Q1 2022 Agree Realty Corp Earnings Call
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Yes.
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Good morning, and welcome to angry reality Corporation's first quarter 2022 earnings call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Ruben treatment director of corporate Finance. Please go ahead.
Thank you good morning, everyone and thank you for joining us for <unk> first quarter 2022 earnings call before turning the call over to Joey and Peter to discuss our results for the quarter. Let me first run through the cautionary language. 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 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.
Correct economic effects of the pandemic and containment measures on us and our tenants. Please see yesterday's earnings release, and our SEC filings, including our latest annual report on Form 10-K 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 <unk> and net debt to recurring EBITDA reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release web site and <unk>.
<unk> balanced I'll now turn the call over to Joey.
Thanks, Ruben and thank you all for joining US. This morning I'm pleased to report that we're off to a very strong start in 2020 to.
The first quarter marked record development in partner capital solutions starts as well as our second highest quarter of acquisition volume in the Companys history.
We'll continue to execute across all three external growth platforms. We are very pleased that our fortress like balance sheet and disciplined portfolio construction received an upgrade from Moody's to <unk> one <unk>.
During the first quarter, we invested approximately $430 million and 124 high quality retail net lease properties across our three external growth platforms 106 of these properties were originated through our acquisition platform representing acquisition volume of just over $407 million.
While investment volume was impressive we maintained our disciplined focus on best in class opportunities with our leading retail partners as demonstrated by more than 74% of first quarter acquisitions being comprised of investment grade retailers.
The 106 properties acquired during the first quarter at least a 42 tenants operating in 20 distinct sectors, including leading operators and farm and rural supply dollar stores home improvement general merchandise tire and auto service and auto parts.
We executed on several notable transactions during the quarter, including the 55 property $180 million portfolio discussed on our last earnings call.
Wired portfolio has a weighted average lease term of nearly 10 years derives approximately 90% of annualized base rent from a diversified set of investment grade retailers top tenants include tractor supply Cvs dollar General Sherwin Williams advanced auto parts and O'reilly auto parts.
For the quarter. The total properties acquired had a weighted average cap rate of 6% and had a weighted average lease term of nine two years.
Excluding the 55 property portfolio the properties acquired during the quarter had a weighted average cap rate of six 2%.
During the first quarter. We also acquired six Sunbelt rentals stores in North Carolina, New York, Washington, Florida, and Michigan.
Several years ago, we identified sunbelt and their parent Ashtead group has a compelling and alliance partner with the only investment grade credit profile in their respective space.
Our decision to invest in Sunbelt rentals was recently reinforced by their upgrade to triple B by Fitch, We continue to look for opportunities to build our relationship with sunbelt across all three of our external growth platforms.
Given our significant acquisition activity in the first quarter and robust pipeline, we are increasing our full year 2022 acquisition guidance to a range of one four to $1 6 billion.
Representing a 25% increase at the midpoint.
While the midpoint of our increased acquisition guidance would represent record volume for our company, we have not and will not sacrifice quality or yield.
We continue to believe that retailers dynamically involving and we remain intent on investing in those retailers best positioned to succeed in an omnichannel and dynamic world.
Moving on to our development and partner capital solutions platform. This comp this quarter demonstrates the results of our efforts very comprehensive real estate solutions to our retail partners through our programmatic relationships and as well as the modifications and additions we have made to our team to increase productivity.
Led by our Chief operating Officer, Craig Ehrlich, our development and construction team is working around the clock on a host of exciting projects.
During the quarter, we commenced a record 15, new development and Pcs projects, including 13 geographically diverse gerber collision locations, a sunbelt rentals in St. Louis, Missouri, as well as the Burlington in Turnersville New Jersey.
We completed our first development with 711 in Saginaw, Michigan during the quarter, while construction continued on to Gerber collision projects in Pooler, Georgia, and new Port Richey, Florida.
In total we had 18 projects either completed or under construction during the first quarter, representing $53 million of committed capital.
On last quarter's call I mentioned, our expectation to commence between 50 and $100 million through our development and Pcs platforms. This year and we've now surpassed the low end of that range and our pipeline continues to ramp.
Our value proposition remains unique and distinct our three pronged external growth strategy combined with our outstanding asset management platform continues to provide a full service solutions for the for the country's premier retailers.
Moving on to dispositions, we sold one property Opportunistically for total gross proceeds of approximately $8 million during the quarter.
The property was a recently acquired ground lease convenience store, notably we acquired the property during the third quarter of 2021 and received an unsolicited offer. Shortly thereafter, we sold the asset at just over a forecast approximately 200 basis points below the initial acquisition yield resulting in a gain in over 2 million.
In just six months.
