Q4 2020 Agree Realty Corp Earnings Call
[music].
Good morning, and welcome to the a Cree Realty fourth quarter, 'twenty and 'twenty earnings Conference.
[music] call.
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Draw. Your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Clay sale and Chief Financial Officer. Please go ahead clay.
Thank you good morning, everyone and thank you for joining us for Agi Realty's fourth quarter and full year 2020 earnings.
Conference call.
We will of course be joining me this morning to discuss our record results for the past year.
Please note that during this call we will make certain statements that may be considered forward looking under federal Securities law.
Our actual results may differ significantly from the matters discussed and any forward looking statements for a number of reasons, including.
Earnings uncertainty related to the scope severity and duration of the COVID-19 pandemic the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures on us and and on our tenants.
Please see yesterday's earnings release, and our SEC filings.
<unk>, 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 <unk> adjusted funds from operations or a F F L and net debt to recurring.
Yeah.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release website and SEC filings I will now turn the call over to Joey.
Thanks, Clay and thank you everyone for joining us this morning before I begin I would like to wish all of our listeners and their families health and safety.
And do you continue to navigate these very difficult times.
Despite the incredibly challenging circumstances, our team had a tremendous year, achieving a number of notable milestones, including record and with investment activity of $136 billion nearly doubling our previous record in 2019, adding 325 properties.
<unk> to our growing portfolio the acquisition of 18, Walmart stores, cementing Walmart or as our top tenant at seven 3% of annualized base rent, increasing our investment grade exposure by 930 basis points to 67, 5% of ABR executing on our inaugural public bond offering and receiving a triple B investment.
As we can rating from S&P, and lastly, surpassing $4 billion and equity cap and $5 billion and total enterprise value.
Just as important and we continued to invest and our people, adding 12 team members across an array of functions as well as additions and our systems with our state of the art database driving tremendous sufficient.
Great News.
These investments will enable us to continue on our robust growth trajectory.
While we achieved yet another year of record acquisition volume of 131 billion and our continued focus on best in class Omni channel retailers as demonstrated by nearly 84% of annualized base rent acquired being derived.
Fish and feeding investment grade retailers.
Our laser like focus is further cemented by the ground lease opportunities that we've executed on during this past year. We added 26 ground leases to our portfolio during 2020, representing over 12% of annualized base rents acquired increasing our overall ground lease explore.
From leap to nine 6% of our total portfolio.
Several notable ground leased assets were acquired during the year, including our first Wegmans and Chapel Hill, North Carolina, five long term wawa convenient stores and three Walmart to home depots to all these two sheets convenient stores and.
And until we do Ohio.
As a reminder, our ground lease portfolio derives more than 92% of rents from investment grade tenants and is comprised of the company's country's premier retailers.
We continue to identify additional compelling opportunities to add assets to this portfolio and I look forward to updating you in upcoming quarters.
Woes.
We closed out the year with a strong fourth quarter investing $363 million and 106 properties across our three external growth platforms and consistent with our focus on quality throughout the year more than 83% of annualized base rents acquired during the fourth quarter are derived from retailers with an.
Investment grade credit rating and more than 19% of annualized base rents acquired were derived from ground leased assets.
And 100 properties acquired during the fourth quarter or at least a 31 tenants operating and <unk> distinct sectors, including off price retail home improvement auto parts general merchandise dollar stores.
Quarter convenience stores grocery stores and tire and auto service. The properties were acquired at a weighted average cap rate of six 4% and had a weighted average lease term of 11 six years.
Our pipeline heading into 2021 is robust and I am very pleased with our progress to date as indicated by our initial acquisition.
Guidance of $800 million to $1 billion, we are confident and our teams ability to aggregate high quality transaction comprised of leading omnichannel retailers.
Consistent with our initiative to rethink retail we continue to construct and net lease portfolio with sector, leading operators that are well positioned to succeed and omni channel.
Acquisition will do.
During this past year, we added Kroger to our top tenant list, while reducing exposure to Mister car wash and Dave and Busters, who are no longer amongst our top tenants.
As mentioned at year, and our portfolio is investment grade exposure stood at more than 67%, representing a year over year increase and more than <unk>.
And a one basis points and a two year stacked increase and more than 1600 basis points are focused on best in class retailers will continue as we continue to not see it prudent to move up the risk curve.
Moving on to our development and partner capital solutions platforms, We had 12 development and Pcs projects either completed.
