the sustainable run rate going forward, how much of what we've bought during the quarter more reflection of that spillover you.

Refer to during your commentary, obviously made a lot of capital in this year. So as we look ahead and considering the 300 million thats implied in the fourth quarter, how do we square that know how should we think about acquisitions in the near term for the quarter.

Run rate perspective.

Well I appreciate the question and I tell you from the answer the latter part of the question from a quarterly perspective, I think our increased guidance with a midpoint of $1.3 billion reflective of what we're seeing in todays.

In today's environment, and I think that is reflective of our current pipeline.

In terms of sustainability I'll be honest I really don't look at sustainability as a question for us on a go forward basis were real estate opportunities at our core we will.

We will take advantage of all of the good transactions and execute.

On those transactions in the marketplace, whether it's development acquisitions partner capital solution or a myriad of other of other opportunities for us So sustainability back really to needs question in terms of being able to support the infrastructure. We will continue to invest in the infrastructure, but we are real estate sharp shooter.

As we're not simply spread investors and Thats why you see the portfolio construction as is.

We will be positioned from a balance sheet capability perspective to execute anything.

To execute anything we find that hit our investment criteria.

Okay fair enough.

Maybe shifting to the election and anything from perhaps a policy perspective that that's on your radar screen that concerns you, including but not just limited potential 10 31.

Appeal and another potential repeal here curious what your view is on the direct and perhaps indirect consequence of what the potential appeal to the industry overall, and then more specifically to the public company.

Well I think most notably in 10 31, and I've talked about it is linked I think we sold nearly 40 franchise restaurants into that into that environment. A significant number year to date I think the number the year to date was 12 or 13 in the prepared remarks, and so we feel that is the lower price point assets, where we see.

The significant 10 31 activity that said I am always hesitant with regulatory or tax structural changes.

To imply go forward.

Material changes in the overall environment, what I think is more important in which I think will will frankly outweigh any implications of the potential repeal 10 31 real property would be just the funds was going into net leased in the stability of net lease as a commercial real estate cat asset category.

As I mentioned on the last call underwriting suburban or CBD office underwriting shopping centers malls were small strip whether their grocery anchored power centers is very challenging underwriting a lot lodging asset is very challenging I think the stability of net lease.

Frankly, the the format of net lease in the 21st century environment and investor appetite in net lease whether its primary or secondary through investing in equities is going to continue to to most likely.

Overwhelm any changes in the regulatory environment that said the majority of time, when we run up against any competition for assets. It's typically a 10 31 purchaser they need to secure debt in the form of a mortgage they are under a time constraint. So if anything I think the elimination of the tender to one division is going to frankly clear out some competition.

For us.

Got it got it thanks enough, we own destiny with one more.

Curious at a high level, certainly you've built up pretty soon.

Strong platform with no very obvious offensive and defensive attributes, but your stocks lagged you're in pretty consistently the last few months relative to some of your lower multiple tiers.

Obviously saw that a bit of a catch up true, but curious if you think the market's paying enough attention the tenant credit risk or perhaps overlooking something embedded issues within certain pockets of the industry certainly.

Certainly raising your guidance your third time should should hopefully draw some sometimes and some capital, but just curious if you think perhaps the market.

From a little too far too fast for for certain names and perhaps not.

I'd like to touch until underlies the political issues. Thanks.

Look it's a great question I appreciate it I'm not one to to be out there complaining generally about our stock price, but I'll tell you. This I think this quarter reinforces what acre Realty is all about we had the best balance sheet. The best tenant base, the best growth growth profile and a fantastic cost of capital and so we are we're a rare thing at this point we are.

Both a solid defensive investment to guard against the uncertainty in todays world and there certainly is a lot of uncertainty and we're also a best in class growth company at the same time, so it's pretty hard to find both of those things in one place I think that may explain why some investors are missing the boat and why we're treating two to three turns on them.

Multiple basis, but will return on average while everything about our results from every direction screamed that we should be outperforming.

So it's not.

Not on the buy side I understand the challenges some of the challenges that the buy side have but I think people are missing the defensive orientation of this portfolio in this balance sheet being the best retail portfolio in the country, but then the on the office side the ability for us to grow on a risk adjusted basis earnings in a sustained.