While this was a one off transaction it demonstrates the embedded value in our ground lease portfolio and validates the compelling risk adjusted returns that we've discussed on prior calls.
During the quarter, we executed new leases extensions or options on approximately 358000 square feet of gross leasable area.
Notable new leases extensions or options included a Walmart in Ohio, and a best buy in Amarillo, Texas.
As a result of our asset management team's efforts at quarter end, our 2022 lease maturities stood at just <unk>, 4% of annualized base rents representing a year over year decrease of approximately 80 basis points.
At quarter end, our quickly growing retail portfolio surpassed 500 properties a remarkable achievement in terms of our exponential growth in recent years and consisted of one 510 properties across 47 states, including 186 ground leases, representing 13, 5% of total annualized base rents.
Our investment grade exposure stood at nearly 68% representing a two year stacked increase of more than 800 basis points.
With that I'll turn the call over to Peter and then we can open up for any questions.
Thank you Joey starting with earnings core <unk> for the first quarter was <unk> 97 per share a 15, 5% year over year increase.
<unk> per share for the quarter was also 97.
Representing an increase of 16, 4% year over year, which is the highest <unk> per share growth achieved in 10 years.
As a reminder, treasury stock is included within our diluted share count prior to settlement, if and when ADC stock trades above the deal price of our outstanding forward equity offerings. However, the aggregate dilutive impact related to these offerings was negligible in the first quarter.
Our consistently strong earnings growth continues to support an increasing and well covered dividend during the first quarter, we declared monthly cash dividends of $22 seven per share for each of January February and March on an annualized basis, the monthly dividends represent a nine 7% increase over the annualized dividend.
From the first quarter of last year.
At 71% our payout ratio for the first quarter was below the low end of our targeted range of 75% to 85% of <unk> per share.
Subsequent to quarter end, we declared an increased monthly cash dividend of <unk> 23, <unk> per common share for April the monthly dividend reflects an annualized dividend amount of $2 81 per share or seven 8% increase over the annualized dividend amount of $2 60 per share from the second.
<unk> of last year.
General and administrative expenses totaled $7 6 million in the first quarter.
G&A expense was seven 2% of total revenue, excluding the noncash amortization of above and below market lease intangibles, while we continue to invest in people and systems. Our anticipation is that G&A as a percentage of total revenue will continue to scale decreasing between 20 to 50 basis points as a percentage of total.
<unk> revenue compared to last year.
Additionally, we continue to anticipate total income tax expense to be in the range of two five to $3 5 million.
Moving on to our capital markets activities for the quarter in March as Joey mentioned, Moody's upgraded the company's issuer rating to <unk> from <unk> with a stable outlook. The improved investment grade credit rating is a testament to the strength of our balance sheet and reflects the thoughtful and disciplined manner in which we have grown the company since achieving our <unk>.
Actual rate in four years ago.
The <unk> credit rating will further improve our long term access to capital and enhance our ability to execute in the public bond markets.
As mentioned on last quarters call, we have $300 million of forward starting swaps in place effectively fixing the base rate for a contemplated long term unsecured debt issuance at one 7%.
Near the end of the quarter, we settled approximately three 8 million shares of outstanding forward equity realizing net proceeds of $251 million at quarter end, we still had approximately $4 1 million shares remaining to be settled under the December 2021 forward offering which is anticipated to raise net.
Proceeds of $263 million upon settlement.
Inclusive of the anticipated net proceeds from our outstanding forward equity cash on hand, and availability under our $1 billion credit facility, we had almost $970 million of liquidity at quarter end.
As of March 31, our net debt to recurring EBITDA was approximately four three times pro forma for the settlement of $263 million of outstanding forward equity excluding.
Excluding the impact of unsettled forward equity our net debt to recurring EBITDA was approximately five times.
Total debt to enterprise value at quarter end was approximately 26, 5%, while fixed charge coverage, which includes principal amortization and the preferred dividend remains at a company record of $5 two types.
In summary, we continue to maintain a conservative and well positioned balance sheet that affords us tremendous flexibility with pro forma net debt to EBITDA of four three times and roughly $970 million of liquidity to fund our robust investment pipeline.
Our significant liquidity more than $560 million of hedged capital and our robust pipeline continues to give us confidence in achieving high single digit <unk> per share growth in 2022.
Combined with our nearly 10% <unk> per share growth last year. This implies two year stacked growth in the high teens.
We view that per share growth to be very attractive when combined with our best in class portfolio, our fortress like balance sheet and extremely well covered dividend with that I would like to turn the call back over to Joey.
Thank you Peter at this time, operator, let's open it up for questions.
We will now begin the question and answer session.
You ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Joshua Donnelly with Bank of America. Please go ahead.
Yes, everyone.
