Q3 2022 Agree Realty Corp Earnings Call
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Good morning, and welcome to agree Realty third quarter 2022 conference call.
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I would like to turn the call over to Mr. Rubin treatment director of corporate Finance. Please go ahead Robyn.
Good morning, everyone and thank you for joining us for acreage <unk> third quarter 2022 earnings call before turning the call over to Joanne 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 result.
<unk> 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 will now turn the call over to Joey.
Good morning, everyone and thank you for joining us before running through our standard update I'd like to take a step back to provide some observations on the current state of the market as well as the steps we've taken to further strengthen our positioning in a challenging macro environment.
Our recent capital market transactions have bolstered our balance sheet with attractively priced capital at quarter end, our fortress balance sheet. Good at approximately three one times pro forma net debt to EBITDA, providing tremendous flexibility and enabling us to opportunistically execute as buyers and sellers continue to adjust to the market.
Cap rates are creeping higher most significantly in the merchant builder space and provided us opportunity to take advantage of distressed situations.
We have seen the levered buyer and a number of institutionally capitalized investors exit the market altogether or move significantly up the risk curve to drive incremental yield.
Is the bid ask spread continues to narrow and more sellers capitulate, our focus will remain on the strongest retailers in the country with the balance sheet to execute their omnichannel strategy in a challenging retail environment we.
We will not go up the risk curve in terms of tenant credit profile single purpose assets or private equity sponsored sale leasebacks.
Our working assumption is that attractively priced long term debt does not return to the market for the foreseeable future. Hence we are focused on unlevered returns on equity.
We are very fortunate to have the balance sheet and cost of capital to still drive incremental spreads without leverage.
Our focus continues to remain on per share <unk> growth, while preserving the dry powder to execute on distress.
I remind all investors that our company has thrived in times of economic uncertainty, we lobster acquisition platform. After the great financial crisis, and nearly double the size of our company. During Covid candidly I think the market has been ready for a reset for a while now and I am confident that our team is ready to once again seized on the opportunities that will be forthcoming.
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Moving on to the third quarter activities, we selectively invested approximately $372 million.
And 121 properties across our three external growth platforms 98 of these properties originated through our acquisition platform representing volume of more than $360 million.
The properties acquired during the quarter are leased to 39 tenants, including best in class operators in the dollar store auto parts farm and rural supply grocery home improvement consumer electronics and the off price sectors.
The acquired properties at a weighted average cap rate of six 2% and year to date record weighted average lease term of 11, one years nearly 73% of the acquired properties will be two investment grade operators.
Throughout the first nine months of the year, we've invested a record $1 $2 billion 328 retail net lease properties spanning 42 states.
Over two thirds of the annualized base rent acquired is derived from leading investment grade retailers. These.
These metrics demonstrate our continued focus on leveraging all three external growth platforms to execute on the opportunities with best in class operators.
Given the increased visibility into a high quality pipeline, we are increasing the bottom end of our acquisition guidance to $1 6 billion.
While maintaining the high end of our guidance at $1 7 billion.
That said, we will remain prudent and disciplined in how we deploy capital.
Our investment activities were supported by almost $815 million of equity and debt raise during the quarter that fortified our balance sheet.
At 930, we had over $630 million of forward equity and cash on the balance sheet with no outstanding balance on our revolving credit facility.
Moving on to our development and partner capital solutions platforms. Our team continues to uncover compelling opportunities helping to build the company's largest ever development pipeline.
Our platform is uniquely situated to provide struggling merchant developers with the ability to lock in funding, while providing us with additional opportunities to drive superior risk adjusted returns.
We continue to have dialogue with many of our retail partners to find solutions that fit their store growth strategies.
During the quarter, we commenced two new developments in Tcs projects, including one Gerber collision located Murray out of California, as well as the Sunbelt rentals and Wentzville, Missouri.
We also completed the development of two Gerber collision loci locations as well as the Burlington.
Construction continued on 18 additional projects in total we had a record 25 projects either completed or under construction. During the first nine months of the year, representing approximately $82 million of committed capital.
Moving on to dispositions, we sold our Gardner white furniture store in Canton, Michigan for approximately $20 million during the quarter as.
As noted on previous calls this was the art van flagship we developed prior to the Companys acquisition by Th Lee, which was subsequently re leased to loves furniture, and then most recently to Gardner weight. During the time, we owned the asset we were able to re lease this property twice recapturing effectively 100% of rent without tenant improve.
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Now three tenants in a pandemic later, we are ultimately selling the asset and an IRR of approximately 10%, which demonstrates our bottoms up approach to real estate underwriting.
Through September 30, we sold six properties for gross proceeds of nearly $45 million.
With a weighted average cap rate of six 5%.
Given our year to date activity, we are increasing the lower end of our disposition guidance range to $45 million, while maintaining the upper end of our range of $75 million.
On the leasing front, we executed new leases leases extensions or options and approximately 192000 square feet of gross leasable area, notably new leases extensions or options included Dicks sporting goods in St Joseph, Missouri, and a big lots in Cedar Park, Texas.
