Agree Realty Corporation (ADC) Q3 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Agree Realty Third Quarter 2020 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Clay Thelen, Chief Financial Officer. Please go ahead, Clay.

Thank you, operator. Good morning, everyone and thank you for joining us for Agree Realty’s third quarter 2020 earnings call. Joey of course will be joining me this morning to discuss our third quarter and year-to-date results. Please note that during this call, we will make certain statements that maybe considered forward-looking under Federal Securities law. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons, including uncertainty related to the scope, severity and duration of the COVID-19 pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effect of the pandemic and containment measures on us and on our tenants. Please see yesterday’s earnings release and our SEC filings, including our latest Annual Report on Form 10-K and subsequent reports for a discussion of various risks, uncertainties underlying our forward-looking statements. In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO 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.

Thanks, Clay and thank you all for joining us this morning. First off, I would like to wish all of our listeners and their families, health and safety has continued to navigate a very challenging year. We have got a lot to cover. So, let’s get down to our many accomplishments of the quarter and a summary of our year-to-date activities. We had a truly outstanding third quarter that began to materialize early in Q2 during the depths of the pandemic. During the quarter, we invested record $471 million in 97 high-quality retail net lease properties across our three external growth platforms. 91 of these properties were originated to our acquisition platform, representing record acquisition volume of more than $458 million. While once again achieving record volume during these challenging times, we remain intensely focused on finding best-in-class opportunities with our leading retail partners. This was once again demonstrated by 16% of third quarter acquisition volume being comprised of ground leases and approximately 72% of third quarter acquisition volume derived from investment grade retailers. The 91 properties acquired during the quarter are leased to 26 tenants operating in 15 distinct sectors, including best-in-class operators in the off-price, home improvement, auto parks, general merchandise, dollar store, convenience store, grocery and tire and auto service sectors. The acquired properties had a weighted average cap rate of 6.4% and had a weighted average lease term of 11.5 years. We executed on a number of notable acquisitions during the quarter, including our first target in Phoenix, Arizona. The location is a high performing small format store located on Camelback Road. We also acquired our first Wegmans in Chapel Hill, North Carolina. Wegmans is subject to a 20-year ground lease and is currently completing construction of their new store. In addition, during the quarter, we closed on two unique TJX combo stores in high barrier to entry markets, first in Eugene, Oregon, near the University of Oregon’s campus, where we acquired a TJ Maxx and Home Goods combo and then in Napa Valley, California, where we purchased the Marshalls and HomeGoods combo store. We continue to source and execute on several unique ground lease opportunities. Including the Chapel Hill, Wegmans, we acquired five ground lease properties for a total purchase price of $83 million during the quarter. Additional ground lease acquisitions included a Walmart and Home Depot in Pittsfield, Massachusetts, a Home Depot in Paterson, New Jersey, and a Walmart in Mena, Arkansas. Today, our ground lease portfolio spans 73 assets or nearly 9% of our total annualized base rents. At quarter end, over 91% of our ground lease rents were derived from investment grade retailers, including Costco, Walmart, Wegmans, all the Home Depot, Lowe’s and Wawa. Less than 1% of these rents is derived from sub-investment grade operators and the remaining 8% of the ground lease portfolio is leased deleting unrated retailers. We continue to uncover exciting ground lease opportunities and I look forward to updating you further next quarter. Through the first 9 months of the year, we have invested a record $977 million across 227 retail net leased properties, spanning 36 states across the country. Of the $977 million invested, approximately $958 million was via our acquisition platform. Of the 217 properties acquired year-to-date, an unparalleled 78% of the annualized base rent acquired comes from investment grade operators, while nearly 10% of rents acquired year-to-date are derived from ground leased assets. Given our record year-to-date acquisition volume, our strong pipeline and fortress-like balance sheet, we are increasing our 2020 acquisition guidance to a range of $1.25 billion to $1.35 billion from a previous range of $900 million to $1.1 billion. Notably, through the first 9 months of the year, we have already surpassed last year’s acquisition volume of $701 million by approximately 37%. At quarter end, our portfolio’s investment grade exposure stood at more than 62%, representing a year-over-year increase of more than 500 basis points and an impressive 2 years tax increase of 1,500 basis points. As we maintain our focus on leading retailers that are positioned to thrive in an omni-channel environment, I anticipate our investment grade concentration will continue its upward trajectory. Moving on to our development and partner capital solutions platforms, we had 10 development and PCS projects either completed or under construction during the first 9 months of the year that represent total committed capital of more than $37 million. Three of those projects were commenced during the quarter with total anticipated cost of just over $10 