Agree Realty Corporation (ADC) Q2 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Agree Realty Second Quarter 2016 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Joe Agree, President and CEO. Please go ahead Joey.

Thank you, operator. Good morning everyone, and thank you for joining us for Agree Realty's second quarter 2016 earnings call. Joining me this morning is Matt Partridge, our Chief Financial Officer. So let us get started as we have a lot of exciting things to discuss. I am very pleased to report on our record-setting quarter where we continued to build momentum in all phases of our operations, led by record investment activity and capital raising efforts, including the largest equity raised in the company’s history, we believe this quarter was a milestone in our company’s progression. Notably, we surpassed the $1 billion equity cap mark, thus increasing liquidity for our shareholders while significantly improving the quality and diversity of our industry-leading retail net lease portfolio. During the second quarter we invested approximately $154 million into 36 high-quality retail net lease properties. Of our 36 investments, 34 properties were sourced through our acquisitions platform for a total acquisition volume of $151.5 million. The properties were purchased at a weighted average cap rate of 7.8% with a weighted average remaining lease term of approximately 11.6 years. The acquired properties are located in 15 states and are leased to 22 national and super regional tenants operating in 15 diverse e-commerce resistant retail sectors, including the home improvement, farm and rural supply, discount apparel, craft and novelties, grocery, specialty retail, quick service restaurant, discount and auto service sectors. New tenants to our portfolio include Burlington Coat Factory, Walmart Neighborhood Market, Orchard Supply Hardware, Mister Car Wash [Indiscernible]. As previously disclosed, we closed on the $79.5 million acquisition of a diversified portfolio of 11 high-quality retail net lease properties. The portfolio consists of properties net leased to industry leading retailers with nearly 40% of the portfolio’s net operating income derived from investment grade tenants. Notable retailers include Orchard Supply Hardware, which is a growing small format home improvement concept that is owned by Lowe’s, as well as Walmart Neighborhood Market, Hobby Lobby, Smart & Final, Ross Dress for Less and Big Lots. These retailers operate in sectors such as home improvement, craft and novelties, grocery, discount apparel and specialty retail, where their brick-and-mortar presence serves as the foundation to their omnichannel retail strategy. In addition to the credit quality and sector diversity of the portfolio being both unique and compelling, the geographic diversification was also extremely attractive. Over 50% of the net operating income of the portfolio comes from the Los Angeles and San Francisco markets. An additional 30% is attributable to the properties proximate to the Seattle, Denver, Austin and Orlando major metropolitan markets. The portfolio has a weighted average remaining lease term of 11.4 years and over 6% of the portfolio’s net operating income is derived from assets where the company is the fee simple owner of the land and ground lessor to industry leading retailers. The majority of the ground lease NOI is derived from our first Walmart Neighborhood Market located in Vero Beach, Florida, which we anticipate construction will commence in the next 60 days. During the quarter we materially increased our exposure to Lowe’s Tractor Supply Company and Hobby Lobby, which are now are number 3, 11 and 12 tenants respectively. All of these companies maintain extremely strong brick-and-mortar operations and are the industry leaders in their respective retail sectors. While neither Tractor Supply Company nor Hobby Lobby maintain a public credit rating, both possess investment grade quality financials with very strong balance sheets. During the quarter we also acquired a number of Mister Car Wash locations. We are very excited about our relationship with Mister Car Wash, whom we have been working with for over a year. They are the largest car wash operator in the country led by a fantastic management team and have a committed sponsor, Leonard Green & Partners. We look forward to expanding our relationship with Mister Car Wash and are exploring ways to continue to deploy our capabilities in partnership with them. Through the first six months of 2016, we have invested a record $192 million into 49 