So you had a pretty sizable portfolio acquisition during the quarter just curious how that deal came about and maybe what the bidder pool like in the current environment.
Yes, good morning, Josh I think we talked about it on the last call that transaction for the portfolio itself. We started to look at in 2019 at the time the swap breakage fees for the seller, which is a private individual.
And the mid Atlantic.
We are too heavy for him to burden and so we were re approached.
I believe in December of last year December of last year, and then within three days had a had a transaction that was getting papered and so there was no bidder pool is fully off market or.
A single individual owner with.
The aggregate of the portfolio over several years.
Okay and then so you had.
A record number of <unk>.
Across our development in Pcs programs are there.
There are any <unk> on how big your development pipeline can yet.
No I think look we've always said that we're going to deploy our development capabilities selectively in terms of dedicating our time energy and capital.
We want those projects to hurdle, our internal rates to make sense.
So we don't see any governor we've made significant additions to the team both on the development and construction side as I mentioned.
The prepared remarks, and so we're going to continue to ramp that pipeline and Opportunistically. We have several projects, we anticipate announcing in Q2.
But we think there's we think there's ample opportunity right and they're giving the disconnect between rates and returns for private developers for us to step in.
And we're having a number of conversations with retailers.
<unk>.
Programmatic in individual projects.
Great. Thanks.
Thanks, Josh.
Our next question comes from Rob Stevenson with Janney. Please go ahead.
Hi, Good morning, guys Joey just.
Follow up on the last question on the Gerber stuff was there anything in particular that sort of drove timing I mean.
Of doing that I mean that was 13 to 15 development BCS volumes at this point in time or is this just part of their expansion plans.
Et cetera.
Yes part of it generally part of their expansion plans, we continue to look for opportunities with Gerber across all three external platforms Gruber continues to grow both from a greenfield perspective, and an M&A perspective, acquiring generally independent operators.
These projects are I would tell you about half what we call retrofits renovations or expansions within half Greenfield projects. So gruber continues to take market share in this country.
And we see them as a pretty critical partner and industry is very favorable.
Okay, and then you guys sold the La fitness you acquired the portfolio deal pretty quickly how are you thinking about the other la fitness locations in the portfolio and the other gyms in the portfolio in general are those near term disposition candidates was there something about this one.
That caused this one to be sold so quickly versus the others. How are you thinking about gyms and fitness going forward yes.
Yes, just for clarity purposes that was not part of the La fitness was not part of the 180 $180 million portfolio that was part of a Walmart and home depot portfolio that we acquired we agreed to take the la fitness, which was based in Houston.
But immediately look to divest of that even pre close to divest of that at our cost basis. We're just simply not willing to take on incremental specifically la fitness exposure, but generally health and fitness exposure unless it's a.
Really a low cost operator, or a piece of real estate that were really in love with so as you can see we reported the la fitness at $3 31 to one 5%, but theyre truly down to one 3% just immediately after or subsequent to quarter close.
We still look at the gym sector.
The health and fitness sector.
With general suspicion.
We have some impaired balance sheets, obviously, we still have COVID-19 out there, but I think just just the fragmentation of the space the private equity in this space and just the sheer number of options available for consumers today.
Really make that space difficult to underwrite for US Okay, and then last one for me Peter If you were doing on note issuance today wherever you gotten indications from your bank group that you could price five or 10 year debt versus where you would have been at the end of 2021.
Yes, Rob first as noted in the prepared remarks, we have $300 million of forward starting swaps in place today that are effectively fixed the base rate at one 7% comp.
Contemplated as a 10 year unsecured debt issuance.
In terms of the spread on top of that base rate.
It depends on when we access the market obviously the capital markets have been somewhat volatile to start the year, but the good news is we're in excellent position from a liquidity perspective and can be opportunistic in terms of when we access the market and issue additional unsecured debt.
Okay. Thanks, guys.
Thank you Rob.
Our next question comes from Nicholas Joseph with Citi. Please go ahead.
With regards to the development pipeline what are you seeing in terms of construction costs and how does that ultimately allocate relative to the yield.
Yes, good morning, Nick will come back to net lease.
Construction costs continue to rise across the country and so we're very cognizant of where those costs. These are generally fixed return projects I think most tenants are aware the construction costs.
And also lead times things like HVAC units roofing material.
Both things are factoring into construction.
Construction costs, but also efficiencies to deliver I think and Thats why we see a number of retailers looking to us with the liquidity, obviously being publicly traded and having the access to the revolving credit facility to be able to.
To provide certainty truly of delivery at the end of the day, but construction costs continue to be a challenge for everybody here, we're very cognizant of those and like I said most of the transactions that we enter into our open book fixed return and so that risk isn't going to be on us.