900 construction during the year that represent total capital committed and more than 43 million.
Neither of these projects were completed during the past year, representing total investment volume of approximately $31 million to.
Two of these projects will commence during the fourth quarter with total anticipated costs of just over 6 million.
And we're under the project consists of a Burlington and Texarkana, Texas, and our Gerber collision and Buford, Georgia.
Construction continued during the fourth quarter on the company's first development with grocery outlet and Port Angeles, Washington, which is expected to be completed and the second quarter of 2021.
Subsequent to quarter and we.
We commenced construction on our first 711 development and Saginaw, Michigan, seven and level will be subject to a 15 year net lease upon rent commencement, which is anticipated to take place in the first quarter of 2022.
The continued growth of our pipeline demonstrates our efforts to expand our relationships with best in class retailers and and leverage our three.
And <unk> external growth platform. These capabilities continue to produce opportunities that fit very nicely within our portfolio.
We fortified our portfolio through record and investment activity. We've also diversified our portfolio during the year through strategic asset management and disposition activities.
We sold 17 properties for total gross.
Proceeds of just more than $49 million and 2020. These.
These dispositions were completed at a weighted average cap rate of seven 1%, notably we sold 12 franchise restaurants. During this past year, reducing the company's franchise restaurant exposure to a mere one 2% of annualized base rents at year's end.
Our asset management team remain diligently focused on addressing our upcoming lease maturities and it was.
As a result of their efforts at year, and our 2021 lease maturities stood at just <unk>, 9% of annualized base rents representing a year over year decrease of 170 basis points.
During the fourth quarter, we executed new leases.
Extensions or options on approximately 82000 square feet of gross leasable area.
For the full year 2020, we executed new leases extensions or options on approximately 518000 square feet notable new leases extensions or options included new 20 year leases on three wawa convenient stores located in the mid Atlantic.
Sporting goods, and Boynton Beach, Florida, and a giant eagle and Luc and near Pennsylvania.
As of December 31, our rapidly growing retail portfolio consisted of 1100 29 properties across 46 States. This represents approximately a 38% increase and total property count over the course of just one.
And the strength of our carefully constructed portfolio as reflected on our collections data for 2020 during the year, we received second third and fourth quarter rental payments originally contracted for and those quarters from $95 98, and 99% of our portfolio respectively.
And that past year, we also entered into deferral.
Year agreements per second and third quarters of debt of 2% and less than 1% of fourth quarter rents respectively net of repayments received.
In January of this year, we saw a continuation of these collection trends as we again collected 99% of rent. This marks the fifth consecutive month of 99.
Percent collections for our portfolio.
I will again highlight that our collection of data includes both base friends and recurrent recurrent operating cost reimbursements. In addition, we include base rent and operating cost reimbursements charged to tenants and bankruptcy and have not made any COVID-19 related adjustments to the denominator when making these.
These calculations and our goal remains.
To provide complete and transparency to our investors on actual collections data.
As evidenced by our increasing investment grade exposure are expanding ground lease portfolio, our minimal near term lease rollover and our leading rent collections are poor.
Portfolio is better positioned than it has ever been in.
In January we launched our rethink retail initiative to challenge the misperceptions about the future of brick and mortar retail and highlight why net net lease properties and specifically our portfolio is exceptionally positioned and an omnichannel retail world.
Our newly launched Webster.
And include resources regarding our portfolio as well as our first white paper, which provides a perspective on omni channel retail.
We will be putting out additional materials and the coming weeks focused on the dynamic nature of retail and how eager realty is positioned to capitalize on this landscape I would encourage everyone to visit our new website and please.
Please provide any feedback as we continue to build out the content portal.
And January we also announced the conversion to a monthly dividend the conversion to a monthly dividend is a testament to the reliability and consistency of our portfolio is operating cash flow as well as the increased individual investor participation and the equity markets.
Lastly, I would like to take a moment to welcome Karen Dearing to our board of directors. Many of you are very familiar with care and as she serves as the Chief Financial Officer, and Executive Vice President of Sun communities. We're very excited to add current accounting finance capital markets and REIT industry experience to our board.
Look forward to her many insights.
Experiences as we continue to scale, our growing and dynamic company I'll handle the call over to Clay and then we can open it up for any questions.
Thank you, Joe and I'll start by providing a balance sheet update and an overview of our capital markets activities during the year.
We were very active and the capital markets this past year, having raise.
<unk> are settled a record of nearly $1 5 billion.