high-quality retail net lease properties in 17 diverse sectors. Of the total first half investment volume, $184.8 million or a total of 46 properties were sourced through our acquisition platform. The properties were acquired at a weighted average cap rate of 7.8% with a weighted average remaining lease term of approximately 10.7 years. Spread across 20 states, the properties are leased to 36 national and super regional tenants with a conscious focus on high-performing retailers in the auto service, farm and rural supply, home improvement and discount grocery sectors. Our year-to-date acquisition volume of $185 million as well as our pipeline puts us right on track to achieve our 2016 increased acquisition volume of $250 million to $275 million. While the second quarter of 2016 was our single largest quarter in terms of acquisition volume, I want to stress that our acquisition methodology continues to be a disciplined, bottoms up underwriting approach, which emphasizes real estate and consumer fundamentals. Our underwriting is combined with a top-down focus on e-commerce and recession resistant retail sectors. We are increasingly focused on retailers that are outperforming in today's omnichannel environment, offering either a value proposition or a unique customer experience that necessitates a brick-and-mortar presence. Turning our attention to the development in Partner Capital Solutions front, we continue to gain momentum and are seeing increased opportunities to leverage our distinctive capabilities for a number of national land super regional retailers. We currently have nine development or Partner Capital Solutions projects completed within the year or currently under construction with capital deployed or projects in progress totaling over $20 million. As we move into the back half of 2016 we anticipate our pipeline continuing to evolve and anticipate increased activity heading towards 2017. During the second quarter we brought two projects online. Construction was completed on the company's previously announced Burger King located in Farr West Utah. This development, which is subject to a new 20-year lease and had a total project cost of approximately $1.6 million, was the inaugural project of our partnership with Meridian Restaurants to develop up to 10 new Burger King locations. The company also completed a Family Fare Quick Stop in Marshall, Michigan. This project is subject to a new 10-year ground lease. In addition to these completed projects, we have a number of exciting developments where construction commenced or continued to progress during the second quarter. In April, construction commenced on our second Burger King project with Meridian in Devils Lake, North Dakota. Similar to our Farr West project, this location is subject to a new 20-year lease and has a total estimated cost of $1.6 million. We anticipate rent commencing during the third quarter. We continue to make progress on Wawa in Orlando, Florida; our Chick-fil-A in Frankfort, Kentucky; and our Starbucks in North Lakeland, Florida. Our Orlando Wawa project, which represents the ninth Wawa in the company’s portfolio, continues to make fantastic progress and we anticipate rent commencing during the third quarter of this year. The project has a total cost of approximately $2.5 million and is subject to a new 20-year ground lease. In Kentucky, the company’s first Chick-fil-A is also expected to commence rent during the upcoming quarter. This project is subject to a new 20-year ground lease. The total project cost is approximately $0.6 million. We are very pleased to add such a high quality retailer to our portfolio. The company's first Starbucks development in North Lakeland, Florida continues to make progress and is expected to commence rent in the first quarter of 2017. Total project costs are approximately $1.3 million. Subsequent to quarter-end I am very pleased to announce that construction has commenced on two additional exciting projects. We commenced construction of the company’s first Texas Roadhouse in Mount Pleasant, Michigan. The project is located at our recently created outlot to our Central Michigan Commons property. Similar to our Starbucks and Chick-fil-A developments, our asset management team led by our Chief Operating Officer, Laith Hermiz did a fantastic job identifying this embedded opportunity within our existing portfolio. The development is subject to a new 15-year ground lease, and has a total project cost of approximately $0.6 million. In July, construction commenced on the company’s first Camping World project in