Okay, and then as you think about kind of pricing forward deals do you expect to be able to continue to get the similar returns to what you've been experiencing or ultimately is there kind of a price point, where maybe that yield has to come down a bit.
On the development side specifically.
On development.
Yes, we're very hesitant to go too far out the curve.
We're really looking at shovel ready projects nothing thats, taking too long from an entitlement perspective from a permitting perspective.
As you can see the 15 starts we had this quarter, we will have a few stores next quarter as well in the case, where we are going out longer with a longer entitlement.
Period, or permitting period, and again, it's going to be a fixed return open cost structure, where we know what those costs are but even in that instance, given the volatility we see out there we're pretty hesitant to enter into those without any without significant premium.
Thank you.
Thanks, Nick.
Our next question comes from Spenser <unk> with.
Green Street Advisors. Please go ahead.
Thank you can you comment on the cap rate environment, specifically as it relates to what youre seeing in terms of portfolio deals versus some one off transaction.
Yes, good morning, Spencer I think.
Louise compared the net lease space to single family residential which is the longest lag time in terms of cap rate movement because of the fragmentation of ownership, but also the sheer number of intermediaries in the forms of brokers and agents that are out there trying to get or promising to get aggressive pricing for sellers I'll tell you we're starting.
See some cracks in specific instances of cap rates moving upwards, but I think it's really going to take that 90 to 150 days, which are typically the.
Upon expiration of those listing agreements, which which again brokers had promised sellers very aggressive pricing in and set the tone for the overall market.
But we're starting to see some cracks in terms of portfolios versus one off it really is it's really dependent upon the qualitative the quality of the portfolio and the type of portfolio and we're not looking at anything that generally ABS buyers or by heavily levered buyers would have played in that.
Historically, those IRR is have gone down significantly because of the availability of debt and obviously the coupon on the debt available today.
But I would tell you.
On both sides of the equation, we're hopeful we see more movement. It takes time.
They haven't seen material movement across the board yet, but they are of course opportunities, where where we've been able to push cap rates.
Okay anything like thematic.
In regards to the cap rate.
Increases that youre seeing or is that just kind of a nuance and then perhaps maybe just some color on the general Groundlings environmental from a pricing is there.
Yes, nothing somatic its really one off sellers generally what we're dealing with average price points of $5 million absent the portfolio transactions we mentioned.
Ground leases this quarter were light for us partly because of the large portfolio transactions. The one to 180 and then the other $80 million. We've always said, we're going to take advantage of ground lease opportunities that we see them I think we acquired five during the quarter. We obviously disposed of the C store ground lease at a extremely aggressive cap rate for the 2 million.
That was off market as an opportunistic inbound bid by our high net worth individual there are a number of ground leases.
In our pipeline today don't see any material change on the ground lease versus the turnkey structure. Although there is obviously more focus on ground leases today, given given the focus on us as well as safe and some of the work that you guys among others have done.
Okay, great. Thank you.
Thanks Spencer.
Our next question comes from Wes Golladay with.
Please go ahead.
Hey, good morning, guys, yet corporate provisions added to the portfolio or the developer Tcs program. This quarter do you anticipate adding more retailers had a similar scale and the program also appears to be building momentum throughout this year can you comment about how big you think this program can get over the next few years 300 400 $500 million.
What is your ultimate vision here.
With Gerber with Gerber specifically with.
Well just more so.
You clearly have a programmatic program along with Gerber collision will there be more added to that.
Similar scale.
The Gerber program, but.
The developer PCI program, how big can that get.
Yes, we're very pleased at how it's scaled and ramped as I mentioned, we've always held that capability. It's the core of this company has started as an agreed development of $19 71, and then up until the launch of the acquisition platform in 2010, I will tell you we've had more and more inbounds from retailers.
To provide that certainty of execution, we have retailers that are growing in this country that are facing the pricing pressures the labor shortages that their historical developers can not.
And in a rising interest rate environment, potentially rising cap rate environment. The historical developers can't perform and they can't deliver the stores that they are typically being public and produced a promise I should say to wall Street. So we're having a number of conversations I'll be Frank some of them arent fits for us they may be they may be credit fits for us.
We may like the operator, but the price point is too small and it would be akin to us launching a single family home construction business across the country and we are not interested in doing that.
But I will say those conversations have significantly ramped up given the environment. We're in today specifically to Gerber.
I think it's almost akin to what we did with sunbelt and we discussed in the prepared remarks in terms of identifying early on a retailer that we thought was.
And it was in a tremendous position to access a fragmented space and had the balance sheet capabilities to do so so with Gerber specifically owned by the Boyd group of Canada publicly traded on the Toronto Stock Exchange has over 700 stores very low leverage at just over three times Levered at the Conservative company at its core.