At quarter end, our 2022 lease maturities stood at just 2% of annualized base rents.
We're also in terrific position for the upcoming year with only a one 5% of our portfolio wide leases maturing.
At quarter end, our portfolio encompassed over 700 retail properties across all 48, Continental United States, including 201 ground leases, representing 12, 7% of total annualized base rents.
Occupancy ticked up during the quarter to 99, 7% while investment grade exposure stood at nearly 68% representing a two year stacked increase of 530 basis points.
Our portfolio is the best in the country and undoubtedly position to withstand any economic headwinds with that I'll hand, the call over to Peter and then we get it open up for questions.
Thank you Joey starting with the balance sheet as Joey mentioned, we had another very active quarter in the capital markets, raising or settling almost $1 3 billion of capital.
At quarter end, we had no floating rate exposure and approximately $252 million of cash on hand.
In conjunction with no material debt maturities until 2028, we are well positioned to withstand interest rate headwinds and volatility in the capital markets.
In August we completed a $300 million public bond offering comprised of four 8% senior unsecured notes due in 2032 and.
In connection with the offering we terminated related swap agreements of $300 million, receiving approximately $28 million upon termination <unk>.
Considering the effect of the terminated swap agreements the effective all in rate for the 2032 notes is 376%.
The offering further staggered our maturities and extended our weighted average debt maturity to approximately eight years.
During the quarter, we raised more than $5 billion of additional forward equity we sold nearly $1 7 million shares during the quarter via our ATM program, raising net proceeds of approximately $127 million.
And in September we completed a $5 8 million share forward offering for anticipated net proceeds of approximately $382 million upon settlement.
In conjunction with the September forward equity offering we settled all eight 7 million shares of outstanding forward equity realizing net proceeds of approximately $601 million at quarter end, we still had $5 8 million shares anticipated to be settled from the September forward offering representing anticipated net proceeds of approximately 382.
$2 million.
Our capital markets transactions provided us with more than $1 6 billion of liquidity at quarter end, including cash on hand full availability on our $1 billion revolving credit facility and our aforementioned outstanding forward equity.
As of September 30 pro forma for the settlement of the $382 million of outstanding forward equity our net debt to recurring EBITDA was approximately three one times, excluding the impact of unsettled forward equity our net debt to recurring EBITDA was approximately four times.
Total debt to enterprise value at quarter end stood at 24%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend remained at a very healthy level of five times.
Moving to earnings core <unk> and <unk> for the quarter were <unk> 97, and <unk> 96 per share representing five 6% and seven 8% year over year increases respectively.
As mentioned on prior calls we continue to anticipate high single digit <unk> per share growth in 2022, implying two year stack growth in the high teens.
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.
The aggregate dilutive impact related to these offerings was a penny in the third quarter.
During the third quarter, we declared monthly cash dividends of $23 four per common share for July August and September on an annualized basis. The monthly dividends represent a seven 8% increase over the annualized dividend from the third quarter of last year.
While meaningfully increasing the common dividend over the past year, we maintain conservative payout ratios for the third quarter of 73% of core <unk> per share and <unk> per share respectively.
Subsequent to quarter end, we again increased our monthly cash dividend by two 6% to <unk> 24 per share for October .
The monthly dividend reflects an annualized dividend amount of $2 88 per share or a five 7% increase over the annualized dividend amount of $2 72 per share from the fourth quarter of 2021.
Sure.
General and administrative expenses totaled $7 million in the third quarter <unk>.
G&A expense was six 4% of total revenue or five 9%, excluding the noncash amortization of above and below market lease intangibles.
We now anticipate that G&A expense will decline between 40% to 50 basis points as a percentage of total adjusted revenue compared to last year from our prior anticipated range of 20 to 50 basis points.
Total income tax expense for the third quarter was approximately $720 our expectation for total income tax expense. This year remains between two five and $3 $5 million.
In summary, our well positioned balance sheet affords us tremendous flexibility with pro forma net debt to recurring EBITDA of three one times and roughly $1 6 billion of liquidity to fund our robust investment pipeline 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.
Okay.
I'll begin the question and answer session.
Yeah.
That's a good question.
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First question for Mark J Milligan of Raymond James. Please go ahead.
Hey, good morning, guys.
Good morning R J.
Yes.
So I'll start with my Boilerplate question.
This earning season whats your current weighted average cost of capital and how do you calculate it.
Yes. Thanks RJ. This is Peter I'd say first we're always looking at to get ahead of our capital needs. So that we can retain flexibility in terms of how and when we access the markets.
And to that end, we raised or settled $900 million of capital during the third quarter that was used to fund our acquisitions during the quarter, but also provides us significant runway moving forward the breakdown in terms of the capital raise during the quarter includes $300 million of long term debt issued at an all in rate below 4%.
And we also settled $600 million of forward equity with our costs in the mid to high fives. So blending that all together, we raised $900 million during the quarter at a weighted average cost of around 5% weighted two thirds equity and one third debt.
