Q2 2022 Agree Realty Corp Earnings Call
[music].
Good morning, and welcome to the agree Realty second quarter 2022 conference call.
All participants will be listen only mode.
If you need assistance crews signal conference Ashley Carson Starkey, followed by zero.
After today's presentation there'll be an opportunity to ask questions.
Last question for Mike I'm, starting to wonder if that's true.
So as part of your question. Please press Star then two please.
Please note this event is being recorded.
The concert Lupin treatment director of corporate Finance. Please go ahead. Thank you good morning, everyone and thank you for joining us for Ecu Realty's second 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.
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. 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 website and SEC filings I'll now turn the call over to Julie Thank.
Thank you Ruben I am very pleased to report that we continued our strong start to the year deploy significant capital across all three external growth platforms, maintaining near full occupancy and further solidifying our balance sheet. While these results are readily apparent for investors to see what our most notable achievement towards our continued progress on our ADC Sea.
The art initiative, both our ERP implementation and arc enhancements made material strides during the quarter and will drive significant efficiencies for our growing organization.
During the second quarter, we invested approximately $430 million and 121 properties across our three external growth platforms.
99 of these properties originated through our acquisition platform, representing acquisition volume of more than $420 million.
The 99 properties acquired during the second quarter or at least a 34 tenants operating in 21 distinct sectors, including best in class operators in the dollar store general merchandise tire and auto service home improvement off price warehouse clubs convenience store and auto parts sectors. The acquired properties at a weighted average cap.
At a six 2% and a weighted average lease term of 10 years.
Our investment activities were supported by almost $525 million of equity raised during the quarter that fortified our best in class balance sheet and positioned us for continued growth.
Through the first half of the year, we've invested a record $860 million across 228 retail net lease properties spanning 40 states in 26 retail sectors approximately $828 million of our investment activities originated from the acquisition platform nearly two thirds of the annualized base rent acquired during the first six months.
For the year is derived from leading investment grade retailers.
These metrics demonstrate our continued focus on a broad spectrum of opportunities with leading omnichannel retailers through multiple growth avenues, ranging from one off acquisitions diversified portfolios select sale leasebacks development and our PCM platform. This diversified tool kit continues to ramp and produce superior.
Risk adjusted opportunities and long term relationships with our retail partners.
As of June 30, tire and auto service with our top sector, representing nine 4% of the portfolio. We continue to find content compelling opportunity across the space and view this sector quite favorably.
The average age of U S cars on the road hit a record of over 12 years. This combined with high quality National operators, and then will rents per square foot score very highly in our model.
Given our record acquisition volume year to date and our robust pipeline, we are increasing our 2022 acquisition guidance to a range of one five to $1 7 billion.
For the previous range of one four to $1 6 billion.
The low end of this range would represent record acquisition volume for our company, surpassing the approximately $1 4 billion acquired last year.
Given our improved cost of equity capital, we are able to invest at even greater spreads and provide additional cash flow accretion our superior cost of capital combined with our fortress balance sheet. Because this is just to pursue many exciting opportunities while levered competitive lever competitors have exited the market, we're seeing distress amongst owners and developers and our.
Our intent on leveraging our strong positioning while once again raising our acquisition guidance. We are cognizant of that dynamic macro environment, and we'll remain disciplined to our strategy.
Moving on to our development and partner capital solutions platforms. Our team continues to uncover compelling opportunities with a growing pipeline cap rate expansion inflationary pressures and rising construction interest rates have uniquely situated to deliver projects timely and on budget.
During the quarter, we commenced five development and Pcs projects, including three additional gerber collision as well as in other sunbelt rentals. We completed we completed the development of the Gerber and prove our Georgia and construction continued on 16 additional projects in total we had a record 23 projects either completed or under construction during the first half of the year.
<unk>, representing $74 million of committed capital.
On last quarter's call I mentioned, our expectation to commence between 50 and $100 million store development in Pcs platforms. This year.
Given our significant activity year to date and our growing pipeline, we've increased that range and now expect to commence between 75 and $125 million this year.
Moving on to dispositions, we sold four properties for total gross proceeds of almost $17 million during the quarter with a weighted average cap rate of approximately 7%. This activity includes the previously announced sale of the la fitness in Houston, Texas, which further reduced our health and fitness exposure.
Through the first six months of the year, we sold five properties for gross proceeds of nearly $25 billion with a weighted average cap rate of approximately 6%.