As Youre, probably aware there are the big three collision operators in this country Gerber caliber service King service King.
If you read media reports is entering into potentially an out of court restructuring given to some of their financial constraints and if not could be heading into bankruptcy.
What's interesting about the collision business, it's really a tremendous business today.
It used to be the <unk>.
You bumped something with your bump where you had a little scratch or a little dig in maybe you've got it fixed and maybe you did and now you've got <unk> sensors to cameras Lidar all of this high tech equipment in there and so.
Frankly, the days of the local collision shop, having the skilled labor and the capability for all of those high Tech repairs are pretty much gone now the vehicles the accident rate.
We see going down generally across the board just because of some of those safety features as well, but the cost to repair it.
What used to be minimal repairs is absorbing it and so.
The national vendors, which have relationships and pricing power with the with the auto insurers are really thriving Gerber works hand in hand, with those insurance companies to direct customers to their collision centers and as a preferred vendor for them and so we see.
Very similar to the equipment rental business, we see Gerber really taking the lead on collision and so we're excited to continue to work with them across all three platforms.
Great. Thanks for all that and then one for Peter I guess can you talk about the swaps are those 10 year swaps and for your 200 million.
Issuance would the all in rate, including the swaps and then just.
Follow up to that does that Moody's upgrade at all help you from a.
Our current debt issuance.
Yes. Thanks for the question. So first the $300 million of forward, starting swaps contemplate a 10 year unsecured debt issuance, so they're hedging effectively.
<unk> 10 year issuance, so we could apply them to issuance with a different tenor they have effectively fixed the base rate or at one 7% as I mentioned and it can be used at any time throughout 2022. So there is no near term rush to use those swaps certainly we think that the upgrade from Moody's to <unk> one well.
Improved pricing and also access to capital in the public markets in terms of ultimately where that prices I think thats dependent on when we access the market and we are in an excellent position today as I mentioned in terms of liquidity and can be opportunistic in terms of when we go to the public debt markets.
Alright, thanks for the time guys.
Great. Thank you.
Okay.
Our next question comes from Ronald Camden with Morgan Stanley . Please go ahead.
Great.
Can I touch on telehealth, a little bit saw the occupancy was up sort of very little bankruptcies.
That we are hearing maybe you just give us an update how are the tenants feeling and what are you hearing about sort of inflationary pressures or even toss of a recession that we've seen mentioned.
Our broadly.
Yeah. Good morning, Ron I think look we're in a very unique position, we have zero I believe bankruptcies in the portfolio today.
And this is a portfolio that is built for with recession resistance and what we call used to call E Commerce resistance, but omnichannel critical and so the largest tenants in our portfolio are non discretionary led by the Walmart and dollar generals of the world non discretionary retailers that are core.
Providing core goods and services.
To customers. They also have the greatest ability to absorb recompete on pricing given inflationary pressures and have the greatest distribution logistics networks amongst those retailers in the world and so today for a smaller mid sized retailer who is dealing with labor pressures and inflationary pressures.
You name it right logistical pressures it is extremely challenging.
If you're a walmart or if your home depot or T. J Maxx, you have global procurement networks that can quickly pivot.
And have the ability to absorb price, we've always talked about we want to invest in retailers a few distinct characteristics number one they have the capital and the balance sheet to invest in Omnichannel, we know how our expensive micro and macro fulfillment can be.
Two they have the ability to try and test out new new forms of distribution and delivery to meet customers' needs and then three they can compete on price because once you move.
Customers.
Because of due to price today, and a price transparent world, where any customer can see the price of anything on an iPhone and about four seconds. They generally don't come back and so we are heavily focused on those retailers that EBIT, even in the short term if that impact margins.
Can retain customers and frankly grow their customer basis.
Great and just one that sort of go back to the acquisition questions I think that it's been asked a couple different ways, but.
Look I think you talked about sort of cap rates, maybe having a little bit of a lag before repricing, which is all fair but.
Just specifically on private equity buyer or any other type of buyer have you started to see any sort of deals being re traded.
To size or that sort of buyer pool, taking a step back at all or is it sort of too soon to say.
Ron frankly, we don't have much exposure to the private equity heavy heavily levered buyer pool.
Theyre, just not participants and the types of transactions and the types of opportunities that we're pursuing.
We haven't seen on the disposition side, obviously very negligible, we havent seen it I've heard rumblings.
Of re trades, obviously <unk> have gone from upper teens to lower to lower teens, if that for a number of for a number of heavily levered purchasers, but.
Our competitive set is generally the 10 31 purchaser the private individual.
And so if they do re trade or if they do back out of a deal where we're generally the first call.
Great. Thanks, so much I appreciate it.