million. Construction continued during the third quarter on the company’s second development with Harbor Freight Tools in Weslaco, Texas, which is expected to be completed in the fourth quarter of this year. The company completed two development and PCS projects during the quarter, including the company’s first development with TJ Maxx in Harlingen, Texas adjacent to a high performing target and a Burlington interactive supply in Columbus, Ohio. Our growing pipeline is the results of our team’s effort to work with our retail partners to screen vacancies, to identify potential backfill candidates, as well as partner with developers looking for a new source of capital during these uncertain times. While we have strengthened our portfolio through record year-to-date investment activity, we have also diversified our portfolio through strategic asset management and disposition efforts. During the third quarter, we sold two more assets, including a franchise restaurant and a bank branch under a very short-term lease for gross proceeds of approximately $3.5 million at a 5.6% cap rate. Franchise restaurant exposure is now down to a mere 1.3% of our portfolio. Dispositions for the first 9 months of the year have totaled 16 assets for gross proceeds of approximately $48 million, with the weighted average cap rate of approximately 7%. Since the beginning of the year, we sold 12 franchise restaurants, reducing our exposure by approximately 130 basis points. Our asset management team continues to intently focus on addressing upcoming lease maturities. As a result of their efforts, our 2020 lease maturities stood at only 4 remaining lease expirations that represent just 0.2% of annualized base rents. We have also made material progress on our 2021 lease maturities, reducing our exposure roughly 160 basis points over the course of the year to only 1% of annualized base rents at quarter end. Notably, I am extremely pleased to announce that we executed three new 20-year leases with Wawa during the quarter that extended the lease maturities from 2021 to 2041 for all three locations. All three leases were set to expire in 2021 and represented our largest remaining 2021 lease maturity. At the time of the acquisition, the Wawa was acquired with limited term remaining. These three extensions serve as the testament to our acquisition or underwriting and market intelligence capabilities. As of September 30, our growing retail portfolio surpassed 1,000 properties and now contains 1,027 properties across 45 states. This represents a 25% increase in our total property count for only the first 9 months of the year, an impressive feat when you consider the quality of the assets and credits we have added. The portfolio remains effectively fully occupied at 99.8% and has a weighted average remaining lease term of 9.8 years. Our balance sheet remains in a very strong position. At quarter end, pro forma for our outstanding forward equity, our fortified balance sheet stood at approximately 3.2x net debt to recurring EBITDA. With more than $850 million in liquidity, we have tremendous flexibility as we look to continue to execute on very high-quality investment opportunities. During the quarter, we of course completed our inaugural public bond offering raising $350 million of 2.9% senior unsecured notes. The offering was extremely well-received and provides a new source of capital for our rapidly growing company. We received July, August and September rent payments from 96%, 97% and 99% of our portfolio respectively. In the aggregate, we received third quarter rent payments from approximately 97% of our portfolio entered into deferral agreements representing approximately 2% of third quarter rents. I will highlight that our collections data includes both base rents and recurring operating cost reimbursements. In addition, we include base rents and operating cost reimbursements charged to tenants in bankruptcy and have not made any COVID related adjustment to the denominator when making these calculations. Our goal was to provide 100% transparency to our investors on actual collections data. Our collections data demonstrates the importance of portfolio quality and a disciplined underwriting approach. We have been focused on credit quality and strong real estate fundamentals since the inception of our acquisition platform in 2010. Our discipline has paid dividends during these most stressful times. I would like to take a moment to welcome Craig Erlich as our Chief Investment Officer. After his invaluable contributions as a Director of the company, I am thrilled to have Craig join our growing organization as we continue to scale and develop our talent, seek to constantly improve our systems and processes, and position our company for future growth. Craig’s operational business development, sales and marketing expertise made an immediate impact on our organization. And I look forward to as many contributions in the future. I am equally pleased to welcome Mike Coleman to our Board of Directors. As many of you are familiar with Mike, he currently serves as the Senior Vice President and Treasurer at Hilton. Prior to his time at Hilton, Mike held multiple roles in investment banking and management consultants. We are very excited to have Mike’s finance, capital markets, and REIT industry experience to our board. To sum it up, our company is incredibly well-positioned with one of the strongest and fastest growing retail portfolios in the country, an unparalleled balance sheet and the people, processes and systems that will enable us to capitalize on the innumerable opportunities that we continue to uncover in this environment. Before handing the call off the Clay, I would like to thank our entire ADC team. I couldn’t be more proud of the challenges that this team has overcome and the outstanding accomplishments that they have achieved. Thank you for your patience. And I will turn it over to you, Clay.