Tyler, Texas. This project has a total cost of $7.5 million and is subject to a new 20-year lease and represents a differentiated opportunity for our company to partner with an industry-leading retailer on their national expansion plans. This is our first project partnering with Camping World, and we look to deploy our unique capabilities in partnership with them in the future. Lastly, while we have no remaining lease maturities in 2016, our asset management team has been proactive addressing future lease maturities. Of note, our largest maturity in 2017 is Off Broadway Shoes located in Boynton Beach, Florida. Off Broadway has no options remaining and the singular maturity represents nearly half of our 2017 expiring rent. We have recently executed a lease with a dominant national retailer and are pursuing a unique opportunity to intensify the site and create additional value. The project, which is still subject to customary conditions entails expanding the existing building square footage by nearly 75% into approximately 36,000 square feet. We look forward to discussing the project in further detail in upcoming quarters. The increasing activity of our three external growth platforms continues to reflect our capability to work with retailers at any point in their growth cycle, demonstrating our company’s distinctive operating model in the retail net lease factor. In addition to our investment activities our disposition program has started to take shape. We currently anticipate disposing of between $20 million and $50 million of assets in 2016. As previously discussed, our focus is on opportunistically and proactively reducing existing concentrations in our portfolio. During the second quarter we closed on the sale of our Walgreens in Port St. John, Florida for $7.3 million, which represents a 5.5 cap on in-line net operating income. As a result of this sale and the company’s growth, our Walgreens exposure has decreased to approximately 14% down from 18.7% at this time last year, nearly a 500 basis point decrease in only 12 months. We anticipate that our Walgreens exposure will continue to decrease as we opportunistically dispose off additional assets and as our portfolio continues to expand. Furthermore in addition to our evolving tenant diversification our geographic diversity has continued to improve. In just the past year our Michigan exposure has been reduced by over 600 basis points. Michigan now makes up only 16.7% of in place rents, down from nearly 23% this time last year. Additionally, we strategically increased our California exposure to 4.9% of in place rents, which now represents our sixth largest state. Now let me elaborate on some of our existing portfolio’s characteristics, which remains 100% concentrated in retail and is one of the strongest in the net lease space by almost any measure. It is comprised almost exclusively in national and super regional tenants with over 46% of annualized rents coming than tenants with an investment grade credit rating. The portfolio remains effectively fully occupied as our overall portfolio occupancy rate increased slightly to 99.6% at the end of the second quarter and has a weighted average remaining lease term of 11 years. As of June 30 our expanding retail net lease portfolio consisted of 326 properties comprised of industry leading tenants that operate in over 25 diverse retail sectors. Our portfolio spanned 42 states, and totaled 6.3 million square feet of gross leasable space. Within the portfolio we continue to believe there is exceptional value that is attributable to our ground leased assets where the company is the fee simple owner and ground lessor to prominent national and super regional retail retailers. In just this past quarter we have added Walmart Neighborhood Market, [Indiscernible] Chick-fil-A, Texas Roadhouse and another Wawa to this unique portfolio. These ground leases, which comprise nearly 8% of total base rental income, are another reason that our portfolio represents an extremely attractive risk-adjusted investment for our shareholders as nearly 90% of this portfolio is leased to leading retailers that have an investment grade credit rating. With that, I'd like to thank our many loyal shareholders for their continued support. Through a combination of share price appreciation and dividend growth, the company has realized a total return of 45.1% for the first half of the year representing the highest total shareholder return in the retail net lease space. I will now turn it over to Matt to discuss our second quarter 2016 financial results. Matt?