Thanks Ross.
Our next question comes from Linda Tsai with Jefferies. Please go ahead.
Hi, good morning, Hi.
High single digit earnings growth, you hit that last year and Youre on track to achieve this year, what do you see as the key puts and takes and potentially sustaining this growth going forward.
Good morning, Linda a number of them one is our ability to source, obviously accretive transactions across all three of our platforms cost of capital, obviously moves into that cost of equity capital as well as debt predominantly equity capital cap rates, where cap rates move maintaining spreads.
What's amazed me as the team's ability here to consistently and continuously find those opportunities.
<unk> across the country across all three platforms without sacrificing our investment criteria again this quarter, 74% investment grade debt number now at 68% investment grade. So we're not going up the risk curve we're not.
We haven't changed.
Our team and I think that's most important and so the investments in the team. We've made the additions to the team. We've made the investments in technology that we've made specifically arc those types of things continue frankly to surprise me to the upside I never envisioned if you would've asked me several years ago that we'd be deploying at the mill.
Point of just that acquisitions $1 $5 billion a year at 70 plus percent investment grade and then putting another $50 million to $100 million in the ground I would've told you that's pretty crazy, but what we're operating in is a massive space, which is 65% of U S retail GLA, it's highly fragmented.
And the team just continues to do a tremendous job uncovering those opportunities.
Thanks, and then I know you said that the 4% was a bit aggressive for the unsolicited ground lease deal what sort of cap rate would be reasonable to assign to the rest of your ground lease portfolio.
Close to 14% of your ABR.
It's a great question.
I will tell you that that was not a dominant operator, who was not wawa. It was not quick dripper sheets. It was a smaller regional operator, I believe with a couple of hundred stores, an unsolicited inbound four months from closing a 200 basis points inside.
I don't think I've ever flipped in asset that quickly.
My career, but a $2 million gain was something that we just couldnt turn away I think that is demonstrative of the overall value of the ground lease portfolio here I mean this was a C store. It was a it was a smaller regional operator this wasn't Wal Mart lowes or Wegmans I think it's demonstrative of the.
Overall value of the ground lease portfolio, so I'll leave that to others to decide.
But it was it was it was an interesting unsolicited offer someone who is familiar with the credit with the real estate.
And then we were pleasantly surprised to be able to book that gain.
Thank you.
Thanks Linda.
Our next question comes from Keybanc. Please go ahead.
Hey, good morning, guys good.
I'm wondering can you Bob.
So just wanted to tie together a few things that you mentioned about the prospects of.
Potentially a higher rate.
You also increased your full year acquisition guidance and I know this isn't like a video game that you're going to start and stop and okay.
Carrying on and off the acquisition of switch right.
Business and.
There's a lot of momentum to it and I get that.
As a as a.
How do you balance that.
Prospects of higher rates and maybe better deals ahead.
Very good.
Pushing that throttle up a little bit and buying more today.
How do you balance that.
It's a terrific question, if we didn't have our overall hedging policy in place I think it would change the answer and so having forward starting swaps of one 7%.
As Peter mentioned, having.
260, plus million dollars in forward equity already priced so let's call it nearly $300 million.
Post settlement of some of the forward it before $3 31 gives us that medium term visibility into our pipeline and also into <unk>.
<unk>.
Outside of just spreads on the debt side have locked in our cost of capital and so if we were a spot issuer of capital in our spot purchaser, given plus or minus 70 days of acquisitions every single decision becomes much harder and Thats why we have always been emphatic users.
And we have always said getting visibility into our medium term cost of capital is critical to us. If you really think about it what we're acquiring today was already <unk>.
Nancy.
Months ago, right I mean, that's the bottom line and so we know what those spreads are today.
And that's a critical component of it and I said on the last call in regards to leverage its much easier to lever up right then to delever and so maintaining that balance sheet capacity heading into intermediate view of your cost of capital in an external growth business makes that question.
It removes a.
The preponderance of the answer to that question that said you always have to look out at opportunities and you have to try to project forward in that video games stimulation, you said of what's going to happen with cap rates.
And so we balance what we think is going to happen on a go forward basis with the opportunity at hand, but again, knowing that you have your cost of capital locked in for the medium term makes it a much easier decision because of course, there is no video game and there probably is.
There is no right answer just a bunch of prognosticators, including us.
Okay great.
And.
Going back to the client Gerber collision.
And then I think.
I think by the next generation of automobile is coming out.
I'm not an automobile expert.
I can barely driveline, but.
If you think about kind of EV.
Kind of EV Revolution in autos.
Yes.
Yes.
It's foreseeable to think about it bear case scenario, where maybe autopart O'reilly.
Use for it going forward.
I'm sure. This question I think five years too early Brian .