As Joe mentioned in his prepared remarks with the debt markets effectively frozen today, our long term cost to borrow in the sixes, assuming a new 10 year public issuance and so absent any changes in the debt capital markets will likely look to fund the business using equity only going forward, while continuing to utilize the.
Our revolver for shorter term borrowings.
Today, we have more than $380 million of outstanding forward equity available to us that was raised at a cost in the mid to high fives and any incremental equity issue would be at a similar cost based on our current share price I think most importantly, we're going to continue to be disciplined and prudent in terms of investing incremental capital, we're not going to deploy capital.
It's only marginally accretive and at the same time, we're not going to go up the risk curve just to achieve better spreads.
Got it so I think it's fair to acknowledge obviously the pre funding that you guys have executed on over the past few months there is a pretty long equity runway relative to some of your peers.
And you've got a cost of equity capital that still allows for accretive growth, but if cap rates are moving higher the expectation is that they are going to move higher why accelerate growth into <unk> versus waiting for the market to move.
Well I think argue that's opportunistic for us so I anticipate cap rates in Q4.
To pick up for us with a similar credit profile to the third quarter.
And a similar term profile.
This quarter as well so I would anticipate taking advantage of the merchant builder market, where there is an immediate need to recycle capital.
And I think we will see that in Q4 given that.
Increasing the bottom end of our guidance going forward, we'll take qualitative and quantitative aspects.
Obviously, both into consideration as we deploy capital I think I think the bottom line is this we've taken we've taken flak historically now not from you but.
We've taken a hit black historically for running a very low levered balance sheet, introducing forward equity into net lease space, which wasn't really overly welcome. The first time. It was was introduced and maintaining a conservative approach. So these are the times frankly, when that pays off and.
And at the same time, we're going to continue to run a low levered balance sheet stay within our.
Our historical sandbox of investing the best in the best retailers in the world because at some point that will come back into the market I don't believe it's going to be anywhere near the rates that we've seen given the super cycle.
But we'll be in a position to add incremental leverage at that time.
Thanks for that Joe you've been pretty vocal over the past couple of quarters that you expect M&A and the broader REIT space and maybe a net lease and we did see one of your peers taken private recently do you think there is more M&A to come.
First off congratulations to Mary and her team I mean, obviously that was a terrific outcome for them.
Look I think we are not only in the net lease space I think there are a number of companies situated given their cost of capital and potentially their balance sheets and or their investment strategies, which arent able to drive those spreads.
And as you know, it's very difficult to come back in and in the REIT space. Once you havent impaired cost of equity, especially and so our approach our bent has always been.
<unk> in preparation for what's next we will continue to follow obviously that historical approach here that predates my time in terms of balance sheet management and.
And we'll see what happens in 2023, we don't have a crystal ball here, but I wouldn't be surprised to see more M&A activity across the across the REIT space.
Hey, guys.
Thanks RJ.
Thank you our next question for Brad Heffern RBC capital markets. Please go ahead.
Hey, good morning, everyone Joey.
Joe in your prepared comments, you mentioned distressed opportunities sort of in passing I guess, how frequent are those and what do they look like.
Well I think the most the most distressed quote unquote distress. We're seeing right now is those that are in the need to sell the need to recycle capital.
And so what Youll see again for us in Q4 as Opportunistically working with those developers that have pipelines that are delivered that need to recycle capital that our historic merchant builders across the space and have recognized that the 10 31 buyer of the 2021 pricing there is into feasible option for them to recycle.
Capital into new projects.
We're into other adventures and so that is I would tell you the true distress that were seeing today. Those are the first to recognize the immediate expansion in cap rates given the second level of those with debt maturing or having a defined use for other process for those proceeds.
And we're seeing that as well.
<unk> the market continues to lag with wishful thinking for that miraculous 10, 31 buyer or frankly, the person the buyer of the things. We are still in 2021 are an all cash buyer, that's where we really see the bid ask spread remaining we anticipate that hopefully.
To see more capitulation for that to narrow as well.
Okay.
And then you said you won't invest if it's only marginally accretive I know historically, you've solved for a spread of.
150 basis points, plus or minus so if youre, saying cost of equity is in the high fives do you anticipate cap rates growing about 7% for your sandbox eventually.
Well I would tell you what I anticipate cap rates growing I mean im looking into my Crystal ball I think history here is a useful guide between 2014 and 2018, there was approximately $55 billion of single tenant net lease retail traded 10 year averaged about two 5% at those times.
And the average cap rate was six five.
So I'm not going to sit here today and say I believe cap rates are going to go north of seven and that said I have no idea what type of economic.
Conditions were willing to be in in 2023 I think.
We're investing capital and let's call it around 75 basis points Unlevered on an accretive basis and high quality assets.
With a later infusion of that again, not with the 10 year at 2% and spreads back to 100 with an all in cost of 3% I think we can get there that said if we are unable to invest capital Accretively, we're going to maintain our discipline.