Thanks, Joey. Good morning, everyone. Before I begin, let me quickly run through the cautionary language. As a reminder, please note that during this call, we will make certain statements that may be considered forward-looking under Federal Securities Law. Our actual results may differ significantly from the matters discussed in any forward-looking statements. In addition, we discuss non-GAAP financial measures including funds from operations or FFO and adjusted funds from operations or AFFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release. As we announced in yesterday's press release, total rental revenue including percentage rents for the second quarter of 2016 was $19.9 million, an increase of 23.6% over the second quarter of 2015. Year-to-date total rental revenue has increased 25.8% over the comparable period in 2015 to $38.6 million. G&A expenses were approximately 9.3% of total revenue in the second quarter, which is a 78 basis point decrease year-over-year as compared to 10.1% in the second quarter of 2015. As we have noted in the past, we expect to continue to achieve decreases in corporate operating leverage as we grow the company and realize greater operating efficiencies through increased scale. Since 2012, G&A as a percentage of total revenue has decreased nearly 700 basis points. FFO for the second quarter was $13.8 million, representing an increase of 23.8% over the first quarter of 2015. Year-to-date FFO has increased 25.4% over the comparable period in 2015 to $26.4 million. Similarly, AFFO for the second quarter was $13.7 million, representing an increase of 24.3% year-over-year. Year-to-date AFFO has increased 25.3% over the comparable period in 2015 to $26.5 million. On a per share basis, FFO decreased 8.1% over the prior year's results to $0.61 per share and AFFO decreased 1.4% to $0.61 per share, both materially impacted by the expected near-term dilution from our May equity raise, which was completed in order to in part prefund the $79.5 million portfolio acquisition we closed in June and to fund our healthy pipeline. FFO and AFFO per share for the first six months of 2016 have increased 3% year-over-year to $1.22 per share. As previously noted, in May we completed the largest follow-on offering in the company’s history, issuing 2,875,000 shares of common stock, which included the underwriter’s full exercise of their option to purchase additional shares. After deducting the underwriting discount and operating expenses, total net proceeds from the common equity offering were approximately $109.7 million. In addition to the follow-on public offering, the company issued 15,156 shares of common stock through its at-the-market equity program realizing gross proceeds of approximately $0.5 million. We continue to view the ATM program as an efficient tool for us to reduce overall cost of capital, as well as improve the timing and efficiency of raising capital. Now let us turn to our balance sheet, which continues to be one of the strongest in the industry. As of June 30, 2016, total debt to enterprise value was approximately 25%, and net debt to recurring EBITDA was approximately 5.1x at the low end of our stated leverage range of 5x to 6x. Our fixed-charge coverage ratio, which includes principal amortization, was a healthy 3.6x. These metrics indicate significant liquidity for future growth and continue to align with our targeted leverage and coverage levels. Subsequent to the end of the quarter, we completed $100 million of long-term unsecured fixed-rate debt, which has a weighted average interest rate of approximately 3.87% and a blended term of 10 years. The financings were comprised of a $40 million unsecured seven-year term loan and $60 million of privately placed 12-year senior unsecured notes. The unsecured term loan has an interest rate based on a pricing grid over LIBOR, which is determined by the company’s leverage ratio. The company has a fixed LIBOR over the term loan’s seven-year period and we anticipate the interest rate will be fixed at the 3.05% based on current leverage levels. The $60 million of privately placed 12-year senior unsecured notes are priced at a fixed interest rate of 4.42%. Closing and funding of the new private placement of senior notes is expected to occur later this week. Finally, on July 15 the company paid a dividend of $0.48 per share to stockholders of record on June 30, 2016, which represents a 3.2% increase over the $0.465 per share quarterly dividend declared in the second quarter of 2015. The company has paid 89 consecutive cash dividends since its IPO in 1994, and the dividend represents a 20% increase over the quarterly dividend paid in 2011. Our payout ratios for the quarter were 79% of both FFO and AFFO, which were elevated because of the increased share count from the May equity raise, but still remain in the lower half of the company’s targeted ranges and reflect a very well covered dividend. We are thrilled with how the first half of 2016 has developed, and we are extremely well positioned to continue to execute on our operating strategy, maintain our conservative balance sheet and provide very appealing risk-adjusted total returns to our shareholders. With that, I'd like to turn the call back over to Joey.