Way that our outsize relative to to our peers, but also to due to the REIT industry.

And so we will let the market take care of itself. All we can do day in and day out is come and get to work and do what we do best and Thats investing.

In high quality net lease retail real estate.

Thank you our you look like thanks.

Thank you.

And our next question will come from Katy Mcconnell with Citi. Please go ahead.

Thanks, and good morning, everyone. So when it gets the team's acquisition how is your thought process changed around the size of transaction.

And are you getting more attractively priced opportunity for larger deal or any portfolios in the pipeline.

Yes, good morning could I appreciate the question I would tell you.

Our thought process really hasn't changed we're doing transactions as low as a $1.2 million on a typical Riley your auto parts transaction all the way up to the mid 30 million dollar range for something like like a wegmans and in between.

And so it's a broad.

Dynamic in a broad marketplace, which we're addressing we pay.

We prefer to stay away from those $1.2 million dollar transaction, just because the inefficiencies involved but.

But again, we really start from a 30000 foot perspective of the best Omni channel retailers in the world that are recession resistant and ecommerce resistant or our mission critical it in an Omnichannel World and then we underwrite or from the bottoms up. So so price point I would tell you is probably the last piece there as long as were comp.

Who would the residual the credit sector the owners.

The underlying real estate fundamentals and of course, the pricing that's probably the last input that we're looking at.

Okay, great. Thanks, and then can you talk generally about your approach to handling fees, if they were to happen.

Thank you Bob format.

Jen.

What's your expectation for 10 fall out with some of the highlights category.

Uh huh.

Yeah, well I think what we have historically avoided those single purpose structures of course weve identified those at risk categories, which on an absolute and relative basis are very de minimis for us I'd tell you.

Most importantly in our real estate underwriting today is the fungibility of those boxes. That's why you see a skew toward ground leases and then the 6000 square foot rectangles like autos owns O'reilly and Sherwin Williams and the like and so I would be returning those boxes on a general from a general perspective is very challenging.

Those are single purpose in nature, I think if you drill into our fitness portfolio. We have successfully businesses specifically they are extremely high quality real estate, you're talking about hard corners across from Costco is urban assets, such as our la fitness in the nationwide a headquarters in Columbus, Ohio, and some really high.

High quality pieces of real estate. So we were very selective when we made those investments and we.

And we think the residuals on those we'll pay it out but as far as theaters go I would tell you what the theater, it's probably always a theater.

Okay great.

Thank you.

And the next question will be from Rob Stevenson with Janney. Please go ahead.

On the 106000 square foot of leasing in the third quarter and the 436000 year to date are versus the expirations and what do you expect as you sort of roll forward over the next year year and a half year with you know the lease.

The lease renewal discussions with tenants.

So sorry, Rob we repeat the first part of that question cut out for us not sure if the cut off for everybody.

Yeah, you did 106000 of leasing in the third quarter and fourth 36 year to date, Where's the new rents versus expiring and where do you expect you know as you're having discussions with tenants over the next year for those type of.

Renewals to sort of pan out at.

Yeah got it. Thank you so as I mentioned the prepared remarks, the 20 year Wawa extensions, we did not give a rent concession or ti side. Those are 20 year leases with contractual increases every five years that was the biggest component of our maturities in 2021 as you can see on page five of the release our 2021 only.

We had 16 leases remaining.

Come up for expiration majority of them have after this 0.7% of total rents and so it is our 0.1% sorry, 1% of total rent and so very de Minimis in terms of square footage as well as a VR and so our asset management team continues to monitor and proactively engage we don't anticipate.

At any material disruptions in the portfolio and we think occupancy is going to remain at an elevated level like it has historically there. So we're we're in a fantastic position from a lease maturity profile I would note. We include things even in near as temporary leases like a Halloween pop up store this year in our four remaining leases and so.

We have a couple of redevelopment opportunities embedded in there potentially will be executing on and so we think the portfolio is in a very strong position.

Okay, and then given your earlier comments about the 10 31 market I mean are you sensing urgency on the part of some of these.