So we're not going to take this balance sheet to a leverage leverage position, we're not going to get on a hamster wheel Halloween is over so we're going to find the best opportunities. What I can tell you. This I can guarantee you that this team and this company will lead the cap rate expansion in our given space and thats without blowing up the risk curve.
That's without moving into private equity sponsored companies that a sale leaseback basis, that's without looking at short duration risk on assets is going to stay within our confines of what we're best at.
Okay. Thank you.
Thanks, Brett.
Thank you.
Next question comes from Joshua <unk> of Bank of America. Please go ahead.
Yes, Hey, guys.
Joe you want to explore your comment on the competitive yet not returning to market anytime soon I guess what are you looking for.
When it comes from kind of tapping the debt markets.
Or how do you really described for <unk>.
Describe like competitive debt like what does that mean to you guys.
Well I think look first moat first off I mean that today is outside of our cost of equity.
That's first off so I mean, there really is no true debt market today, especially in the 10 year unsecured space.
Obviously anyone can look at where investment grade paper is trading today.
We've never historically been a short term borrower, we're not going to run a significant balance on the facility on a variable basis. So that obviously has to be accretive relative to our cost of equity I think thats the threshold.
From there we will see not look I already said I think the super cycle of longer lower for longer is over Thats My best guess.
But at the same time, maybe it's wishful thinking I would hope in the back half of next year that we'll see a debt market that materializes and truly becomes a market again that is sprint kept the companies are able to.
Obviously rates debt capital in.
Alright.
Sure.
Like sellers like or do they understand the change in the cost of capital that buyers have today like what.
Are the conversations like.
Josh they are wide ranging.
I will tell you, though there are sellers that.
Still believe wishful thinking maybe that will end with the fed today, we'll see.
But we are seeing more and more sellers recognize that we're in a very distant position from 2021 or even earlier. This year I think I think the most important thing there.
Isn't really seller's recognition of the macroeconomic conditions <unk> uncertainty.
Is the hope.
<unk> of the loan 10, 31 are all cash buyer throwing in a bid for an asset so in conversations with brokers and theres been notes to a similar degree the assets that are out there out there widely marketed asking low cap rates sub five or five caps.
For high quality net lease assets are getting two bids today, maybe not 10 Act.
Activity is down to 20% of historical activity recent historical activity. So I think the biggest challenge there again is not.
Is not pouring cold water I think it's the wishful thinking in the hope for that for that 10, 31 buyer all cash buyer at a return or throw in a bit I think as we move forward in this economy as there is less than $10 $31 here deployed.
Going to see.
We're going to see some changes hopefully in terms of sellers' expectations.
Great. Thanks.
Expectations I should say.
Yes.
Thanks, Jeff.
You next question comes from Kevin Kim.
Kim Afterwards, please go ahead.
Thanks, Good morning.
Sorry, if I missed this but.
What kind of cap rates should we expect over the next couple of quarters.
Good morning, Kevin.
I think next quarter is all we have visibility until we just began sourcing for Q1.
And I would expect cap rates to tick up moderately there again with similar profiles to the third quarter Q2 was an aberration because of the large sale leaseback that we executed on in terms of investment grade profile.
But I would expect.
Over 70% investment grade similar to this quarter at or near 11% or 11 years weighted average lease term and I would also anticipate ground lease activity kicking up there as well.
Okay, and I know someone asked previously, but we kinda stab at it.
<unk> balance looking at.
You mentioned your WAC, obviously, it was more favorable looking backwards and going forward for everybody.
But how do you balance buying this type of volume I know you can with a great balance sheet, but how do you balance buying it versus.
With your view that cap rates need to be higher and maybe taking a little bit above.
Pull back.
Well I think look it's a great question.
This is an art and not a science nobody has a crystal ball into 2023.
We'll get hopefully a little bit more clarity.
From Mr Paulo, shortly here, but nobody has clarity into 2023, yet that's why I would refer back to Peter's comments.
We will be disciplined.
We're going to make sure that transactions are accretive both.
Both mathematically accretive but also qualitatively accretive we are by no means is going to put the pedal to the metal here.
And lever up the balance sheet with spreads that don't make sense, and we're going to be disciplined and thoughtful as we have always been.
What we are in very uncertain times, there are many risks on the horizon, whether they're domestic or macro international risks. We're cognizant of those risks again this balance sheet. This company was built for those risks.
And so every dollar we deploy has to be thoughtful and has to do with purpose.
Okay.
A more of a bigger picture question.
I'm, a little surprised that more triple net REIT haven't issued convertible debt I mean, you guys report on a <unk> basis, any way, where it gets rid of GAAP interest expense non benefit doesn't really matter.
Any broader thoughts on convertible debt and its got a tool that makes sense for you guys at some point.
It doesn't make any sense for us again.
We're trading today at an implied <unk> basis in the mid five range per variable doesn't make any sense for us today in terms of an option a capital source for other companies really haven't spent any time on it.
Okay. Thank you.