Fortifying, our balance sheet and positioning us for growth in.
In addition to external capital raise we also generated approximately $85 million through our disposition activity and free cash flow after dividend during the year.
Some of our notable capital markets activity from the year.
<unk> and <unk> $575 million of net equity proceeds raised or settled through our ATM program.
Forward a follow on public offering of $2 9 million shares of common stock, including the underwriters over allotment option for net proceeds of approximately $170 million.
And underwritten.
Written public offering of $6 2 million shares of common stock and connection with the forward sale agreement and which the shares were sold to Cowen and steers, we settled the offering and tranches during the third and fourth quarters, realizing net proceeds of $355 million.
And the completion of our inaugural public bond offering for.
For $350 million of two 9% senior unsecured notes due in 2030.
And <unk> the public debt markets represents an important milestone for our company, which we anticipate representing a meaningful source of capital and the future.
Subsequent to year, and we completed and overnight offering of approximately three.
Eight 5 million shares, including the underwriters' option and received and received net proceeds of approximately $222 million.
The proceeds were used to pay down our revolving credit facility fund acquisitions and development activity and for working capital inclusive of the January offering.
Anticipated net proceeds from our outstanding forward equity and availability under our credit facility, we have nearly $700 million and liquidity.
As of December 31, our net debt to recurring EBITDA was approximately four eight times pro forma for the settlement and of our outstanding forward equity offerings, our net debt to recurring EBITDA.
Approximately four times.
Total debt to enterprise value at year end was approximately 23, 4%, while fixed charge coverage, which includes principal amortization.
And at a company record $4 eight times.
Moving to earnings core <unk> was <unk> 84 per share for the fourth quarter and three.
It was <unk> 23 per share for the full year 2020, representing three 8% and four 8% year over year increases respectively.
<unk> was <unk> 83 per share for the fourth quarter and $3 20 per share for the full year, representing four 8% and 6% year over year increases.
And during the past three quarters, we have elected to treat COVID-19, deferrals as delinquent receivables and our <unk> measures include this revenue.
On a quarterly and full year basis core <unk> per share and <unk> per share were impacted by dilution required under GAAP related to our recent forward equity offerings Treasury stock is to be included.
And within our diluted share count and the event debt 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 <unk> and <unk> per share for the fourth quarter and approximately <unk> <unk> for the 12 months period.
General and administrative expenses.
<unk> and 2020 totaled $28 million G&A expense was eight 4% per total revenue or seven 9%, excluding the noncash amortization of above and below market lease intangibles.
Given the recent changes to the leadership team and newly a recently amended employment agreements G&A expense as a percent.
<unk> percentage of total revenue increased slightly year over year for 2021, we expect that G&A expenses as a percentage of revenues will decrease approximately 100 basis points.
Income tax expense for the full year total for the full year 2020 totaled $1 1 million.
For 2021, and we anticipate.
Total income tax expense to be and the range of one four to $1 6 million.
The company paid a cash dividend of <unk> 62 per share on January 6th to stockholders of record on December 31, 2020, representing a 6% year over year increase this was the company's 107th consecutive.
<unk> cash dividend since our IPO and 1994.
For the full year, the company declared dividends of $2 40, and a half cents per share a five 5% year over year increase.
Our payout ratios for the fourth quarter were a conservative 74% of core <unk> per share and <unk>.
<unk> per share respectively.
For the full year 2020 on a per share basis, our payout ratios were 75% of both core <unk> and <unk> respectively.
These payout ratios continue to reflect a growing and very well covered dividend.
And as Joey highlighted in January we announced the transition to a monthly cash dividend.
And <unk> and have since declared monthly dividends for January and February of 'twenty, and seven tenths of a cent per share. The monthly dividend. This monthly dividend reflects an annualized dividend amount of just over $2 48 per per common share representing a six 2% year over year increase.
With that I'd like to turn the call back over to Joey.
Thank you clay at this time, operator, we will open it up for any questions.
We will now begin the question and answer session to ask a question you May Press Star and then one on your Touchtone zone.
If you are using a speakerphone please pick up your handset before pressing the keys.
And if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star and then two.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Linda Tsai with Jefferies.
Please go ahead.
Hi, Good morning can you just give us more color on your investor outreach to retail investors and your website White papers tick Tock do you have a systematic strategy for this initiative and how do you measure participation.
How familiar our retail investors with net lease Reits.
Good.
And then I appreciate the question and I didn't realize we had a tic Tac account and then maybe my children, but.