Thank you, Matt. To conclude, the second quarter represented an exceptionally active quarter for our company, which will drive increased earnings performance in the quarters and years to come. Our strategy has been unwavering, and we have continued to expand and differentiate our retail net lease portfolio, while maintaining our ability to opportunistically execute through our industry-leading balance sheet. We are confident in our ability to continue carrying out our growth strategy for the remainder of 2016 and beyond. At this time, we will open it up for questions.

Thank you. [Operator Instructions] And our first question will come Collin Mings of Raymond James, please go ahead.

Thank you. Good morning Joey, good morning Matt. First question from me this relates to the acquisition pipeline, Joey may be can you touch on what you’re seeing in terms of other small to midsized portfolio deals like what you completed in the quarter?

Sure. We were typically in aggregate or by nature across all three external growth platforms that said, we’re always evaluating portfolios of any size and shape, we don’t see anything in our pipeline today similar to the portfolio we closed during the second quarter. But, we’re always looking typically at diversified smaller portfolios of net lease assets.

Okay. That’s helpful. And then, just switching gears as far as from a disposition activity you talked about in the prepared remarks, can you maybe talk it through the timing of that and then given the shift towards being a more opportunistic seller, should we expect a 5:5 cap rate like what you completed on during the quarter for the remainder of the year on what you’re selling?

Right. So, our disposition platform will continue to focus on the concentrations within the existing portfolio most notably Walgreens, it’s a great time to be disposing of those assets and we’ve discussed before 5 to 6 caps this important -- was right in the middle of that range nothing notable about the store, the real estate or at the store performance at a 5.5 cap. So, our Walgreens exposure year-over-year is down nearly 500 basis points like we discussed in the prepared remarks. Our focus will be continuing to opportunistically divest those assets and redeployed into all three of our external growth platform. To speak to timing it’s challenging [inaudible] the majority of purchasers in the space of 10.31 purchasers just like the very nature of the 10.31 loss until a purchasers rankly has closed. It doesn’t provide for the most certainty of execution that said we’re looking to maximize price on these dispositions and we can tolerate a little bit of flex in the timing.

And then just going back to the changes in your sector concentration Joey, you just touch a little bit more on the increase in the store exposure and just how you’re thinking about that category, some of the underwriting requirements you’re looking at as it relates to that segment and just any sort of other deals in that pipeline?

Sure. So, our grocery exposure is up let’s call what 170 basis points towards third largest sector. When we really focused on what we call really brick and mortar foundational businesses that in context of an omnichannel retail world, we see those brick and mortar operations with improving same-store sales. So, specific to growth, we’re focused in the grocery spaces in the deep discount, we’re not a high end grocery buyer, we typically don’t buy middle order road grocers. So our exposure has been increased from the Wal-Mart neighborhood market, that’s our first Wal-Mart neighborhood market that’s a brand new ground lease where Wal-Mart is currently paying rent and will commence construction in the next 60 days. Additional grocery exposure in the form of smart of final stores in California obviously very unique merchandizing, unique shopping experience smart and final and they continue to perform very, very well in California. And so, our focus on these sectors on grocery and farm and rural supply and home improvement, our focus on these sectors is really driven by our top down approach to retail and how we view retail of that e-commerce resistant lends and then we’re focused on acquiring, developing and deploying capital in our partner capital solutions platform to the industry leaders in those respective sectors. So you can see Lowe’s is now our number three tenant tracker supplier, number 11 tenant, hobby-lobby our number 12 tenant, home improvement, farm and rural supply and crops and hobbies respectively. We were confident that those sectors are going to continue to perform well and that we’ve targeted the best operators frankly in those sectors.

Thanks for that detail Joey. One last one for me just on the development and partner capital solutions pipeline. Just given the rising cost of what land and labor, just talk about how you’re mitigating those risks that you continue to build out that pipeline?

Sure. So, we’re speculating on land, we aren’t speculating on any GOA, so we’ve all of our cost buttoned up prior to close. Again, people confuse our development pipeline with the speculative pipeline or think it entails increased risk. I would tell you it’s the exact opposite, before we close on any parts of land, we’ve a lease with all contingencies waived, all entitlements and permits in hand and we’ve fixed lump sum contract from a general contractor. So, we know what our costs are going into these projects, any appreciation in land prices or appreciation in labor material costs or inflation of labor material costs, we’ve got our arms around obviously before we enter in, before we put a stubble on a piece of property.

Alright, thanks guys, I’ll turn it over.

Thank you Collin.

Our next question will come R.J. Milligan of Robert. W. Baird, please go ahead.

Hey, good morning guys.

Good morning, R.J.

Joey, slight deterioration in the percentage of in grade tenants this quarter, given the acquisitions as well as the Walgreens disposition. Curious what level you're comfortable with in terms of percentage of tenants coming or percentage of rents coming from investing in the grade tenants as we get into the end of this year and we get into 2017 as you reduce your Walgreens exposure and continue to acquire assets that might not necessarily be investment grade?