Thanks, Kevin.
Thank you next question will come from Nick Joseph with Citi. Please go ahead.
Joe do you have any sense of how much 10 31 money is still out there looking to be deployed.
Okay.
Wish I did it's amazing.
Even though I will tell you there's a lot of talk of it still I think the feedback that we've gotten that I've gotten from my team, especially from recent conferences and Roadshows in meetings is that there is a recognition that that money is waning.
So theres a lot of talk of it.
Tell you that the sentiment and the hope has gone from in the broader community has gone too wishful thinking.
More from.
Hopeful that Theres 10, 31, and so that has been recognized I haven't seen anybody try to quantify those dollars, but undoubtedly those dollars are beginning to wane as the sheer number of real estate transactions in the commercial space.
The velocity of Ms decreased significantly.
Yes exactly.
And then what are you seeing in terms of the different stickiness for cap rates on ground leases versus traditional net lease.
Really the same I think ground leases have gotten as I mentioned, probably on the last couple of calls ground leases have gotten a lot of attention due to.
US safe hold to the sell side covering them.
I would tell you that it's.
That market is very similar relative to the broader net lease market that there is still a bid ask spread.
So still looking for sellers to capitulate that said I do anticipate our our ground lease.
Pipeline in Q4 will be will be fairly sizable.
Thank you very much.
Thanks, Nick.
Thank you next question will come from Randall. Thank you Lee Mizuho. Please go ahead.
Okay.
Hi, Good morning. This is Rob you did in the line for <unk> Hope you guys are doing well can.
Can you comment on the acquisition good morning.
Can you just comment on the acquisition pipeline are you targeting any new tenants or categories are you seeing any pricing differential that you're seeing on a category basis.
So no new tenants or categories I would tell you.
Selectively we will we will insert tenants into that sandbox, where we will remove them into that sandbox, but I don't think its appropriate any new tenants or categories on a holistic basis in terms of cap rates by sector, we're seeing velocity in those sectors in terms of cap rate dispersion.
We're seeing velocity in the sectors that are driven by merchant builders thats generally retailers that are growing at a fast clip and have leveraged the merchant build community and Milton <unk> builder community excuse me.
To drive new store growth for them.
Got it just one more here.
I know youre shopping in the higher quality end of the spectrum cap rates tend to be stickier, there, but could you comment how cap rates have shifted for investment grade tenants versus non investment grade tenants.
I would tell you we don't spend much time investment.
Investment grade and we've always said is an output of our strategy there are significant tenants in our portfolio.
Don't have ratings that are fantastic balance sheets. Many of them are transparent to the public to see whether that's publix hobby lobby chipped away all of the top two retailers in this country. The bottomline as tenants in the non investment grade or unrated that art.
I would tell you probably double b or better, especially the smaller operators and even more acutely the private equity sponsored retailers.
The cap rates.
<unk> assets are blowing out and they should.
I mean those assets today those sponsored tenants.
Have balance sheets that have variable rate debt have near term maturities are generally single purpose boxes in nature.
Nearly impossible to put a residual or a terminal value on the underlying real estate. They have limited access to capital and their funding sources predominantly net lease Reits on a sale leaseback basis, who tend to be their largest unsecured creditors or amongst the largest unsecured creditors.
We have no interest in playing in that space.
I think it's I think it's been prudent given the macroeconomic outlook that we see today.
With the potential ranges of outcome, but we've never played in that space and so I can't give you specific instances that the cap rates because frankly, we don't spend time there.
Got it I appreciate the color guys.
Thank you.
Thank you. Our next question will come from Tayo Okusanya of Credit Suisse. Please go ahead.
Hi, Yes, good morning, everyone. Congrats on a solid quarter.
Joey could you I mean, your earlier comment just about again rising cost of debt.
Balance sheets, we have an opportunity to squeeze.
Could you talk on the flip side with your retailers, who will also go into that rising cost of capital and kind of.
<unk> balance sheet, if any and just talk a little bit about the watch list what you see going.
A particular category become a little bit more concerned about with just what's going on with the overall macroeconomic backdrop in the U S.
Yes.
Good morning, Tim I think in terms of categories. We don't have exposure to categories, where we have concerned again, we just don't have the discretionary component of recreational component the luxury component in this portfolio. We're focused we're focused specifically on.
Those core durable generally recession resistant tenants and the leading operators in their respect respective sector. So that's really not worth now every property in our portfolio is on our website. So you want transparency to go to our website all 1706 properties as of 930 or on our website, we have three bed.
Bath and beyond in the portfolio, we bought them all for the real estate.
They are all tremendous pieces of real estate feel free to Google Earth, and we have one at home in our portfolio in Provo, Utah.
It is a critical piece of real estate on the main thoroughfare in Provo, we'd love to get it back one day and have had multiple offers on it. So at the end of the day, we look at every asset.
Sure.
On a single case by case basis, and we just really outside of a couple of few movie theaters that we have in the portfolio just don't have those challenges.