Well I think first and foremost the important piece was to build the infrastructure out here in terms of investor accessibility. So the new website, the rethink retail campaign the industry insights include.
And <unk> of the white papers.
And then we will use different social media tools as well as other tools to continue to build out the individual investor strategy that we have here, which is which is truly a medium term platform for us and we think is and.
And incremental approach to our shareholder base. So it's not.
Good morning, a whole change of direction here, but it's incremental and I think it's it's additive longer term to our shareholder base.
Thanks, and then we saw on the news that kroger's pitching a portfolio of 28 stores under its Fred Meyer banner is this something youre looking at and do you view this as indicative of the potential for more.
Our increased sale back leaseback deals coming to market and 2021.
Yeah, I'm sure the team and I'm sure. The team here will we will look at and retailers. They have access to is still with a historically low rate environment and the unsecured debt markets. There are retailers that are looking at sale leasebacks.
And I would remind everyone thats not a predominant means of growth.
Growth for us, although we explore all opportunities.
Have seen that debt portfolio, which you are referencing.
And I'm sure the acquisition team will look at it but but for that to hurdle it would have to.
Not only a hurdle from a from a.
Earnings perspective or a.
It would also really have to hurdle from a real estate perspective, so I am sure.
And we do everything, but our typical mo of aggregating one off.
Isn't going to change soon.
Thanks, and then just a question for Clay you talked about the 12 members you added to your team are there any other additions you need and then in terms of the G&A going down 100 bps could you provide a dollar range too.
Sure. Good morning, Linda I. Appreciate the question book in terms of building out the team Joey mentioned 12 team members were added in 2020.
That's in addition to the investment we made and processes and systems as well, which is a growing company, we continue to make and continue to invest and the business.
So in terms of additional hires will continue.
We will look at us and the business will continue to hire more and bring on new team members as the company growth and that.
100 basis point reduction and G&A is reflective of continued growth and G&A. If you look back at where G&A has kind of grown our trended. The past couple of years has grown between 'twenty and 'twenty and 25% the past couple of years.
And that's obviously with meaningful growth and revenues as well.
And I'll, probably I won't provide a range in terms of dollars for the year, but we're certainly targeting a 100 basis point reduction as a percentage of revenues, which we think represents just the continued scaling of the book of the company.
Thanks.
And the next question comes from Nate Crossett with Bear and Baird. Please go ahead.
Hey, good morning, guys.
I was wondering if you could give some color on the outlook for pricing for this year I know it's been.
Pretty stable and the last six months or so but are you seeing any true.
And then and competition or pricing.
And what should we expect in terms and yields.
And good morning.
Pricing and interest rates and demand.
There is causal here correlations are very difficult to determine with the recent increase.
Kris and the 10 year I'd be hesitant to give any pricing forward looking guidance, we've seen fairly static pricing cap rates.
Either and the same place potentially marginally lower earlier and the year or late last year, I really should say, but again, there's a lot of moving pieces here as I think I mentioned.
Change is Paul I think also which is very difficult to quantify.
Net lease specifically is one of the only investable asset class I think that can be underwritten today, and so I think where youre going to see additional dollars pour into the space. The vast majority of those dollars are chasing higher yield noncredit and so it's not incremental.
And on the last question to us.
I don't expect any and any true expansion of cap rates, unless we see and economic volatility that's unpredictable, which we share.
We could see.
I think cap rates will remain effectively where they are a day.
Okay could you maybe remind us the return.
Rental comps that you guys get on your development stuff and what's I guess the guidance for development starts for the year or is it more just ad hoc.
Well I would tell you the development and Pcs are both value added products to our external growth platform, which which are which are targeting 200 plus.
And your line is basis points above market cap rates, obviously subject to the duration of the project. If we're just financing the owner project the very different rate of return on that we're looking for if we're taking a project all the way through.
The permitting and entitlement and construction phase and it will give we don't give forward looking guidance in terms of acquisitions and partner capital solutions.
And most deals can obviously have a number of hurdles and four of them and.
And a longer duration in terms of the lifecycle of those assets and the gestation of those assets I will tell you our pipeline on both fronts continues to grow we continue to see a number of interesting opportunities specifically on the BCS front.
<unk>, Okay and then that's helpful. Thanks, and just one last one can you kind of on line.
You guys just sort of your overall deal flow.
What percent is in house generation versus other sources today and has that changed at all over the last year with on the ads that you guys.