Some of these smaller players to get deals done and if so you know is your plan to accelerate dispositions of remaining franchisees and bank branches and things like that into the fourth quarter. I know that you know you. Your guidance now is somewhere between three and 27 million or something like that in the ballpark range for the fourth quarter.

Personally I mean is there a chance is a good chance you're going to hit the high end of that range.

Or is there something where you take a look at it and you are saying is now is not the time to sell how are you thinking about dispositions heading into year end and the first part of next year I think.

I think it's truly the inverse mi franchise restaurants as we discussed is just over about 1% now and the majority of that is a taco bell franchisee on a master lease with high performing stores. So weve really taken our franchise restaurant exposure I guess, just a few years ago from 4% to 5% down to just over 1%. So I'd say, we're very comfortable.

You may see us selectively dispose of a couple of more by year Red, but we're very comfortable in terms where that exposure stands today on a risk adjusted basis. We just don't think franchise restaurants or restaurant that all war and five and a half to six cap unless throughout a ground lease structure and you get a building for free I think what's going to be more interesting is that if there is.

By no means predicting anything but if there is a democratic sweep here and by Didnt take the presidency the Democrats extended.

On the flip side really so I'm more focused on the inverse that one sellers potentially feared the repeal of real property in 10 31 back to the early question. What is the what is going to be the urgency to sell were opportunities on the flip side for us to acquire by year end I think that could materialize obviously.

Subject to election result in some very interesting opportunities, but only time will tell there.

Okay.

And then I guess the last one from me would wind up being made what do you guys.

Any incremental demand out there on the part of sellers to take back units.

And transactions. These days are they just all why cash Oh.

LP units, Yeah, I would tell you know it's a tool in our tool belt, we've looked at select transactions in terms of utilization of units as currency. We have never done an LP unit holder LP unit transaction to date, it's something that we are open to doing for the right transaction, but I would tell you we have not seen any incremental demand.

And as of as of today.

Okay. Thanks, guys.

Thanks, Rob.

[music].

Hi, a question it will be from RJ Milligan with Raymond James. Please go ahead.

Hey, good morning, guys I wanted to follow up on can you just a question on the potential fallout, obviously strong rent collections in September but just for that small sliver of uncollected rents. When do you think you will have the visibility.

The collectability of that range and more broadly when you think we want visibility as a sector for what the ultimate tenant fallout will be well I'm. Just curious just something that's going to probably take another quarter or is there a much longer timeframe for the industry to resolve these unpaid rent buckets.

Well I think the at risk sectors that have have been identified it's going to take some time potentially from a from a 30000 foot perspective for this health crisis to clear up with them to get visibility than we have today is that or is it unilaterally withholding rents that were different stages of collections with those tenants I mean, obviously.

The GAAP and Simon has been high profile and in that regard and the litigation I think we're going to continue to see collections were at 99% in September I anticipate october to be around rate at that level.

So I think we're going to see collections continued to be strong, especially with our portfolio, but I think the underlying underlying health crisis here is going to drive the resolution of a number of these issues what would again I'd point out is our exposure to these is extremely de minimis on an absolute and relative basis, and then secondarily we are.

Very comfortable with our position I don't.

I don't see chapter seven liquidation is taking place in a worst case scenario and so our underlying real estate the store performance of those limited positions.

With those at risk tenants gives us great confidence there.

Okay, and then moving to cap rates, so as a company the cat average cap rate going in for acquisitions is trended.

Equally lower over the past couple of years and I'm sure part of that's a testament to what do you guys have been buying in terms of higher quality Walmart type assets, but how do you expect like average cap rate going in yield trends as we move forward given you know your thoughts on mix of what you're buying versus.

Just market cap rates in general.

Well I think market cap rates in general are going to be.

If anything we'll continue to compress we're not a market buyer in the least we are a sharpshooter I'll tell you we continue to target six and a half cap.

On an acquisition fraud, plus or minus obviously, that's on a blended basis. It's about a 200 basis point band 100 up under down from there we.