On the leasing front, we executed new leases extensions or options on approximately 102000 square feet of gross leasable area.
Notable new leases extensions or options included a best buy in El Paso, Texas, a chick Fil a in Rocky River, Ohio, and a panera bread in Nashville, and New Hampshire.
As a result of our asset management team's efforts at quarter end, our 2022 lease maturities stood at just <unk>, 1% of annualized base rents.
Our portfolio remains nearly fully occupied at 99, 6% at quarter end. It encompassed over 600 properties across all 48 Continental United States and included 193 ground leases, representing 13% of total annualized base rents.
Our investment grade exposure stood at nearly 68% representing a two year stacked increase of 650 basis points.
Before handing the call over to Peter to discuss our financial results I wanted to when Peter in our entire ESG steering committee for their efforts at our second annual ESG report. The report includes enhanced disclosure through the incorporation of climate related investor preferred frameworks. We encourage you all to read our report, which you can access within the investors section of our website.
With that I'll hand, the call over to Peter and then we can open it up for questions.
Thank you Joey starting with earnings core <unk> for the second quarter. It was <unk> 98 per share representing a nine 7% year over year increase <unk> per share for the second quarter increased 10, 4% year over year to 97.
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. The aggregate dilutive impact related to these offerings was close to a penny in the second quarter.
In April we increased our monthly cash dividend to $23 four per share representing a three 1% month over month increase we subsequently declared monthly cash dividends of $23 four per share for each of May June and July the monthly dividend represents an annualized dividend amount of $2 81.
<unk> per share and a seven 8% higher than the annualized dividend amount from the comparable periods in 2021.
Our payout ratios for the second quarter were a conservative 72% of both core <unk> per share and <unk> per share or growing and well covered dividend continues to be supported by our consistently strong earnings growth.
General and administrative expenses totaled $7 7 million in the second quarter.
G&A expense was seven 3% of total revenue or six 8%, excluding the noncash amortization of above and below market lease intangibles, while we continue to make investments to support the growth of the company. 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 adjusted revenue compared to last year.
Our expectation for total income tax expense this year remains between $2 5 million and $3 5 million.
Our capital markets activities during the second quarter further fortified our balance sheet and positioned us for continued growth during the quarter, we raised more than $5 billion of additional forward equity.
This included our May transaction of $5 8 million shares of common stock for anticipated net proceeds of approximately $388 million upon settlement.
We also sold nearly $1 9 million shares during the second quarter via our forward ATM program raising anticipated net proceeds of approximately $127 million.
In June we settled approximately $4 7 million shares of outstanding forward equity realizing net proceeds of $300 million.
At quarter end, we still had nearly $7 1 million shares remaining to be settled under existing forward sale agreements, which are anticipated to raise net proceeds of approximately $476 million upon settlement.
Additionally, in connection with the acquisition of the Walmart and home depot portfolio, we assumed a mortgage loan with a principal balance of just over $42 million at a fixed interest rate of 363%. The loan is interest only and matures in December of 2029.
Our strategic capital markets transactions during the quarter provided us with more than $1 $1 billion of liquidity at quarter end, including cash on hand $630 million of availability on our revolver and approximately $476 million of outstanding forward equity.
As mentioned on prior calls we have $300 million of forward starting swaps in place effectively fixing the base rate for a contemplated long term unsecured debt issuance at approximately one 7%.
Taken together with our outstanding forward equity, we have hedged the costs of more than $775 million of capital to fund this year's investment activity.
As of June 30, our net debt to recurring EBITDA was approximately three eight times pro forma for the settlement of $476 million of outstanding forward equity.
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 25%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend remains at a very healthy level of five one times our.
Our significant liquidity more than $775 million of hedged capital and a robust investment pipeline gives us continued confidence in achieving high single digit <unk> per share growth in 2022 building.
Building upon our nearly 10% <unk> per share growth in 2021. This implies two year stack growth in the high teens.
Combined with our leading retail portfolio fortress like balance sheet and well covered dividend. We believe this level of per share growth is very compelling.
With that I'd like to turn the call back over to Joey.
Thank you Peter at this time, operator, we will open it up for questions.
We will now begin the question answer session.
Answer your question you May Press Star then one telephone keypad.
He was in your speakerphone, please pick up your handset before question to Keith.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Keith Ken Ms. <unk> you May now go ahead.