Okay.
Well I'll tell you we have a 10% origination team led by our Chief investment Officer, Craig <unk> Cregger ROIC.
That is regionally focused.
Transactions come from all different sources and relationships from retailers to developers owners from leasing brokerage.
And the investment sales brokers and frankly, the best transactions typically come from the Strangest places.
As you would expect and so it's a very wide net debt, we cash I think and the deck. We go through the 30 plus billion dollars that we've underwritten and that's not reviewed but truly underwritten and spend time on and the last few years and so.
Brokers its a wide net it's a low batting average with high hurdles, but we will continue to focus on best in class retailers and the team and the systems are built out to continue to build that to scale.
Okay. Thanks, guys.
Thanks, Nick.
The next.
So and comes from <unk> St Juste with Mizuho. Please go ahead.
Hey, good morning.
Good morning, and.
Hey, great. Thanks capital if you will so a quarterly number.
And you're looking back at last year, some of the investments that 84% of the deal for I agree the Walter.
Closer to 11 years, almost two years above the portfolio average and it.
And pre Covid I guess I'm curious if you think looking back 2020 will.
That will prove to be an anomaly given maybe some COVID-19 dislocation or is it realistic.
Repeat that level of I agree and Walt.
The deals this year.
Well I would tell you.
I would anticipate our investment grade exposure to tick up this year I would anticipate our ground lease exposure to tick up this year and that's just and the visibility, which we have today.
It's hard to look forward, we have and we always say 70 days and visibility.
Alrighty into our pipeline, so it's hard to look forward and and <unk>.
Predict those outcomes were focused on that sandbox of retailers the $25 30 best retailers on the country. The majority of those carry investment grade credit ratings, and we're not seeing any deviation from.
Traditional or last.
Last year's weighted average lease term as you mentioned so.
I think that is I wouldn't say, it's an anomaly I think we are targeting the same types of retailers and so outcomes wouldn't deviate very.
Wouldn't deviate very far from there.
Got it thank you.
Question on the.
1% on collected.
And the fitness operator, it's been a few quarters now with no.
And no movement, there and Thats still your expectation will be receiving those rents. This year any recent conversations with them or any updates to provide there.
We continue to have conversations we anticipate receiving the receiving those rents.
The largest.
And operator effectively in the country and we anticipate receiving those rents I think everyone acknowledges that they are not only collectible, but they are due and owing we'll look at our remedies and our recourse and and continue to engage in dialogue with them.
Got it and one more on that from 31, but maybe from a different angle.
I noticed that your and upbeat and was curious that if it's 10 31 is repeal are would you consider issuing op units the sellers of assets as a maybe a tax mitigation strategy is that something thats come up and any conversations and what do you see the pros and cons of maybe doing that.
Issuing op units and some of the.
Transactions to the sellers youre dealing with.
It's a good question is their tool and our tool belt.
We continue to look at with select transactions and I'll say, the frictional cost of doing it for something under a call. It 2000 $30 million probably doesn't make much sense. It is a great currency that we have I think with care and edition specifically.
<unk> to the board and Sun communities history of using <unk> transactions and preferred OPE units brings and additional experience to the board of directors level.
Looked at a number of transactions I think it is.
And frankly, I'm surprised that more sellers don't don't look for OPI units.
Of larger portfolios or larger assets, but we will continue.
And you evaluate opportunities.
To use them as currency.
Got it alright, thank you guys.
Thanks, Andrew.
The next question comes from Katy Mcconnell with Citi. Please go ahead.
Great. Thanks, and good morning can you go.
And more background on the rethink retail opportunity and your portfolio and then to what extent and are you starting to see increased demand from traditional mall or strip center tenants today to migrate to them at least concept because it looks like stability.
Yeah I agree I appreciate the question. Good morning, Good morning, Katie on the recent retail campaign.
And it's really it's really double nuance related challenges retail investors to rethink net lease and AG Realty and then challenges real estate investors to think of net lease and and Omnichannel World. So I think I think the three dimensional video on the landing page demonstrates the increased capabilities enhanced capabilities.
And when do you and accelerated by Covid and everything for lockers, and bogus and same day delivery and pickup if you go to Walmart and most recent press release I believe just three or four weeks ago. It was on our website you can see the pickup window is that they are now and micro fulfillment centers that they are now adding to their stores the net.