Weve acquired almost 80% investment grade for the year I think it's basically unheard of in terms of acquisition volume and quality and then when you mixed into yield of six and a half at 6.5% approximately I think it is.

It's pretty it's a testament to the team in it it's a phenomenal outcome for us. So obviously our cost of capital over the last few years has dropped significantly the 10 year Treasury has dropped significantly.

And I think we're going to be able to maintain our performance here given all of those factors I mentioned.

Great. Thanks.

Thanks RJ.

And our next question will come from Linda Tsai with Jefferies. Please go ahead.

Hi, Thanks for taking my question, just a sense of how.

Do you have a sense of how much he could comprise of girls portfolio overtime.

No and we don't have a target Linda it's a good question. We don't have a target obviously that number continues to rapid over 62% today.

At the same time, we're huge fans of retailers and I know I've talked about at length, such as hobby lobby in tractor supply and Chick fillet and publics.

And so it's really going to be opportunity dependent where we deploy that capital Theres no doubt that I mentioned in the prepared remarks that we continue to anticipate that number to trend upwards, but we really start with that sandbox of 20 fiveish retailers in the best operators in the country. This quarter, we added target add wegmans two of the four I'd highlight.

Did that we didnt own in the portfolio in prior quarters.

So, we'll see what opportunities materialize, but I.

But I think given the current trend and trajectory, it's very fair to say that number will continue to increase how far it increases will really be subject to the opportunities that present themselves.

Thanks, and then can you provide some color on your developments in the pipeline and the potential for additional developments with tenants going forward.

You know what does the opportunity to have to look like for you to initiate new relationships like this.

Well I think first and foremost it has to be in you hit it on the head there it has to be relationship base for us and so as opposed to several years ago. We have no interest in doing a one off transaction on the development front. It takes 18 to 24 months for $2 million to $5 million for Fourq for a single tenant and so what you see our device.

Element team focused on is working with our existing tenants as well as new tenants on opportunities that we think our relationship base that have legs to provides outsized returns to us we're not a core and I of course, developing at 6.5% returns here and.

And that frankly, our tenant that typically fall within our sandbox and so we've made a number of efforts to continue to screen vacancies and work with our relationship tenants those tenants in our sandbox to find appropriate opportunities for them to backfill we had a number of projects three projects I believe start this quarter.

Our pipeline has similar activity that we anticipate announcing in Q4 and or Q1.

But we're excited about the opportunities as private developers continue to struggle, putting together you do the capital stack and or have challenges in their own pipe.

Pipeline or portfolio that they are unable to execute on so our pcls in development platform gives us to other too.

Two other growth prongs to take advantage of opportunities that fit the return profiles and risk threshold that we like.

Thanks, and then how do we know for developments compared to going in cap rates on acquisitions.

Generally a at least a couple hundred basis points higher on the development side, if we're going to put a shovel into the ground again and go through that 18 to 24 month organic development process, where we are.

We're looking at a significant spread on a PC EPS basis.

About call it 150, or 100 to 150 basis points above acquisition yields those projects typically lasts from six to nine months. So we we effectively cut the development cycle and half by leveraging our partners capability or where the developers capabilities.

So we continue to see some unique opportunities on that front and I think in the upcoming quarters and years, we'll we'll continue doing that that could potentially continue to ramp.

Hi, just one last one you guys continued to fire on all cylinders here looking out to the year ahead, what do you see is the main risks.

Well it.

That's a tough question. The main risks, it's very difficult to see any internal risk we update our threat. We are SWOT analysis and in our risk assessments on a quarterly basis.

It's very difficult to find a risk embedded in our portfolio from a lease maturity standpoint from a tenant credit standpoint from a balance sheet standpoint, we're in a fantastic position.

Obviously, there are macro risks that we were never anticipated inclusive now of Pandemics that are on our threat matrix.

But as I said, we're every defensive oriented portfolio with the best retailers in the country hundred freestanding basis, you combine that with our balance sheet in our ability to grow earnings.

Given the external growth that we have.

The opportunities we have in front of us and I think it's very difficult to decipher any risks I think most prudent is is the manner in which we hedge risk and mitigate risk on the external capital raising front, we are and that leaves read that the voracious need user of external capital we've raised over.