Thank you, Joey. I will start with a balance sheet update and highlights from our capital markets activities over the past quarter. We had another very active quarter in the capital markets completing our inaugural public bond offering of $350 million of 2.9% senior unsecured notes due in 2013. As Joey mentioned, this transaction provides us with meaningful near-term liquidity and a new source of capital as our company continues to grow. We were again active in the equity capital markets entering into forward sale agreements through our ATM program to sell more than 885,000 shares of common stock at an average gross price of $67.47, for more than $58 million of anticipated net proceeds. On September 28, we settled 1.5 million shares from the forward equity offering completed with Cohen & Steers in April of this year. Upon settlement, we received net proceeds of approximately $88 million. At quarter end, we had approximately 6.3 million shares remaining to be settled under the Cohen & Steers transaction and our ATM forward offerings, which in total are anticipated to raise net proceeds of approximately $376 million upon settlement. In addition to our capital markets activities, we also generated roughly $13 million through our disposition activity and free cash flow after dividend during the quarter. This capital raising in combination with nearly full access to our $500 million revolver, provides the company with more than $850 million in liquidity. As of September 30, our net debt to recurring EBITDA was approximately 4.7x. Pro forma for the settlement of our outstanding forward equity offerings, our net debt to recurring EBITDA was approximately 3.2x. Total debt to enterprise value at quarter end was approximately 24.6%, while fixed charge coverage ratio, which includes principal amortization, stood at a company record 4.8x. Moving to earnings, core funds from operations for the third quarter was $0.81 per share, a 3.5% year-over-year increase. Adjusted funds from operations per share for the quarter, was $0.80, an increase of 4% year-over-year. During the past two quarters, we have elected to treat COVID-19 deferrals as delinquent receivables and our FFO measures include this revenue. On a quarterly and year-to-date basis, core FFO per share and AFFO per share were impacted by dilution related – under GAAP related to our recent forward equity offerings. Treasury stock has been included within our diluted share count in the event that prior to settlement, our stock trades above the deal price from the offerings. The aggregate dilutive impact related to these offerings was roughly a $0.01 to both core FFO and AFFO per share for the third quarter and approximately $0.02 for the 9-month period. General and administrative expenses in the quarter totaled $4.8 million. G&A expense was 7.5% of total revenue or 7% excluding the non-cash amortization of above and below market lease intangibles. Given the recent changes to the leadership team and new and recently amended employment agreements, we now anticipate G&A as a percentage of total revenue to be in the upper 7% range for 2020, excluding the impact of above and below market lease intangible amortization. Given the sheer level of investment activity and the expectation of adding approximately 300 properties this year, we continue to invest in the platform and our team to support our current and anticipated growth. We anticipate G&A expense as a percentage of revenues to continue to decline in future years. The company paid a dividend of $0.60 per share on October 9 to stockholders of record on September 25, representing a 5.3% year-over-year increase. This was the company’s 106th consecutive cash dividend, since our IPO in 1994. For the first 9 months of the year, the company declared dividends of $1.785 per share, a 5.3% increase over the comparable period in 2019. Our quarterly payout ratios for the third quarter were 74% of core FFO per share and 75% of AFFO per share respectively. For the first 9 months of 2020, our payout ratios were 75% of core FFO per share and 76% of AFFO per share respectively. These payout ratios are at the low end of the company’s targeted ranges and continue to reflect a very well covered dividend. With that, I would like to turn the call back over to Joey.