Any kind of early thoughts on that.
Well, there's definitely less parts right moving parts in Evs and the typical combustion engine.
The benefit to the collision shops, such as Gerber is debt.
You can't Jerry rigor ignore.
Any longer these minor Fender benders, let alone any larger collision.
Again, when you when you bump into the light pool in the parking lot by accident when youre backing out of your parking space. It used to be a little Ding on your bumper now with a camera on a sensor and so if you don't get that fixed and your overall vehicle protection system doesn't work and so the cost of repairs.
It's almost an it job today is not a bump job right. It's not a bump shop anymore. These are.
Professionals it almost has to be working on the cars and so the days of the local closing shop as I mentioned are gone you can't just bump things out or paint things or are all the little fixes anymore. Because these these cars are loaded with high tech equipment that works on an integrated basis to provide for the overall <unk>.
Safety of the driver.
And so those repairs are much more nuance and that's enduring to the collusion operators benefit who have the scale, who have the relationships with the retailers and who can maintain that labor pool, which is also challenging obviously today to be able to get those people in those could be working at those closures to fix those.
Repairs, but it's a very different profession today in a very different business than it was just several years ago.
But you don't see any kind of a longer term risk to the auto parts retailers.
Well auto auto parts retailers, they're very different from collision the collision operators generally are working on the exterior of the towers right down to the strong theyre not working on generally.
On the combustion engine that that's a different operation there.
The mechanics, the auto parts retailers continue to benefit from two different forms of customers that do it yourself customer, which has been <unk> core business now working to continue to expand the back door customers of the commercial customers and then O'reilly, which their core business has historically been more commercial oriented.
Working to expand the do it yourself customers.
Our front door businesses they called it.
No we really don't see much in the way, they're if you look at their same store sales. If you look at the trajectories in their commentaries in their earnings call. Those operators continue to gain market share through recessions through Pandemics. The average age of cars on the road continues to go up you can't even find the car anymore half the.
Time, and so it's a benefit now look there's no doubt the auto industry. We're sitting here in the motor City is going to continue to change with Evs, especially.
But those premier operators with the balance sheets.
And the store network and the distribution networks are going to continue to thrive here.
Okay. Thanks Kelly.
Thanks, Kevin.
Our next question comes from Nate Crossett with Bad Bank. Please go ahead.
Hey, good morning, guys.
Maybe.
Some funding question.
On the swaps when do those expire.
When they'll do it.
Now where they are today or higher.
The swap.
Would you continue Douglas grew swaps.
This of where rates are.
And then also I just had a question on the preferred equity.
Did that deal I think last year is that funding options on the table.
Or is that off the table, given where rates have gone.
So this is Peter with respect to the swaps we can use the forward starting swaps at any point in 2022 technically there is an option available to us to royalty asset related to the swaps into a swap and really extend that if we really wanted to.
But we have plenty of optionality and flexibility in terms of when we use those swaps this year as it relates to the preferred equity.
Still an option for us we're always evaluating all forms of capital markets and what makes the most sense in the context of market conditions pricing and how we want to fund our business.
Today, probably not something that we would look at given where pricing is but certainly an option longer term as we evaluate everything available to us.
Okay.
A question on the portfolio that you bought.
Is there any sorry, if I missed it but is there any pruning that needs to be done from that portfolio or.
This essentially every property or property that you'd want to have.
So as you probably saw in the jump in tenant concentration tractor supply was the largest operator in there.
Just concentration and Theyre Sunbelt, a couple of Cvs as a few dollar generals Theres a fedex in there that we'll look to dispose of its who are not we are not in the.
Industrial or distribution.
Business here, we think that will be accretive obviously, the overall portfolio. It's a small Fedex I believe in North Carolina adjacent to the airport.
And so we will dispose of that asset other than that.
We're pretty comfortable with with all with the entire portfolio again, it was 90% investment grade, 100% retail outside of that fed one Fedex asset.
With 10 years weighted average lease term, we're very cognizant of the Cvs is that we acquired in terms of that pharmacy exposure. We're very we're very comfortable with the store performance there their long duration Cvs is theyre not on any closure list.
This was a really unique opportunity frankly, the only portfolio absent a ground lease portfolio from seven years ago that truly fit qualitatively within our existing portfolio composition and Thats why it was such a great fit let alone the unique circumstances here and so we'd love to be able to find more of them.
As most of them don't have one assets, you've got to dispose of the 20% of it it doesn't fit qualitative within the portfolio. So that was I would tell you that you hit it on the head that was that was the real driver here is that.
There was one asset.
Disposition on an accretive basis that we intend to execute on.
Is there any reason why there wasn't shopped around that mean.
And Thats, a testament to your relationships, but it would seem like.