Well over a billion dollars this year alone.

And so using things like forward equity offerings in swaps and other derivatives provide us the stability in terms of our cost of capital to do what we do best and that is execute on the real estate transactional front.

Thanks.

Thank you Linda.

The next question comes from John the Soca with Ladenburg. Please go.

Please go ahead.

Good morning.

Good morning.

With anything new putting to cash accounting are determined to be doubtful receivables during the quarter and if so how much.

Good morning, John we had two new tenants added or now being reflected on a cash basis.

That's so that brings the total to five in addition to the three from last quarter. The total impact for Threeq, who is roughly $500000. So very immaterial impact for us.

Okay understood and then maybe as you think about the 5.9 million or so okay. Fernan uncollected right in the first nine months. This year how much of that today comes from kind of these higher risk tenant industries and maybe how much is from theater specifically.

Well, what we've given the theater at a monthly basis Weve given the theater collection rate I think I think.

My challenge to the question is I think it does it give an accurate picture really to shareholders and we're talking about half of the deferred rent is unique credit retail or on a relationship basis. I can guarantee you that gets gets paid back in total deferred in uncollected rent is under $6 million. If we're looking at conservative assumptions, you're talking about 1.5%.

Pro forma potential 2021, FBR and so it's it's really a de minimis amount than I would be hesitant to even focus on it given the de minimis exposure, we have to theaters with five total theaters in this portfolio and our theater exposure and what 1.5% in the aggregate I mean, I think we've been very clear that 99.

Thank collections in September anticipating 99% lessons in October.

I think we've been very clear with with all of our disclosures to date and I think a focus on theaters with this company is misguided.

Well I mean, I guess, there was kind of a default either in the theater space or maybe on Dnbi, Dave and Busters, and what would kind of be the onetime impact too.

To kind of financials.

Well, Dave and Busters yesterday launched a $500 million unsecured bond offering we raised $200 million in equity earlier in the year. So again I think I mean clay can get into the specifics, but I think we have three Dave and Busters total in the portfolio experience will retail or entertainment retail in this portfolio is a total of 1.2.

Percent.

Okay.

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I guess, one last kind of detail one maybe what.

Yes, maybe what drove the impairment in the quarter.

It was related to one that health and fitness asset.

The 24 hour fitness Yep, Yep, 24 hour fitness that filing bankruptcy, which is included the 124 hour fitness in our portfolio, which was included.

In our collection or non collection data embedded in that 99%.

Okay.

That's it for me thank you very much.

And the next question comes from Todd Stender with Wells Fargo. Please go ahead.

Hi, Thanks, most of my questions have been answered on the pricing front, but just looking at the weighted average lease term that you guys acquired that in Q3 is about 11 years can you kind of expand on that maybe what the ground leases, where they are probably pretty lengthy and it might shake out some of the shorter term leases.

Acquisitions in the quarter. Thanks.

Yes, good morning, Todd the ground leases ranged from 10 years to the full 20 years I mentioned with the Wegmans and so I would tell you they were at or significant or slightly above the 11 and a half years weighted average lease term. We do have it did make some shorter term acquisitions, including shorter term being four to six years, including the Napa Valley.

Home goods TJ combo as well as the Eugene Oregon will continue to look for shorter term opportunities with our relationship retailers and our partners understanding obviously store performance.

Under and the underlying real estate, but it is a it so as I mentioned with the Wawa acquisition. It is a core competency this organization to use our market intelligence relationships to make.

To make those shorter term acquisitions, but no material deviation given the ground leases there from the overall weather and a half years.

Thanks, So that kind of leads me to the next piece is that what we look at that you guys is that value creation component can you speak more about that at Wawa lease renewal, how many years, where the left on the original lease when you acquired the properties and then maybe you kind of touched on.

The lease renewal before but we didn't hear about maybe where the rents were and what they are going to.

Yes, so there was a seven and a half years, when we acquired seven to seven and a half years. When we acquired those I believe in 2013 remaining three stores, while typical while our gas and convenience store in the mid Atlantic we bought them at the time from a non traded read about three years after launching the acquisition platform obviously.