Great. That's helpful and then on the transaction market.
Look a little bit different we'll ground lease.
Pipe transactions versus kind of.
Brian it's fee simple.
Our triple net buildings out there.
No as I mentioned before generally the same.
Transaction specific now the ground lease market is nowhere near as deep or as large as the standard net lease market. So there are of course aberrations, but generally the same.
Nothing overly.
Both markets today.
Or in a stare down for that.
The general.
The general steroid I'll say in terms of buyers and sellers in gaps there.
Great. Thank you.
Thank you.
Thank you next question will come from.
Oh Jefferies. Please go ahead.
Hi, good morning.
High single digit earnings growth in 2022, and high teens on a two year stack as you look at your pipeline and given the view that cap rates move higher what type of earnings growth might be achievable next year.
Good morning, with it's a great question.
A lot of it is going to depend obviously on the sources and uses if and when the debt markets come back where cap rates move too.
I think the thought of net lease Reits growing in the upper single digits in terms of <unk> growth of double digits probably.
As an owner will be prudent if there is any thought of that next year.
And so we're going to see the macroeconomic circumstances are really going to drive.
Obviously, the sources of capital in terms of the cost there and then what happens in the overall cap rate environment and pricing environment is going to be the second piece there.
I wish I had the crystal ball to be able to tell you that today.
No. We unfortunately don't have it.
Thanks, and then has the tone or tenor changed from retailers as it relates to their store growth outlooks.
No I would tell you that the conversations we have with retailers again, we're not in the luxury of discretionary space. So I can't speak to those retailers.
The conversations that we're having with retailers today revolve around the inability of developers to perform on their new store strategies, they're storing strategies for 2023 are generally already built out with those with pipelines now it comes down to execution.
So I'll give you an example, we talked to.
A large farm and rural supply retailer recently with a developer who had 50 stores in the pipeline and then down to 30 stores three ended up hurdling.
Generally speaking the retailers in our portfolio have promised new store openings to the street.
They are in growth mode.
Now they have challenges.
<unk> constituents and stakeholders, they actually execute on that new store growth due to rising costs both les.
Labor, obviously and materials.
Rising interest rates, the lack of availability of construction loans.
And then most importantly, now for a merchant builder I'd tell you the lack of clarity on what their exit cap rate will be.
And so we're working with those partners to see if there is a solution that makes sense for both of us.
In terms of deploying all three of our platforms.
Thanks, That's really helpful. Just one last one what's driving G&A lower.
Peter's comp.
Linda This is Peter in terms of the decrease in G&A during the quarter it was spread across several different areas, including accounting and tax.
And stock based compensation expense, where there was a onetime decline due to some employee forfeitures.
I would note that our guidance for 2022 implies a 40% to 50 basis point deceleration in G&A to approximately six 5% of total adjusted revenue.
That guidance assumes that G&A in the fourth quarter returns to a level more similar to the expense that we saw during the first and second quarters of this year.
Thank you.
Thank you next question comes from Wes Golladay Baird. Please go ahead.
Hey, good morning, everyone.
Ever been a time, where your cost of equity has been less than your cost of debt for a prolonged period like we're seeing now and then you did make the comment about no short term debt is that sort of read no term loans always been a target of 10 year debt with a more clarification on that.
Yes, not in my tenure with our cost of capital are effectively inverted today.
And we anticipate to remain in the Bourbon for awhile here as the 10 year remains elevated and spreads remain extremely elevated.
When we talk about short term that we're talking about carrying extended balances on our credit facility either on a variable basis or on a swap basis. We have looked at the term loan market and executed specifically in the seven year term loan market. Historically, most recently, we've been obviously an unsecured issuer in the public bond space at the tenant.
10, and 12 year levels here.
We will look at all available options here, where it makes sense in terms of our capital stack debt maturities, but we're not going to take any variable rate risk.
Or any tender risk.
Okay got it and then we'll look at the merchant builder situations do you get the sense that retailers are willing to pay higher rent to help the merchant builders absorb a little bit higher cap rate on their exit and when you look at your pipeline. This year was really a lot of Gerber collision is you made a good headway there in the background you have a bunch of retailers are a handset.
Retailers that you are potentially going to have drop next year, where we see maybe this pipeline as well.
So retailers are looking for all different types of solutions today.
The team has been to a number of retailers headquarters meeting with their heads of real estate in their respective departments, they're looking at increasing rent theyre looking at internalizing development, they're looking at fee based programs to keep it on balance sheet, they're looking at.
More term.
Larger increases.
I think all different types of solutions are being looked at so if they can get new stores opening in the ground.
To your second question, we're always talking to retailers and we're always looking for opportunities to grow commensurate with their pipelines again. It just really has a hurdle for us across our three platforms from an economic basis.
Okay.
Follow up on that I mean was there something specific about carbon where you're just going to probably maybe provide them a little bit more.
I guess platform value, where they said hey, we want to just grow with you quite a bit.
One that we want to work with.