Sure. And I appreciate the question. Good morning, R.J. So, the only thing only stable part of the question I'll take issue with this is deterioration. We are using major rating agencies in terms of denoting our investment grade exposure. As you can see in our filings, tractor supply and hobby lobby and our top number of 11 and 12 tenants respectively. Both of those retailers have very strong financial, effectively minimum or no debt. We aren’t going to impute credit ratings to them combined tractor supply and hobby lobby in our portfolio today of 4.2%. If you add that to the 46%, we're again north of 50. So, we're not going to impute credit ratings. We're not going to come up with our own scoring system, we'll continue to follow the major rating agencies. Our focus in investing capitals on industry leading retailers in the respective sectors which we just discussed, whether or not they have a credit rating that won't drive our investment decisions. And other perfect example there is our Chick-fil-A in Frankfort, Kentucky, again an unrated company Chick-fil-A is obviously a fantastic operator with an investment grade balance sheet. But since they're unrated, we are going to put them in the investment grade pool. Looking forward into the future, we're going to continue to operate by that same amount and we're going to acquire the best operators in those ecommerce and recession resistant spaces where we feel comfortable that the brick-and-mortar foundation is an essential piece of their omni-channel retail experience. We're not going to allow an investment-grade credit rating or lack thereof drive our investment decision. I would end today our investment grade exposure is still the highest in the space. It's a 100% retail at the investment grade exposure. You add in the 8% ground leases, I think by any measure our portfolio stacks up very well against frankly any other portfolio in the country today.

Okay, that's helpful. Thanks Joey. And one last question in terms of the capital partner solutions arm as well as the development. Those projects in terms of numbers are increasing, yet they tend to small dollar volume and I'm wondering as you grow your company size, with the bulk of that growth coming through acquisitions, is there a point where those other two platforms don’t make sense just in terms of effort versus dollars going out the door?

That's a good, that’s a great question R.J. So, we talked about we what we think is the ideal size for this company of $2.5 billion to $3.5 billion enterprise value, effectively doubling the size of this portfolio, I mean, in the balance sheet once again. And the reason we really get to that size, that 2.5 billion to 3.5 billion is we're comfortable and confident that we'll have an investment grade with credit rating at that time. We'll also have a balance sheet which can tolerate an index eligible public bond. And but we'll also be able to move the needle on a consistent basis through all three of our external growth platforms. Which you see this quarter is frankly what we believe is the next step in the evolution of this company where we can deploy all three capabilities in addition to a sizeable balance sheet that's north of a call it a billion side today in enterprise value. We can deploy those capabilities simultaneously or concurrently to really add value to a retailer in any point in their growth cycle. So, that we have smaller projects in here such as the Burger King, we have larger projects in here, such as our first Camping World project. Any shape or size, as long as we're comfortable and confident that we are going to be have a partner with a retailer and be able to deploy our capabilities and invest a material amount of capital over the course of one year, three or one year and three years, I think you're going to see it take advantage of those opportunities and drive outside returns to our for our shareholders.

Great. Thanks for the color.

Thanks, R.J.

Our next question will come from Rob Stevenson of Janney. Please go ahead.

Thank you. Good morning, guys. Matt, how should I be thinking about the debt capacity or the investing fire power for you guys opposed to this $100 million debt issue. And so, I assume you're paying down the revolver and then basically using that to fund acquisitions going forward. In addition to the 100 million of capital here to deploy, I mean, how much additional debt are you guys comfortable putting on the company at this point without hitting the corresponding equity, whether or not it adds at sales ATM program or secondary offering?

Yes. Hi, Rob. You're exactly right, the line was 98 million at the end of the quarter, we sourced a 100 million as long-term debt to pay that down. And you should expect us to continue to use the line to fund acquisitions over the near term. In terms of future capacity and what we're comfortable putting on the balance sheet from a debt perspective, we're going to operate within that five to six times leverage drains that we talked about in the past, that's what we are comfortable. Today we're at 5.1, so at the low end of that range. And as we continue to execute through on our guidance to the end of the year with acquisitions and dispositions we are comfortable that we can stay within that range without tapping further equity.