The time, we're also working in Florida on development aspects with Wawa do those leases were set to expire with the noticed an option notice period last quarter. They were set to expire in mid 2021. Those leases are now full 20 year leases with fixed contractual bumps ever.

Five years.

And the the year one rent is same as the current rents. So it was a big win for US our largest lease maturity in the aggregate in 2021 with no Ti dollars no no expenses out the door.

An increase rental rates fixed increase rental rates over the 20 year period.

Great. Thank you Joey.

Thanks Todd.

The next question will be from Chris Lucas with capital One Securities. Please go ahead.

Hey, good morning, guys, just two follow ups.

Starting with that dividend policy, Joe you had mentioned we got are significant.

You know acquire or external capital or user of external capital I guess, just in terms of thinking through the dividend policy any thoughts to grow.

Growing the dividend at a slightly slower pace of growing AFFO per share growth and trying to retain more cash or discuss sort of what you targeted in the past as the payout ratio is that how should we be thinking about it going forward.

No I appreciate the question, Chris I think we're at the low end of our stated range of 75% to 85%. We understand that there are obviously difficult. It's immaterial for us I should say, it's immaterial now source of capital, which clay mentioned in the prepared remarks, but.

We understand that there are investors ranging from individual to re dedicated that have different dividend and yields requirements or or investment objectives, and so the board, which I anticipate raising the dividend in Q4. The board continues to believe that predictability sustainability and transparency in terms of dividend policy is done.

Is the number one objective to hopefully satisfy or we find a middle ground from those I think we should reduce payout to increase payout because theres, obviously, a broad range of desires there.

Okay. Thanks for that and then just as it relates going back to the transactions for the quarter. I guess just trying to understand are you guys underwriting deals or is there a better hit rate as competition pulled back or is there something going on that we should be thinking about that in some.

Sort of.

Leading to the success you had this quarter.

Well I think I think we were definitely underwriting more deals. The acquisition team has grown in headcount also has grown experience in tenure and capabilities simultaneously I think our market presence in our market positioning is has only improved.

We've taken market share in mind share from sellers developers brokers and the like.

And so the only thing that hasn't changed is our is our underwriting itself.

As a company thats growing in scale in dynamics Ism in every direction with every constituency in terms of real estate transactional and I'd tell you a big piece of that also is our relationships with our retailers. We are the active partner for them not just the coupon clipper. We are on the ground. We are with them we are talking to.

Them.

And we serve due to frankly, a full service approach and I can't tell you. The best complements I get are about our lease administration, our asset management team whenever there is a problem or a retailer has challenged jump out and they get those from Ceos and heads of real estate from retailers.

Frequently so.

I'll tell you our hit ratio is probably about the same but everything.

But everything about this company is scaling and growing as you can see in the results.

Great.

And the next question is a follow up question from Katy Mcconnell with Citi. Please go ahead.

Hey, Joe It's Michael Bilerman good morning.

Good morning, Michael how are you.

Right.

Yes last May you bought the the Wawa on market Street, one of their flagship properties $15 million clearly you have a very close relationship with them.

Is there opportunities for you to go further into urban street retail either buying locations from third parties or direct from retailers that make control that they're looking for liquidity and is that an area that you sort of see as an opportunity for you to deploy more capital.

It is it's a timely question during the Biden time town Hall to hit on showing the wawa in the background with which I thought was pretty funny look.

Well it is it's not outsized for us it's a component of what we do I will tell you that we do have some urban esque type College town transaction I tell you the TJX in Eugene, Oregon is just north of the campus there.

But we are not going to be urban explores here I don't think at the appropriate time to do so it is not the majority of what we do but when we do find credit opportunities and unique pieces of real estate, whether they're on college campuses earn in urban environments. We certainly have the capabilities to typically dig through the car.

Endo documents structure revise the lease because they typically need some types of revisions to create a truly net lease and then execute on the transaction. So it's an opportunity for US there are one or two out.

Similar in the pipeline, but I don't think its a necessarily a near term growth catalyst.

No there wasn't I was there anything in the third quarter that would fit that type of purchase.