Maybe others are just doing a one off so I'm just wondering if theres any anything special about that one because it's really worth a lot of <unk> this year.
Yes.
Well, we've been talking to <unk> I would say for upwards of six years.
And we had identified Gerber specifically because they are the only public company.
Traded on the Toronto stock exchange owned by Boyd group through the only public company in the collision space and so as we saw caliber and service King both private equity sponsored continue to gobble up independent operators as well as open net new stores, we were very attracted to the collision space because of the <unk>.
To prepare the third party payment cost of repairs because of the cameras and sensors and as I mentioned before you can't just go to your traditional bumps up you need a technician at a computer wizard to fix everything on your car today.
So we're very attracted to this space, we identified gerber again because of their low levered balance sheet, which everybody can see add a line.
Those conversations culminated with gerber entering into a significant growth phase, obviously from organic perspective, rather than an M&A perspective, and so the collision space was dominated by M&A by the big three operators as I mentioned Gerber being the only public one acquiring.
One off and small collision repair chains.
It then became cost prohibitive.
Or frankly, a lack of opportunities out there so they flip to greenfield and brownfield development and Thats, where we finally hit a chord and found a partnership there that work for both of us. So.
So we're very active obviously with <unk>, where they have over 725 locations across there.
Cross the country.
And we love the business the direction of the business and frankly their relationships with auto insurers, who direct clients took over.
Got it thanks, everyone.
Next question will be from Ronald Camden Morgan Stanley . Please go ahead.
Hey, two quick ones just come back to sort of the acquisition pipeline.
Theres sort of two factors right. There is volumes and then there is pricing.
As you have sort of talked about that cap rate six two in the quarter that should be going up.
We're sort of thinking about next year.
Should we expect sort of the same amount of volumes at those higher cap rate levels right. Because I think I think what you are messaging is that cap rates are rising, but they are probably rising a little bit slower than cost of capital.
So is this a scenario where yes, we should be expecting higher cap rates coming through but.
Are the volumes is there give or take there or is there just enough.
Go around that makes sense.
No I think you hit it that up and if we don't see cap rates rise, where the hurdle for US quantitatively. Then you will see volume slow down I mean, there is obviously no doubt there is no doubt about it and so as as cap rates move we will be careful with or don't move frankly, we will.
Be careful with how we put our pedal to the metal or frankly, we lay off.
So again, we have to take every transaction.
Yes.
And a discrete basis look at the qualitative and quantitative aspects of both of them.
And then decide whether it makes sense relative in the broader market for us and so we are going look we are in.
In a read and react mode. I think it's fair to say everybody is in a read and react mode.
And we will not get ahead of our skis that's for sure.
Great.
And then just moving on to tenant tenant health tenant risk maybe can you just remind us just what bad debt has been this year. Obviously you guys have a super clean portfolio. So it's pretty small but the real question is obviously as we're thinking about the next year or the next two or three years.
Are you seeing anything to suggest that there is going to be more pain coming down the retail pipeline like what are you hearing on that front. Thanks.
From a high level, yes, I anticipate paying not specific to this company because of the portfolio is so strong, but I think a lot of a lot of balance sheets.
Our repair retailer balance sheets will repair during COVID-19.
They either.
The oddity of surge sales or frankly.
The ability to access low cost capital and so a lot of balance sheets. Ironically were repaired during COVID-19 I think we're seeing the deterioration of those balance sheets today.
Back to a more normalized pattern based upon their overall businesses and so over the next two or three years I think we're going to see and I think maybe even a shorter period of time, we're going to see more and more distress in the broader retail environment again, a lot of this is dependent upon the consumer and macroeconomic conditions, but kobo.
As an outlier COVID-19.
Hold people consistently colvin was not a proxy for a recession COVID-19 was not a proxy for retailer distress. It was a timeout and during the tie that out a lot of people a lot of retailers got got got to eat.
And frankly got some free things were very.
Cheap things and so now we're seeing a normalization of sales levels across most retail sectors today.
And the normalized sales patterns are a lot of these retailers pre COVID-19 didn't make much sense to be sustainable in terms of an ongoing retail operations.
So I think we're going to see that normalization and we're actually we're seeing it today, we're seeing the tip of the iceberg today, Peter you could talk specifically about the bad debt, yes in terms of bad debt year to date, we've only recorded approximately 300000 $300000 of bad debt expense, which is roughly 10% or sorry, 10 basis points of revenue on a year.
To date basis, so very minimal bad debt expense recorded year to date.
Looking forward, we specifically identified tenants or instances of bad debt. So it's difficult to predict exactly what level of bad debt. We will have moving forward, but again as Joe referenced we think our portfolio is in great shape today.
Thanks, so much thanks.
Thanks Ross.
Thank you next question will come from Chris Lucas Capital One. Please go ahead.
Hey, good morning, guys.
Just a couple of quick questions.
Joey.
Take a step back and think about the buckets.
Transaction opportunities that you guys looked at so you've got direct to tenant deals and then you've got sort of existing lease deals that are out there.