Okay. And then Joey, given your comments about selling down some of the concentration liquidity Wal-Mart, I mean Walgreens etcetera. How should we be thinking about the size of a potential sale lease back transaction that you would be comfortable with given now more than billion dollar size of the company, I mean is it 30-50-75 I mean is it when you think about that in terms of adding back a significant concentration through a transaction that type of nature I mean what’s your tolerance for that and is that something that you are looking to do or thinking about doing any time in the future?

Good morning Robert. I think first our tolerance for any single pending concentration is what’s called the gray line of approximately 5%. The only tenant who really is north of that today's Walgreens and we talked about their down to 14% now and we will continue to decrease. In terms of the large single credit sale we expect I will be frank with you that there truly is not our - it's not our MO. It's not our - it's not in our DNA or our business model to take on massive or extremely large sale lease back with a single credit. We look to leverage our balance sheet and utilize our balance sheet in sale lease back transaction when we feel like we have other opportunities to deploy capital with that perceptive partner or tenant and so we will do so on an opportunistic basis. I will expect to continue to for us to do that throughout the course of the year and upcoming quarters. But in terms of the large single credit sale we expect transaction it really goes against our bottom ups underwriting approach so I wouldn't anticipate any thing overly material on that front.

Okay. Thanks guys.

Thanks Rob.

Our next question will come from George Hoglund of Jefferies. Please go ahead.

Hi, good morning guys. So one question in terms of on acquisitions I am looking at your underwriting. Has the recent run in the stock impacted the way you guys think about deals or think about what required returns you would look for to buy deal?

No, it really has and I would tell you that it allows us to improve our cost of capital most notably our improved cost of equity due to the stock price. It allows us to look at transactions potentially different on the margin, but we really look at two things we look at from 30,000 fee we’re looking at e-commerce resistant in an omnichannel future and recess resistant and then our bottoms of underwriting approach we’re really focused on the market dynamics of the four law performance of the store. The retail synergy, the price profound and really marking to market where that tenant is paying a rental rate. And so, on the margin in terms of the portfolio transaction that we execute on the quarter I would tell you that it helps there, but where you will not see us – you don't see deviate from our historical underwriting approach, what you will see frankly is a benefit from wider spreads. And so, we don't feel like we have to chase cap rate down to 10.31 market cap rates. We think we can continuously source opportunities across all three external growth platforms frankly that aren't related to our market cap rate today.

Turning from modeling perspective I guess it's fair to assume that cap rates on GAAP basis would remain kind of highest sevens around 8% range?

That's fair, yes.

Okay. Thanks guys.

Thank you George.

[Operator Instructions] Our next question will come from Daniel Donlan of Ladenburg Thalmann. Please go ahead.

Thank you and good morning. I was wondering if you can talk about the Mister Car Wash and kind of where those assets, kind of geographically where they are and kind of how that transactions came to be?

Sure. We have been talking and working with Mister Car Wash since prior to the re-can conference in Los Vegas in 2015 so we have been working with Mister Car Wash and their management team for about 18 months. The assets that we purchased are in Mississippi, Iowa and Colorado, we think we build a good diversified portfolio of Mister Car Wash location; they’re the leading operator in the space. They have a fantastic management team and obviously a large sponsor in [inaudible]. Our focus is as we touched on in the prepared remarks will be to deploy our capabilities, our partnership with Mister Car Wash and continue to help them facilitate their expansion and their real estate operations.

I appreciate that. And then the campaign world, kind of curious to genesis there that that comes to the PCS program or is that sort of negotiating directly with the retailer?

That’s working directly [inaudible] another retailer that we’ve got a great respect for and enjoy working with in partnership where that came directly with [inaudible] who we’ve been working with for upwards of two years and different opportunities. And so our PCS platform can work with retailers as well as developers similar to Meridian in our Burger King program with Meridian where we continue to enjoy that relationship. And so, it is again another opportunity for us to invest capital at any point in any type of transaction in a retail stores like us.