Good morning.
So Joe you want to go back to the acquisition topic, you closed on a lot of deals at about a six 2% cap rate, which is pretty close to where you've done deals over the past year.
Could you just talk about your outlook on the pricing dynamics and the types of assets Youre looking at.
Yes, I think as.
We've talked about on the last call, we're seeing a pretty wide dispersion among cap rates and that that cap rate trend obviously upward.
Is more concentrated in the high velocity merchant build product. So I would tell you download general specifically, we've seen 75 basis points increase in cap rates.
<unk> like O'reilly, we've seen 35 to 45, increasing cap rates those are merchant builders, who are who are still moving through in cycling through product fairly quickly yes.
Other end of the spectrum there are still sticky there are still sticky cap rates in the less fluid product out there. So it's a pretty wide dispersion and I'll tell you we do see an upward trajectory in cap rates as we've talked about previously it's a highly fragmented and large space. It will take time, how long we'll see.
But we do see cap rates, starting to adjust again with greater velocity in that merchant build type product.
What does that mean for.
Meaning.
Meaning the $6 two should we expect that to be.
Greece X amount over time.
Well I can't tell you I can't see anything today beyond the third quarter to be honest with you I think it's going to be a function of the macro environment. One it's going to be a function of how again, how quickly sellers adjust their expectations. We've moved from fear degreed, but we still have 10 31 buyers. There are remnants of 10 31 buyers in the market are sellers who are.
Hopeful for.
Obtained 2021 pricing I think the most important thing is today with our cost of capital our spreads are as large as they've been all year long even at these at these cap rates. So we will take advantage of opportunities across all three platforms every day, a new deal Pops up but at the same time, given our balance sheet, given our cost of capital and our liquidity.
Profile there is no reason for us.
To opt out.
Of the market.
And just last question.
You talked about the disruption you might be seeing I wasn't sure if that's in the Iga space or more into high yield space, but.
Given your comments about I guess your comments, but the reality of your cost of capital on your balance sheet.
Does that.
That make you want to perhaps enlarge your bullseye and take advantage of some assets that maybe you traditionally wouldn't have bought the pricing has gotten that much more attractive how do you think about all that.
We're going to stick to our sandbox and Thats. The 30 to 35 best retailers in the country, we are seeing disruption.
Amongst merchant builders today, the pressures as I've talked about in the prepared remarks, if theyre under today are tremendous inflationary pressures construction interest loans are harder to obtain and if you do obviously the rates are much higher there's obviously cap rate volatility upon the exit.
And so I would anticipate our PCM platform to continue to uncover those types of opportunities because we can deliver whenever you can strip because we don't need a typical construction financing we have $1 billion revolver.
And obviously plenty of access to capital so we're going to stick the top 30% 35 retailers I don't think it makes any sense to go up the risk curve today to achieve or obtain a few extra basis points.
Okay. Thank you.
Thanks, Kevin.
Our next question will come from Nick Joseph with Citi. You May now go ahead.
Maybe just on that development and Pcs.
You look at kind of new leases being signed or deals being struck are there any changes to the lease terms either from inflationary CPI protection or anything else.
Yes, it's a good question Nick.
I would tell you our sandbox of retailers have their traditional lease terms, what I will tell you that they are now more amenable to higher growth rates typically every five years and in the actions and so while we were seeing.
Potentially one bump or 5% bumps every five years.
Retailers today, given the inflationary pressures are more amenable to seeing 10% bumps or multiple bumps during the base serve and then continuing on through the options.
Thanks, and then you touched on I think in your opening remarks, some internal initiatives can you just walk through those a little more in kind of the benefits to the organization going forward as you make those investments.
Yes, I'll touch on it briefly Peter can speak to a much more tactically that ICANN. We went live with our ERP overhaul with MRI with the first phase of it.
Just recently that was a.
Well, you're a multiyear effort to convert from timber line to MRI Peter.
Peter I'll, let you speak to the specifics of it.
Just to speak on the ERP system in more detail as Joey alluded to our team has been very busy in the first half of the year implementing a new MRI software for accounting and financial reporting.
Live with that software and already seeing efficiencies, including using their contract intelligence tool, which leverages AI to abstract new leases or lease documents.
We will continue to make enhancements to that software throughout the year and look forward to realizing the additional efficiencies from that software and then the other initiatives that Joe mentioned as arc, which we've talked about on prior calls arc is a proprietary technology platform that we've developed over the past couple of years in house, which provides us with real time access to portfolio and pipeline.