So you tend to be chunky or chunky or deals yes, no. So I would tell you that the notable purchases during the third quarter. We went through a strategic combo stores, the home depot and Patterson, obviously, the Walmart ground leases and then the wegmans, but nothing nothing urban that comes to my.

And in the quarter.

And then if we dial back to July when we had the second quarter call. Your implicit guidance for the back half was 500 million of acquisition.

Clearly that now.

Now raised to 800 point increase of 300 million are you at least able to sort of identify at that moment in time. What you were looking at in terms of pipeline and effectively what you closed on to drive that 300 million dollar increase in overall activity.

So so.

I would tell you.

I would take it back even further during the depths of the pandemic with the March overnight and then the what's called the private placement transaction with Conan Steers. We recognized very early on that we had an opportunity that in a window that we wanted to attack.

The pipeline grew very quickly commensurate or simultaneously with those trends with those two transactions plus the ATM activity and so it's been a very dynamic year since literally the end of March when we effectively reopen the react read equity markets.

The pipeline continues to grow obviously this quarter.

Was a remarkable quarter for us our Q4 pipeline is strong our Q1 pipeline is already growing.

But I would tell you it's extremely fluid it changes day to day.

We have nine people on our acquisition team and growing and they are out there are scouring the earth for opportunities that fit within our within our sandbox does that answer your question.

Yeah I just didn't know if there was something in July the lending you had one we're going to do $500 million of deal for the back half or you're sitting here today, you're you're now forecasting 800, yes clear.

Clearly I don't know if it was just stay close ratio versus what the pipeline is or just how much the pipeline just rose to allow you to do it and that's it's just there's been a number of course.

There's been a number of questions around this is just trying to understand the dynamics being three months later.

And almost doubling of the pipeline.

And at the time of the guidance increase we had visibility into the depth and breadth of the pipeline.

Now, we obviously provide a range because things can both fallout during diligence, but also get added in.

Our average transaction is approximately 70 days from letter of intent execution to close.

So when we give increased guidance, we're not buying into that guidance. After we give it we have visibility into a pipeline that we believe will fall into that range.

Hence the increased guidance this time as well.

Right.

And then that's when I talk a little bit about equity capital raising and how investors should think about timing, but also structure.

You've obviously kept a lot of different ways forward ATM straight ATM marketed deal and then you did a direct deal with a single investor a quite large one.

Well, which obviously was good for that Investor.

Good probably in terms of cost.

But also.

I Didnt provide the opportunity for all your other shareholders to maintain their.

Taking the company on an undiluted basis.

Right you know given the pipeline that's coming forward, how should we think about replenishing the equity and they kept the cash.

In terms of timing is there a certain level of capacity that targeting till we have given you.

One or two quarter look at acquisition volumes.

And then how do you think about executing that equity.

Well I think I think clay did a fantastic job Peter Kogan hours well on page nine of our release with the table that shows given all the myriad of equity raising activities that you that you articulated.

A table on page nine has helped but we still are $376 million and anticipated proceeds undrawn unsettled from forwards. So we still have several hundred call it $800 million in buying power to stay within our targeted leverage range. So the flexibility and optionality provided by the myriad of transactions that are.

On that table that you discussed gives us the flexibility and optionality to.

Frankly take our time and raise capital when we think when and if we think it's needed in terms of of mechanisms to raise that capital obviously, the unsecured and other offering was a great success. It was many times oversubscribed, we upsized it by $50 million and then we have been.

Well you creative in ways to source equity use.

Using all the ones, although different tools, you talked about and we will continue to be opportunistic and take advantage of opportunities. When we think we are what frankly, we were confident were going to need that capital to fund our growing pipeline.

Right, but you're sitting here, probably with two quarters of acquisition.

Given the pace of $3 million to $400 million you effectively.

By the let's call it February or March of next year. If you keep on the same page all of that will be utilized and so it's just a question of how many quarters ahead do you want to lock in that capacity.

And whether investors should at least be mindful of.

We'll likely another three $400 million I, just don't know how you're thinking about how many quarters of runway do you want to have and right now you have to.