<unk> and lease format, and we will come out with another white paper that compares and contrasts net lease formats are freestanding formats with the shopping center format is amenable and capable of enhancing all of those different omnichannel capabilities in contrast to being in line stuck in the middle of shopping centers. So we think that debt.
And then.
Net and omni channel capability is unique to net lease as we continue to move to a world where 25% on.
Sales are E commerce related.
The second part of your question remind me real quick on malls and shopping centers, but we continue to see what I will tell you is a slow migration.
And then of retailers rethinking their own strategies and context of this omni channel paradigm that were in our commercial real estate has leases that range from five to 25 years and so these changes are always slow I mean, there are still sear stores and kmarts and existence, but these changes are always slow they take time.
Ratio do you see them on the margin continuing to move. So for example, Chipotle is today is exploring a drive through only store you see the Walmart pickup.
And micro fulfillment you see all different retailers recalibrating, adding additional drive throughs, adding and you can just go and either.
<unk> will stores, adding pickup spots the bottom line is that those modalities are not capable.
To be fulfilled if you're in the middle of them all over for you and the middle of a shopping center the middle of a shopping center you have a front door and you have a back door the front doors for consumer traffic that back doors for truck deliveries Compactors and trash.
And so if you are stuck in that middle of the shopping center you cannot effectuate, a true omni channel micro fulfillment strategy, which we think is the future.
Great Thanks and.
And then just a quick follow up is from acquisition pulp line of seeing today, how should we think about.
Yes.
Well as it always does it ebbs and flows our pipeline changes every day I would tell you today, our pipeline is quite strong and I would always emphasize not only strength in terms of size I sound like a broken record but quality.
It's easy to buy things, it's easy to create sports short term spread that's easy to ignore residual values and acquire single purpose.
Office buildings, we simply we just don't play that game everything and our pipeline stands on its own it's qualitatively additive to this portfolio. It's obviously quantitatively additive in terms of earnings and the bottom line, but I think if you look at our investment grade percentage of ground lease percentages. They keep climbing because we're focused on the best of the best and we see no shortage of opportunities.
To create not only short term, but long term value embedded in this portfolio.
Alright, great. Thanks.
Vicky.
The next question comes from Ross Wes Golladay with Baird. Please go ahead, Hey, good morning, guys just want to go back to there.
And retail and the pace of adoption no based on the retailers do you think this could actually be accelerated I think you've mentioned the longer duration. A typical change but are you starting to see maybe existing tenants wanted to modify their stores and then maybe when you look at your existing Walmart will any of those would be local fulfillment centers.
Okay.
No news from the Wal Mart true last question No news on the Walmart conversion to any of the micro fulfillment centers I wouldn't be surprised over time if that happens.
And have a number of test stores that they are working on currently which I think is book, which is public knowledge.
In terms of the rethink retail campaign.
And if you just look around and you drive to your local stores again, you can see the changes that they're making in their formats and it has been accelerated dramatically by Covid and.
And we think that adoption even in a post COVID-19 world isn't going to go away.
It may not be as significant but the adoption of omni channel I.
And I think I'll tell you my father and my parents are in their mid Seventy's they've used instant card for the first time, they've stayed and their car and had groceries, putting their trunk for the first time they've used door dash for the first time, we're in a world where all of these modalities have been accelerated from Covid.
And frankly, the most challenging one of the two.
I mean challenging demographics, you have the older and and lower income the older demographic has used these modalities the most and the and these are through apps and things where that's typically adoption is amongst the slowest and so it's this is coming it is inevitable and we think we are uniquely positioned given our portfolio.
Two mojo and the retailers within it and the real estate within it to be a major player there.
Got you and then I guess.
Do you have any kind of guidance for G&A and hygiene, a reserve gave you and a bad debt reserve.
What was last year's level and then what is a normal run rate for you.
Sure.
Sure so in terms of run rate.
I guess, let me start by saying in terms of what's still uncollected for 2020, we've put on some additional disclosure at the bottom of our reconciliation on page 15 of our release in terms of a run rate.
And for bad debt.
We specifically identified we don't have a general reserve related to any bad debt in terms of what was written off this year. If we go back to it's related to Covid specifically in terms of tenants that were moved to cash basis that was roughly $1 million and $5 and total for the full year.
Great. Thanks for the detail.
Thanks Ross.
The next question comes from Todd Stender with Wells Fargo. Please go ahead.
Hi, Thanks can.
Can we hear a little bit more about the ground leases you acquired in the quarter.
And maybe going in yield any annual rent escalators and then how much.