Data from multiple data sources across the organization, including our new ERP system.
And it allows us to underwrite and value real estate, while also understanding the pro forma impact on portfolio concentrations and other key metrics and includes modules for departments throughout the organization. It also includes critical information and a work order management system for our asset management team.
And as I stated in the prepared remarks, Nick we had a three year thrust to become state of the art.
Everything that we've done whether it's the MRI implementation are moving to triple net with our internal Internet. This year, our intranet this year, along with a number of other initiatives, including hires has positioned us now to succeed on that three year thrust.
Thank you that's very helpful.
Thanks, Nick.
Our next question will come from Brad Hoffman with RBC capital markets. You May now go ahead.
Thank you.
Can you talk about ground lease.
It slowed down quite a bit from the roughly 30% of acquisitions that it was running at as that.
The market more properly, reflecting the value of those assets or is it opportunities that related.
It's a great question, but I think it's a little bit above I think.
I think ground lease first of all our ground lease activity will pick up in the third quarter.
We anticipate.
I think the market has become more targeted frankly, we took advantage of additional patients in pricing for call. It 18 months in that quarter, maybe two years and in that ground lease space Theres been more attention brought to the ground lease space obviously.
Peers like safe not really appear but a company like say for the initiation by a number of sell side analysts in the space.
Can we still continue to uncover high quality opportunities. This quarter, we bought a lowe's in Delaware on a ground lease so YY and all of the Cvs the discount tire on ground leases and so we continue to be.
We continue to be interested obviously in the space, but like everything in net lease. It is fragmented and you will see opportunities arise at very disparate times, but I think there has been more obviously light shown on the ground lease space in general as opposed to be just be really conflate.
With the with the Triple net space.
Okay got it.
And then I was wondering if you could talk a little bit about the transaction team.
How many people you have at this point and obviously your scale for the one 5% to $1 seven.
$1 billion, but.
What do you think your scale for in addition to that at this point.
We've done a tremendous job building out what we call two teams really of the acquisition team, which is 10 team members in it today and then the transaction team, which is really overseeing contract purchase agreement negotiation in diligence through close with another 10 team members led by four wall.
Layers for different subgroups, and so we have built out and scaled the organization. We are continuing to focus on developing young talent here.
That's most important in terms of the acquisition and origination realm, we want them to bring them up in the agriculture in the Agri way and so we think we are appropriately scaled there.
Continue to grow.
Okay. Thank you.
Thank you.
Our next question will come from Rob Stevenson with Janney you May now go ahead.
Hi, good morning, guys.
Joey how are you thinking about dispositions today, I mean, theres still doesn't appear to be a market for well leased theater assets, but does the market get better from here for selling the stuff in the portfolio that you may not want to own two three years from now.
To be frankly derived there isn't much of that left outside of those few theater assets that you mentioned, there really isn't much of that left the portfolio here today. Our watch list is extremely de Minimis if at all.
And so we are very comfortable with where the portfolio sits today, we will look at opportunistic dispositions, where theres, just a pricing or a valuation disparity.
But the portfolio has never been in better shape right. We have all the exposures were rewarded by sector and by tenant and or just the specific piece of real estate really where we want them today.
So again outside of those outside those few theatres in the portfolio, we're sitting in a really good spot in terms of portfolio quality and concentrations here.
Okay, and then most of the assets that you guys acquire bought with someone else's existing lease structure in place, but you guys have ramped that development Pcs stuff you've done some more sale leaseback. So in those cases, you're obviously, starting with a blank page anything that you guys are structurally differently in terms of length of lease.
Annual bumps CPI indexing et cetera. These days when you can start with a blank page rather than take on somebody else's lease.
Well first thanks for pointing that out because that is obviously a very different dynamic, yes, I think again going back to the earlier question, we are able to get.
We're able to obtain better growth rates on overall basis, I think retailers are more amenable understanding the inflationary pressures not only in their business, but the overall macro environment. So I think I think that.
That's a great dichotomy that you're kind of that you broke out there because that is true in a needle select sale leasebacks and the development in the development area specifically.
We're able to start from a blank slate.
Okay. Thanks, guys I appreciate the time thank.
Thank you Ralph.
Our next question will come from handle Josh.
You May now go ahead.