I think it is it's a great question, it's not binary in terms of quarters of runway. It's all I think it's multi dimensional in terms of how large the pipeline is it maybe two quarters, maybe three quarters and maybe one quarter at the end of the day to be out of those how large that pipeline is what the cost obviously is.

Can we do it.

On an absolute share price basis, how can we raise equity on an efficient basis that I think all the tools you articulated give us to do at that point in time regular way on a forward basis, and so I look at our equity strategy similar to our strategy on the debt side in.

In terms of mitigating external volatility not necessarily in totality to fund X number of quarters, but but but but but taking some of that risk off the table because the one thing we do not control obviously is the capital markets interest rate in our and our stock price. So it's an overall hedging strategy that we deployed here.

What I will tell you and I can guarantee you is we're never going to lever the balance sheet and put ourselves in a position that we can execute on our pipeline that said.

We will continue to use different different tools that are disposal to keep this balance sheet is is one of the strongest unrelated.

And then just the last one your health and fitness Entertainment, obviously, you collected a significant amount during the quarter.

Entertainment going from not getting paid 200% being paid and health and fitness going up to 82% from 20% last quarter.

Yeah, I would assume most of the tenants may not be fully open and so how did you come to agreed upon no deferrals getting paid.

When most I would say the industry are not finding the same fortune how much of it is asset specific how much of it is you believe your lease contract.

Maybe help walk us through a little bit I recognize it's a much smaller amount yet in your portfolio than others, but you still had the success of being able to collect it when others haven't I don't know if you're showing up the door with like two other big.

Hi, guys.

What are you doing to Peter yes.

Yes, meekly impute, a claim Peter or the collectors [laughter] collection agency here no I, we booked.

First I'd tell you given our Dimmit are de Minimis exposure to these tenants were not a critical piece of their of their payables here right and so we're not holding a significant number of assets of theirs at the same time, we can be fairly aggressive in our collection efforts, we know of the underlying real estate that we have.

We're very confident in that underlying real estate as well as the different.

The remedies, we have embedded in those leases and so I tell you we took a hard line approach at the beginning of the pandemic.

That we number one we aren't going to save a company were not your largest landlord we have de minimis exposure to these at risk tenants number two we will not right. We are not going to hand out things that aren't for the benefit of our shareholders. If you want to give something in consideration. We will we will we will look at it and we can make a deal but we have contractual rights that were going to adhere to you.

And we anticipate that use it here too as well and that most notably the payment of rent and so I would tell you tenants have understood that we've engaged and consisted in constant dialog. Some of it has involved clay in Peter's collection agencies. Some of it has been more friendly.

But I think most notably I would point out is we arent a signal we aren't a significant creditor in terms of landlord to most of these tenants, it's de Minimis and frankly to deal with us in the headaches that we potentially could cause or pay us I think it's a lot easier just to passive in today.

Okay, all right. Thanks for the time Joe.

And Peter tough guys tough collectors.

Thank you Michael.

The next question is also a follow up from Linda Tsai with Jefferies. Please go ahead.

Hi, I'm just on your comment in terms of the amount afford equity and liquidity available to remain within your targeted leverage range what is that.

What is that range again and is there a different range you thought about internally on a pro forma basis.

No. We have we have we've effectively lowered our range from five to six times, our stated range to four to five times I think that the appropriate as of September 30 were 4.2 times pro forma for the settlement of that $376 million in equity we were at 3.2 times. So again, we have significant flexibility there.

In terms of Optionality and to deploy that capital, which we will we will deploy of course and so.

Four to five times, we think is appropriate given the environment. The uncertainty. This has never been a company. If you look at our most recent investor deck. This operated notably above that it shouldn't be a shock to anybody adding leverage is easy keeping a balance sheet in position to execute on a on a company thats growing at this trajectory I think is more critical.

Especially when we are able to deliver the returns we can't at that conservative leverage profile.

Thanks.

Thank you Linda.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Joey agree for any closing remarks.

Well I, thank everybody for their patients. Good luck for the rest of earnings season, and best wishes to you and your family.

During the holiday season, we'll talk soon thank you.

Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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