Portfolio of this quality.
The seller would one that kind of shopping around to see what pricing.
I'll give you a little background on the seller the seller was historically the largest post office private post office contractor in the country.
He is in his mid seventies works out of a converted house into an office with four women that have been with them for over 20 years. He owns thousands of acres of land in the beltway that he sold the pulte and toll brothers he disposed of a number of assets years ago.
And instead of acquiring net lease properties.
His lawyers slash friends slash broker, we started the conversation with into 2019.
But Jim our seller on this wanted to get something done doesn't like to mess around would've done a deal on a handshake and so it was a very unique situation.
Great Guy with a great eye for real estate, whether it's agricultural land, whether it's net lease real estate, but he is a unique guy and he wanted to get something done with someone they can trust and someone who could get something done quickly.
Okay. That's helpful I'll leave it there thanks.
Thanks Nate.
Again, if you'd like to ask a question. Please press Star then one our next question comes from Handelsbanken.
Please go ahead.
Thanks for keeping the cargo.
Great one follow up on the on the back of that portfolio question I guess just trying.
Two.
Seller collagen it sounds like the gentleman.
Scenario was looking to perhaps monetize real estate holding but im curious if youre seeing a noticeable change in seller psychology from folks looking at the market looking at the the rising rates and thinking well, maybe now might be a better time to sell and so curious if that is resulting in more deals coming across your desk as result, as well. Thanks.
It's a good question Hamzah, it's really tough.
When you do when you worked on so many transactions.
100 at any given time, it's hard for us to draw any broad strokes here.
I think there are sellers out there given the volatility that will say I need to sell quick and then there are sellers out there are owners out there that say I want to get past this volatility.
It's a bell curve I think it ends up on both sides what will be interesting to see as we progress through the year is obviously, what will happen with cap rates, but the seller psychology is going to is going to drive that and I've always said real estate owners have two primary emotions.
Reed and fear and so we will see how much of that fear sets in and then that's when we always operate the best whether it's a pandemic or recession, our balance sheet is always prepared and we're always ready to pounce when we see an opportunity there, but it will be interesting to see as this plays out given just the extreme.
Volatility we've seen obviously in recent weeks.
I don't have I don't have it trades for Ya.
No fair enough.
Just wanted to get some perspective from you but.
Let me let me let me qualify one one area, where we do see weakness.
Merchant developers.
Who have developed projects and signed leases with tenants.
Then now have zero to no margin and maybe even a loss because that did not anticipate the price appreciation in building components and labor in that inflationary pressure need to sell their existing product to try to get to their next projects and thats on the merch.
<unk> developer side, not the passive owner of longer term owner, we're seeing more and more of that where I'll give you. The example, the dollar general developer that was trying to hold out in the mid to low fives for their dollar general and they're developing a matter let's call. It a seven and all of a sudden they wrapped up the project.
And they were pretty close to a return on cost of 7% net of a brokerage commission or whatever else. It's a breakeven deal and they promised five or 10 more projects to dollar general they have to recycle that capital they canceled out and so we are seeing pressure there.
Led to a number of conversations with retailers, where they said can you provide a more seamless solution for us that will actually give us some predictability in terms of uncertainty in terms of delivery. So that is the one place we're seeing pressure that pressure, though has necessitated bye bye.
By the requirement to recycle that capital and redeploy it.
Got it got interesting is there anything that you perhaps would be willing to do internally scenarios, maybe be short term or mezz lender, where something that to capitalize on that opportunity.
We've never been a lender.
I don't see that happening I wouldn't rule it out it's not something that's a core competency that we would do.
The opportunities we've looked at in the discussions we've had with retailers is jumping in and taking over the entire programmatic relationships <unk> pipeline.
But again, we're not going to do that for million dollars projects strewn across the country.
E for a dollar store that does not make sense for us were just too busy to do that but as you can see in opportunities like gerber collision and some of the work we've done with these repeat tenants the certainty of execution here. There is a premium placed on that from retailers.
Got it got it.
Did you mention or would you mentioned developing notable under contract.
Otherwise today and if that would include any any portfolio.
The answer is yes, but that's about as far as I'll take it I think the increase in guidance speaks for the robust pipeline itself. It includes everything from.
$2 million transactions to larger transactions that we've been that we've been working on so we anticipate.
Obviously, the pipeline is pretty large and that includes some larger opportunities as well.
Got it. Thank you for the time I'll yield the floor.
Appreciate it thank sander.
This concludes our question and answer session I would like to turn the conference back over to Jeremy <unk> for any closing remarks.
Well. Thank you everybody for joining us this morning, it will be great to see you in June at NAREIT.
Good luck for the rest of earnings season I appreciate it.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.