Hi, Good morning. This is ravi behavior on the Libra handheld Sanchez Hope you guys are doing well can you comment a bit on the auto and tire industry given that that's your largest sector, particularly how you think this industry plays out going forward, where from home seems to be persisting.
Yes.
Well I think we spoke about in the prepared remarks, the average age of cars on the road in the U S is over 12 years its a record.
To get a car today is an extremely difficult proposition. Obviously CAGR has just passed it was on the President's desk.
Our bill to increase chip production in this country.
I think if you the work from home trends, we'll see where those go.
But I think if you actually look at the miles driven if you looked at the travel trends that are out there. If you look at the Linq cars today frankly are made from FERC.
To be run for 200000 miles that is very different than automobile construction in the past the tire and auto service industry in the auto parts industry continues to.
Continue to thrive frankly, because of the duration of those cars on the road.
Cars are more expensive today, whether it's new <unk> used cars, although we've seen some some escalation in the pricing in used cars and so.
It's a great space. It has some of the greatest best retailers in the country, they're low rent per square foot.
They typically are in.
Small fungible boxes between four and 6000 square feet on major thoroughfares with retail synergy and I think if you look at the overall dynamics of the space all macro trends, especially if you believe we're heading into a recession here point in the favor of the autoparts entire service industries.
Thank you.
Just one more here can you disclose what the cap rate and the investment grade exposure would have been for the second quarter acquisitions outside of the large in the auto portfolio.
I can't we're under a pretty strict NDA in regards to any transaction, obviously, we have a new tenant in our in our roster.
But we're very comfortable we're very comfortable that as one of the largest obviously retailers, especially in their sectors in the world. It's over 100 year old company. We have always said that investment grade isn't a driver of our decisions in terms of investment its real estate related it is tenant it is sector related it's obviously rents per square.
Foot and getting our arms around the residuals as well as the store level performance.
And we thought a transaction. He this transaction youre, referring to made a lot of sense for us. So on a holistic basis I would anticipate that our investment grade exposure in terms of acquisitions for next quarter to be north of 70 closer to 75% in line with traditional <unk>.
Really our traditional metrics, especially the last couple of years.
Got it. Thank you just one more here if I can can you discuss your balance sheet strategy and what your target leverage is currently at 38 with the forward equity what are you willing to let this pick up too.
Well, we've always stated that our targeted leverage range is four to five times net debt to recurring EBITDA, we brought it down during the pandemic, we havent brought it back up to five to six times I think if you look today at our capital structure cost of debt and cost of equity. There is an argument to obviously to be made that equity is.
Cheaper than that today outside of our $300 million.
Swapped out the tenure at one 7% and so our balance sheet strategy to remain flexible.
Main nimble and it's to remain positioned to execute on any opportunity that arises.
Thank you.
Right.
Our next question will come from Wes Golladay with Baird. You May not you May now go ahead.
Hey, good morning, guys. Thanks for taking my question first one is related to that last point you just made with our cost of equity at extremely attractive and maybe less attractive still very good but less attractive to maybe where you could issue later down the road if spreads were to come in so my question for you would be what is your appetite to actually just continue to fund everything with equity over the near term at every level.
When spreads fall.
Yes. Thanks for the question. This is Peter I would say first just provide a little bit more detail Joey was discussing.
We have as I mentioned in the prepared remarks $300 million of forward starting swaps in place, which are effectively fixed the base rate at one 7% <unk>.
Including those swaps, we think today, we could probably issue 10 year paper sub floor and so.
We view that as an attractive level and we will continue to look for the right access or right window to access the market in the remainder of the year.
Look that said, we're in a fantastic position from a liquidity perspective, and we have a lot of options as it relates to the swaps and so as Joey said will continue to be nimble and opportunistic in terms of how and when we access the capital markets.
Okay, and then maybe go into the arc platform. It's been I think you've launched it in May of last year is there a way to quantify how this is helping to drive acquisition volume is it more deal flow coming in at a higher close rate just any way to put numbers behind it.
Well first our arc is not relegated simply to originations archives at least administration asset management portfolio metrics acquisitions transaction diligence all embedded into it so that's.
Portfolio level data and statistics, all embedded into it I think what most importantly, there is no way to quantify it directly what is most important there is that as a management tool. It's a self management tool it allows us to drive to Kpis.
How's us to drive to.