Term is left.
And characterize the <unk>.
<unk>.
Yeah, just just a little color I don't have the granular detail on a lot of those on the <unk>.
Individual transactions Todd I'll tell you a couple of transactions we bought.
A walmart ground lease in Rancho Cordova, California.
Very unique store, a very unique piece of real estate, we bought a number of wawa ground leases.
Those have significant escalators within them 20 year, typically wawa ground leases, where they constructed their own C store put their own tanks and canopies.
So a number of we bought all day. Another good one is a hannaford grocery.
Restore paying $4, a foot and Augusta, Maine, a very unique building.
And I'd encourage everyone to look at debt structure itself.
And I'm trying to think off the top of my head of sheets, one or two sheets similar to wildlife and industry, leading C store those are ground leases as well.
And so a number of growth.
And these transactions, obviously that we've identified and.
And we continue to see those opportunities.
And frankly during this quarter and upcoming quarters.
Joey how about going in yields particularly from a.
Walmart and California, or maybe the main properties and even any range you can give us.
Yes, generally they vary.
Between five and a half and seven low seven subject to terms subject to a number of things I would remind everybody that our relationships with retailers and enables us enhanced visibility into real estate performance store level coverage and other things.
Metrics that are important so we have no problem buying short term.
Term transactions frankly, some of those are some of the best deals that we do so.
Tell you the range of yields is within the band equates to effectively the mid sixes in this case.
Approximately.
And six four.
Thanks, that's helpful.
And you don't have a lot of leases expiring in the quarter.
<unk>.
And Q4, and you really have a modest level coming up this year can you maybe just share some color on how those conversations are going we're still in COVID-19.
What's the tenants' willingness to sign a long term renewal or really there just referring to kind of a five year renewal at this point.
We anticipate.
And most tenants are basically almost all of the tenants that are upcoming this year in 2021, and it's only 9% of total.
Of the total portfolio in terms of GAAP ABR, we anticipate them effectively all exercising options.
Those options typically are five years.
Alright. Thanks.
Last one and and thanks Cliff and the color on the G&A.
But just as a reminder for timing for your forward equity offerings getting settled is it fair to assume.
That once you hit the 12 month, Mark we will see that being settled or maybe any time and color you can provide.
Sure Hi, Todd.
In terms of timing I think.
And how we've approached forward settlement and the past couple of quarters is a good indicator in terms of settling amounts to remain within our stated leverage range of four to five times net debt to recurring EBITDA.
And that our forward contracts allow for up to a year of settlement on a year to settle our first.
Our first contract that comes up is in May So we have ample time there and.
And flexibility in terms of when we settle and we have roughly $50 million or so and the second quarter.
And that'll come come up for settlement, so a lot of flexibility there, but again I think the past couple of quarters is a good indicator in terms of solving.
And our targeted range of four to five times.
One comment I'd add there Todd I think the forward and inclusive of you can see and our filings any swaps that we have in place for long term debt is and overall part of and overall hedging policy from what we think is the biggest threat to this business is very difficult to identify.
<unk> internal threats in terms of and credit or lease duration and the balance sheet.
As the macro environment and so we've used forward both off of the ATM and regular way as well as swaps.
On the debt side to mitigate volatility and frankly gives us some medium term visibility into our cost.
Moving with interval and so that overall hedging policy provides for stability and visibility there and we pair that obviously with what I call. The brains of the organization as the origination capability. So I've always looked at net leases <unk> of the heart and then you have the brain heart as your cost of capital preserving that.
And captive capital to create those spreads and then the brains of the organization executing in terms of net investment activity and high quality real estate.
That's helpful. Thanks, guys.
Thanks Todd.
As a reminder, if you have a question.
And please press star and then one to be joined into the queue.
The next question is a follow up from Katy Mcconnell with Citi. Please go ahead.
And it's Michael Bilerman.
Joey just on the ground lease portfolio, which obviously has been increasing size and how do you think.
About typically the returns on ground leases are going to be lower than if you're on.
Just trying to box and the ground together.
And if youre not getting a commensurate decline and your cost of capital both debt and equity blended and how do you sort of keep up the accretion.
And I get the point of the quality of the real estate and the quality of the credit.
And in order to drive cash flow and drive accretion you sort of need a commensurate drop and cost of capital. So are you thinking about different structures and.
The ground lease portfolio, which is almost double digit today.
Yes.
And through some of that for us.
Yeah no.