And then, Matt to pitch on the spot here but this cause – is great. But if I’ve to look at page 3 and I was kind of, you’ve aggregate all those different projects what do you think would be an average going in cap rate that you would achieve as you aggregated all that stuff together?

Well, I wouldn’t expect anything less of you Dan then to put aside in the spot. So, our development we’ve been very clear about our development, our partner capital solutions platform. We’re typically from a development, through the development side targeting a minimum of 250 basis points above market cap rates where we typically acquire. We see a like kind product. Our partner capital solutions platform falls in between our development returns and our acquisition returns. So, in terms of the projects you have on, here I tell you that we have returns that have teens in front of them and we’ve returns that are substantially lower on a blended basis, typically we’re targeting almost approximately a 9% cap rate.

Okay, perfect. And then as far as the guidance is concerned on the acquisitions, you basically have about $90 million or so left to do in order to complete the top end of the guidance. We are just kind of curious why not boost the upper end of the range as you just being conservative or you see kind of a slowdown in the back half of the year or just kind of what your thoughts on kind of second half of this year?

We think we are on track to achieve that increased guidance. We have talked about growing and building out and scaling all three external growth platforms so our initial guidance is for $175 million to $200 million didn't take the account the $80 million portfolio transaction. If you back that out we are effectively in the same target range of $175 million to $200 million from our increased guidance of $250 million to $275 million. We are confident that our team is doing a fantastic job, can aggregate opportunities to the tune of 175 to 200. Now investment committee we meet twice a week. We are constantly seeing new opportunities. We underwrite few billion dollars a year in transactions. We are not, we’re single hitter, we are a sharp shooter that guidance I think is right for what we see in the pipeline today what we closed on in the year and we will see what opportunities arrive in the back of in the back half of this year later on.

Okay and then lastly for Matt, just kind of curious on leverage metrics, I think in the past the range has been 4.5 to 5.5 then on occasion maybe 5 to 6 just kind of looking at the most recent offering in your guidance it looks like you are going to want, you are looking to maintain your net debt to EBITDA kind of in the 4.5 and 5.5 range is that fair or you want to take it up kind of into the higher five times range?

No, I mean Dan I think we consistently said that we want to be somewhere between 5 and 6. We don't have any preferred in the capital stack so when you look at us relative to other net lease companies that seems like a pretty conservative leverage rate level. That being said we will go below five times. We may above six times depending on what’s happening in the market and depending on our acquisition pipeline but we intent to be in that 5 to 6 time range.

Okay. Appreciate it. Thanks guys.

Thanks Dan.

Our next question will come from Craig Kucera of Wunderlich. Please go ahead.

Hey guys. Appreciate the color on the underwriting a lot of the questions that kind of circled around that I have got another way to ask it. It sounds like you are sticking with your netting, your cap rates are still on the high sevens, but it seems as it drop in cost with your cost of equity kind of allow for more volume when you think about your capacity would you need to hire more people if you were to close maybe next year if you are thinking about 300 million or 350 do you have people you need right now or would you need to hire more people?

I think, first good morning Craig, but I think we have got a great young and dynamic team here at the company. Our analyst program has continued to produce fantastic young additions to our team. We built a leadership team that we have in place here with Matt, Dan Ravid and we come as on that experience and our middle management continues to grow and gain experience. So, we think the company is currently staffed to continue to really grow all three platforms. That said, we're always looking for young talented and also experienced professionals to add to this team. Our goal is to is frankly is to build something great here and we're always looking for opportunities to add teamers.

Got it. So, when you think about your pipeline, I think you mentioned you look at, maybe $1 billion or $2 billion, I guess what it sounds like is you wouldn’t not fairly need to bring a lot more folks to your, you're fairly scalable as you stand to that.

We think we're very scalable as we stand today. And that we'll continue to execute but we'll also continue to always be in the mark and looking add talent and looking for additions to this organization. I think that's, I think that's probably necessary of any organization.

Okay, great. Thanks.

Thank you.

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

Well, I like to thank everybody for joining us this morning. And we look forward to speaking with you again when we report our Q3 results. Thank you, everybody.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.