Conversion rates and make adjustments on the fly in real time, and so I would tell you. We haven't spent a lot of time, yet quantifying the impact of arc would be difficult to do I'm sure Peter Rubin here could come up with some algorithm to do so.
But we really look it as a tool of transparency.
And a tool to measure our progress and manage our progress as we move forward towards our goals and objectives.
Okay. That's all for me thanks, guys.
Thanks Ross.
Our next question will come from Ronald Camden with Morgan Stanley You May now go ahead.
Great two quick ones from me just first on just going back to the retail commentary. Obviously, you mentioned that the <unk> health has never been stronger with almost no watch list and so forth, but as Youre looking forward and obviously theres more talks of going into a recession and so forth. How are you guys thinking about <unk>.
Other sectors that you maybe pause on I'll get more cautious on or sectors that you lean into over the next sort of 12 months to 18 months.
No Brian I. Appreciate the question, it's really the same for US we haven't changed since Covid.
From a sector perspective, or really even a tenant perspective, we generally avoid discretionary goods outside of superior high quality operators. The portfolio was constructed with a 30000 foot lens of recession resistance to begin with and so we've been anticipating a recession.
I would tell you not to the day of the month of the year, but over the long term just because of the cyclical nature of the economy and so we don't venture into experiential we don't venture into.
Hi, Hi, luxury high end luxury goods or discretionary goods unless there is an investment thesis there that overrides that 30 thousands.
Foot.
Perspective that makes sense.
Great sure does.
The second question I had.
It's just as we're sort of playing together the bread crumbs for 2023.
Youre thinking we're not asking for guidance, obviously, but if were running sort of a similar acquisition pace. This year.
Similar sort of credit losses this year it sounds like.
Interest cost, maybe potentially it could be slightly up but you've sort of locked in rates and so forth, but is there any other sort of big pieces or is that sort of the right way.
To think about it.
I think in a in a static environment, that's probably the right way to think about it I think everybody across the board the cost of short term debt.
Honestly with the increase in LIBOR and transitioning to sulfur.
Is is obviously impactful.
As Peter mentioned as you mentioned the swaps that we have in place put its advantage for long term debts or cost of equity puts us at an advantage.
In terms of our capital structure as well.
I think generally speaking coming off the highs of 2021 when I saw.
I, just don't think a static environment as most likely.
Is most likely to continue into 2023, we were at such pricing.
I'll call. It just insanity in 2021 with dollar general is trading in the low fives and O'reilly is trading at five caps. Those are two tenants we've called out.
I think we're going to continue to see pressures from a labor perspective pressures from inflationary perspective, they may mitigate somewhat but we're going to continue to see pressures that that or can we can continue to show us opportunities to take advantage of dislocations in the market when you're when you will have our capabilities across.
Our three platforms combined with our balance sheet and our cost of capital retailers can look at us and know we're going to get the job done.
To look at other other players in the space not specifically the REIT space, but in the net lease space and have that level of confidence there.
They're going to get it done at the end of the day is.
It is pretty difficult given the changes we've seen and thats not assuming we enter into some type of deep recession here. That's assuming that there is a soft landing gear engineered by the fed.
Super helpful. Thanks.
Thanks, Brian .
Our next question will come from Spenser, <unk> with Green Street advisors.
You May now go ahead.
Thank you.
My questions have been asked but maybe just another one in regards to the increased development and Pcs PCF guidance and I understand you don't need any construction financing, but can you just comment on your confidence in executing new developments just given labor shortages. As you just mentioned there are some permitting backlogs et cetera, then I think cause for development.
Delays in many other sectors.
Yes.
We have.
Spent capital in terms of building out our construction team, where we're not entering into speculative projects. So we're not closing out a piece of dirt until all contingencies have been waived we have bids in hand from a general contractor.
A guaranteed maximum price basis, and we're ready to go. These are single tenant projects as you know Spencer theyre not theyre not multi dimensional with multiple moving pieces is a triangulation of getting the entitlements in place and getting the tenant onboard waving contingencies and so once we have that in place. We're all systems go.
Most of the projects that were even undertaking today frankly are open books fixed return on cost and so retailers understand the cost of metal buildings have doubled.
Every week you hear about the next log jam.
Next inflationary pressure and some building component and material retailers understand that today and so we go into these eyes wide open and our retail partners go into them is wide open, but we certainly arent going to go risk on in terms of development here.