But you might acquire.
Are you seeing any differential in terms of.
The sellers in these cases, either one side or the other adjusting to the capital market pricing today faster than the other at all.
It's a great question I think.
The direct to sellers.
Those conversations generally in those thoughts are moving a little bit quicker inclusive of director of retailers than that.
Neither marketed opportunities and or off market opportunities that are out there shopping so I think those direct conversations are cutting through.
Cutting through to today's reality, a little bit quicker generally speaking then.
Then some of the secured circuitous kind of hopeful.
Conversations that are out there.
Okay. Thank you for that and then.
Peter I guess, maybe just taking the prior question one step further.
<unk> sense as to what year.
Fully swapped seven year or five year term loan all in costs would look like today.
Yes, Chris I guess to answer that I would say as this year has progressed, obviously theres been a lot of volatility in the debt capital markets, specifically, the public bond markets and as a result, I think more issuers have looked to the term loan market rather than the public bond market. We had the swaps in place earlier this year, where it made sense.
For us to access the public bond markets in an all in rate below 4% in terms of accessing the term loan market today I think as banks have issued more term loans this year to issuers.
You've seen balance sheet bank balance sheets grow and less of an appetite to issue term loans, particularly five and seven year term loans and so.
It's difficult to say exactly where we're at a price of five or seven year term loan today I think we're seeing banks pushed companies towards the shorter term term loans, one or two years with options to extend.
Okay. That's helpful and last question from me Joey.
Just curious as to your thoughts about how you feel about Kroger has a credit given the Kroger albertsons merger announcement and how youre thinking about your portfolio are there any risk to.
Regulatory sales or anything like that.
Sure.
You worry about.
No nothing there concerns me in terms of credit there is no release provisions in any of our core release I think the more interesting fact curves I think the more addressed I think frankly as kroger's desire to actually acquire albertsons.
We've been talking for a long time about how we only will invest in the top tier grocers in the country.
And that grocery has been thought of as a safe Haven generally.
Both on the net lease space as well as the shopping center space in the broader retail environment. We continue to remind people to grocery has been a 2% business. Historically when you have to pick it off of the floor paying associates $20 an hour some of them loaded wages, even higher on the union basis.
The margins quickly deteriorated so what we're seeing and I think we're seeing with the Kroger albertsons as a move to increase scale, even further because of margin deterioration capex spend in terms of ocado and fulfillment.
So no concern on our end all of our Kroger deals have.
Again full Kroger guarantees no release provisions there I would anticipate a spin.
Spinoff being really can sell really consolidated in the in the existing albertson store stores I think it can be interesting to see what the FTC does here, we obviously track the.
The tractor or shall an FTC approval process, which I believe extended 18 or more months and only was in the farm and rural supply business.
With 180 stores the tractor was buying.
That consists of the entire company for work so they had to divest of approximately 50%. So as we watch the FTC here, it's going to be very interesting when it comes to something such as food, especially with the inflationary pressures we have seen on food what that approval process is going to look like.
But I think theres no doubt that we're going to continue to see grocers search for scale.
So we're going to stay at the top end of the grocery spectrum, because I just truly don't believe that actually the safe Haven that investors have generally perceived.
Great. Thank you that's all I had this morning.
Thanks, Chris.
Thank you next will be a follow up question from Tayo.
<unk> of credit Suisse. Please go ahead.
Hi, Yes, just a very quick one.
The six two cap rate this quarter the GAAP cap rate can you give us a sense of what the caps.
Those are on.
On your most recent transactions and trying to get a sense.
No.
GAAP cash yield.
The spread between the investment grade and the non investment grade market.
On a GAAP out again.
Collapsed over a while cumulative financing gap out again at this point.
Sorry.
Youre breaking up.
The part that came through really the spread between investment grade and non investment grade or unrated for us is really close again.
Some of our favorite retailers all the hobby lobby Chick Fil a public traded at very aggressive cap rates. There are unrated. Some of them are closely held private family owned companies, but they are but they trade as if they were investment grade because of the perceived credit profile.
Although they don't carry a third party rating. So there really isn't that wide of a dispersion I'll tell you, there's probably given term credit real estate.
And.
And a number of other factors probably about a 75 to 80 585 basis points dispersion across cap rates of where we invest capital with this quarter averaged six two.
And again, we anticipate that picking up in Q4 as we see more opportunity is really driven by the merchant builder space.
Great and then just tax yields were probably the mid fives.
Excuse me, you're breaking up a GAAP yield.
So you got yields were six two cash yield for the quarter, you know close to around 6%.
The cash yields around six yes.
Great. Thank you.
Thank you.
<unk> concludes our question and answer session I will turn the conference back over to Mr. Joey agree for closing remarks.
Well. Thank you everybody for joining us today I'm going to get the opportunity to go blow my nose, and we look forward to catching up in NAREIT in a couple of weeks I appreciate it. Thank you.
Thank you conference is now concluded. Thank you for attending today's presentation you may now disconnect.