We arent, reaching on ground leases. So we are creating value and many of these ground leases. We are extending leases, we're working with tenants. We're sourcing them from unique structures back back to Todd's question. These these cap rates are falling within generally.
And just kind of ranges of our traditional turnkey acquisitions, what I think is really interesting and frankly, almost a little bit frustrating goes almost a segmentation theory here is is our ground lease portfolio, which is going to I will tell you will increase I anticipate it being double digits by the end of Q1, and surpassing 10% of the overall portfolio was appropriate.
Approaching a $1 billion and value was 92% investment grade it's got a weighted average lease term of nearly 12 years I would tell you. It's vastly superior to the triple B to BB plus bond index. There is tremendous upside fantastic real estate and three buildings if they ever leave so I think the market is missing the embedded value and that portfolio.
So and we arent reaching to construct debt portfolio, we're working through.
A whole range of origination capabilities to find them and I'll tell you and interestingly I mean, the Rancho Cordova Walmart that we acquired was from Alex Trebek State.
And we're big Jeopardy fans here and May he rest and piece, but.
It was literally Alex <unk>.
Walmart and so these are unique opportunities that we are finding through the origination team and all of our 25000, plus contacts and our CRM system, but we will not reach in terms of yield there.
But thinking about not getting credit for and it sounds like your funds.
Frustrated net the equity market may not be giving you the appropriate credit for net income stream.
I guess, how are you thinking about maybe capitalizing that portfolio either through the MBS market or another.
And maybe just direct secured.
And that thing against it to effectively straight debt value that you think and then roll that capital and or maybe through a joint venture with an institutional partner.
And I guess waiting for the equity markets to distinguish your income streams ground lease version and the traditional net lease assets and.
Just don't.
Now if it's going to come and so I just didn't know how much you are spending time trying to.
Highlight our scrape that value for shareholders.
Yes, no it's a great question.
We are in the short term and medium and we're not looking at different financing options.
Encumber that portfolio or lever that portfolio.
And I'll tell you, we will maintain and unsecured balance sheet, we anticipate being.
Our consistent unsecured borrower and the investment grade public markets I think what's most important and we will continue to hammer home the embedded value in that portfolio. It seems like investors have understood it and context of safe hold we think.
These ground leases are very divergent and for those they have enhanced credit tenant and these are not structured leases to tenants bill restructured transactions the tenant paid for their own building and their own improvements again at 92% investment grade I think I think the true change here and to Pierce debt segmentation.
Just.
Biography, there is to continue to educate investors on.
On the embedded value in that ground lease portfolio and and the individual pieces of real estate that we're actually acquiring but I hope that works. My expectation is that is that education works, it's not easy and context of a vaccine trade and.
And then the craziness, we see in the equity markets today, but longer term, if we're unable to effectuate that and we'll look at all options as you mentioned.
And there are public market option that was creating this portfolio, which sounds like it's over $1 billion and more to come on.
Creating a tracking stock or.
Spin off or a separate entity, where that income stream could be capitalized differently.
I wouldn't rule it out I think that could be a longer term solution here again, I think it's an extremely unique portfolio. If you. If you look at the relative yields of the Triple B to B plus bond index you look at the term.
Credit and embedded escalators and residual value here, if I'm, a fixed income investor I'd much rather on this ground lease portfolio.
And then the unsecured paper for the retailers within it and so I think we will book will always evaluate options.
But I think that is an option and longer term that.
We don't think we're getting with the correct value and it continues to scale. If that's an option that we should look at.
And by the way you are kicked on Star your interview and lingers on on take time and it looks like Youre on the C store by the way.
Well.
Social and maybe I don't know social media is everywhere I.
I guess, but look part of our recent retail campaign and back to the earlier question part of the <unk> retail campaign involves and enhanced digital and social effort on our part I have been anti digital social media for a long time, but I think it's important as we.
We expand and increase our outreach to individual.
Joel investors to use those mediums I guess inclusive of Tic Tac.
Okay. Thank you.
And the conference you have and.
Do you have a tick tack on top Michael <unk> will follow.
Yes.
[laughter].
Yes.
That is.
Alright.
And operator any other questions.
No. That's it. This concludes our question and answer session I would now like to turn the conference back over to Joey agree acreage for any closing remarks.
Thank you for your patience everyone.
One book forward to catching up virtually during upcoming conference season, and apparently we have a tic Tac accounts. So please follow it and we'll talk to you soon thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Hello.
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