Okay. That's really helpful color. That's all for me. Thank you.
Thanks Center.
Our next question will come from Linda Tsai with Jefferies. You May now go ahead.
Hi, Thanks for taking my question in terms of the comments on the pressure on the merchant builders, resulting in cap rate expansion for dollar generals and O'reilly. It sounds like you might be investing more in these names are there any other names you would highlight.
Good question, Linda I think those the two that come to mind that we have seen material cap rate movement.
Dollar tree is another one obviously any of those tenants that are growing organically through our merchant build program with private developers at high velocity.
The bottom line is those developers need to recycle that capital and either try to get new projects and their ground or just get in the ground for their test the tenants that they are working with or get their capital out of the ground for some other reason and so.
Im trying to think off the top of my head to the most high growth names tractor supply comes to mind not as not as growing as quickly 60 to 70 units per year, but the greatest discrepancy or the greatest material change. We've seen is the dollar stores that are growing to the tune of 1700 stores per year.
Developers just need to cycle capital.
We've had discussions directly.
With those tenants there, obviously, a strong retail partners and our interest in development, it's not something that we're interested in doing necessarily it's just too to widespread to smaller price points for us, but there are challenges there.
If you are a net grower today at any significant velocity as.
As a retailer is a challenging environment to rely on private developers today.
Thank you.
Thanks Linda.
Our next question will come from Joshua <unk> line.
<unk> with Bank of America, you May now go ahead.
Yes. Thanks for the question guys hope everyone is well.
Kelly.
Just kind of curious on the Big picture, one thing I've kind of noticed this earnings period outside of net lease is that the transaction market seems to have slowed down or even pause, but what kind of gives you comfort that the net lease.
<unk> will remain robust through year end.
Well I'm not sure about the net lease market, specifically remaining robust through year end and I think that the private.
Purchasers will slow based upon the availability of leverage I mean, youre looking at a negative leverage in most of these situations and lower ltvs.
I'm confident in our ability because our cost of capital is now driving the biggest spreads that we've had all year long and so what youre going to see US do is take advantage of the best retailers of the best real estate.
At greater spreads.
That's what we're going to do through Q3, and Q4, and so I won't speak to others cost of capital, but just given our positioning from a balance sheet and cost of capital perspective, we're going to take advantage of those of those opportunities. This company has been built to take advantage of dislocations, whether we launched the acquisition platform in the great recession.
While we doubled the size of the company throughout the pandemic, we are positioned to always to take advantage of dislocations in the market, whether thats just purchasers being on the sideline macroeconomic turbulence lack of debt we will.
Pretty good with our swaps in place today, we've been wrong in the other side historically.
Part of our overall hedging policy inclusive of forward equity in forward starting swaps on the debt side is to position ourselves for disruption in a downturn.
And so we will be ready, we will take advantage of opportunities that are both big and small.
Got it okay. Thanks for that.
Thanks, Josh.
Again, when you have a question. Please press Star then one.
Our next question will come from RJ Milligan with Raymond James You May now go ahead.
Yeah, Hey, good morning, guys. Joey just a bigger picture question you guys are trading at now the highest multiple in the space.
Theres, a very discount between you and some of your peers, which would you could argue is a dislocation I'm just curious with your market cap is significantly higher.
Larger are there any other public portfolios Adrian would be interested in and how seriously do you guys think about public to public M&A.
But if we look at all opportunities everything from 1 million five a few billion dollars, we will get evaluated all opportunities that are out there public to public M&A is.
It's fairly rare, obviously and read them.
I think we're going to see potentially more M&A as.
As we move through this economic cycle I think efficiency from a from a G&A perspective is critical and I think obviously accessing cost of capital is critical I think everyone's going to be focused at the end of the day on on margins. It's.
It's not something we spend a lot of time on here. Our threshold has always been we're not going to qualitatively dilute the portfolio that we've constructed over the past call. It 12 years, so methodically and meticulously.
And then if anything surpasses that qualitative threshold.
Then we move to the quantitative does it make sense at the pricing at that given time.
Alright, thats it from me.
Thanks RJ.
This concludes our question and answer session I would like to turn it over to Julia <unk> for any closing remarks.
Well I, thank everybody for joining us today, we look forward to hopefully catching up in person as we re enter conference season in.
Get past summer so you soon thanks.
The conference has now concluded. Thank you for today's presentation you may now disconnect.