Thank you, Clay. At this time, operator, we open it up for any questions.

Thank you. [Operator Instructions] And our first question will come from Nate Crossett with Berenberg. Please go ahead.

Hey, good morning, guys.

Good morning, Nate.

Hey, wondering if you could characterize the deal flow a little bit, what’s kind of causing the acceleration in your view? Was there some bigger boxes in the quarter or it seems like every quarter I think you are going to hit and you beat it by a lot. So, what’s kind of causing that acceleration?

Well, I think as I mentioned in our prepared remarks, we acquired upwards of almost 100 properties during the quarter. So, I don’t think it’s necessarily bigger boxes while there are some including the Wegmans and Home Depot and Walmart ground leases we required. I think this company is positioned from a balance sheet perspective and a capability perspective to take advantage of opportunities that we see in the marketplace and obviously this quarter, we saw a significant number of those opportunities that are in our increased guidance projects that forward into the current quarter here into Q4. So, I think it’s a – our balance sheet enables it, our cost of capital enables it, but really, it’s a testament to the team uncovering unique opportunities really across the country.

Okay. I mean, I guess my question is, there like an upper bound that you guys like, realistically could achieve based on your current resources, or I know, you have added a few people this quarter, I am just trying to get a sense of like, what the max amount is assuming it is busy throughout the entire quarter?

Yes, I would tell you, I don’t see a maximum amount. I mean, we are as Clay mentioned we anticipate adding 300 properties to this portfolio this year, we surpass 1000 properties, we continue to invest, in not only the team in terms of adding new team members, but our systems, most notably, and then our prophecies. So this, company is set up from all three of those perspectives to continue to execute. And of course, the balance sheet is there to support it. So I don’t see an upper bound, I think that limit is set by the number of quality opportunities that we uncover, while we maintain our discipline, investing in best in class retail.

Okay, that’s helpful. And then just one, can you kind of help us size what the ground leads opportunity is for you guys? Obviously, the net lease market is huge. But how big is the total addressable market for ground leases for what you are looking at and can you kind of remind us how these deals come to you?

Yes, and your first point, I really don’t have any data in terms of the addressable market, either from $1 or property count, I tell you that number constantly is fluctuating with either net new transactions entering the market or new development of new sites. Now there are a number of ways those transactions come to us direct from developer through brokers directed by retailers. And so I would tell you, our traditional sourcing methodologies for turnkey, or typical turnkey assets also apply to ground lease assets most notable during the quarter, obviously, we are at about 9% ground leases now were up from just a bottom 8% investing significant capital in our first wide wins notably, the Home Depot in Paterson, New Jersey, a long term Home Depot ground lease, and then both the Home Depot and the Walmart, in Pittsfield, Massachusetts, outside of the Berkshire. So we continue to find these opportunities. There are a number of pipelines for Q4. And I anticipate our ground lease exposure will increase by the end of the year again.

Okay, is there anything? Is there any differences in the ground lease pricing versus normal acquisitions right now as M&A thing because of COVID that change that or has it been pretty consistent?

I will tell you, it’s pretty consistent ground leases historically, been valued between 100 and 200 basis points inside of like, similar turnkey leases. That said, we are executing on a number of fronts, with our partners, whether they are short term long term direct with the developer that is not materially different than our overall blended average in terms of acquisitions.

Okay, thanks, guys.

Thank you, Nate.

And the next question will come from Haendel St. Juste with Mizuho. Please go ahead.

Hey, good morning out there. Thanks for taking my questions.

Good morning. Haendel and how are you?

I am great, Joey, thank you. Hope you are too. I wanted to follow up on Nate’s question here on the acquisition during the quarter, certainly a level that surprised many of us. And I guess the question is, trying to figure out what the news, the sustainable run rate is going forward. So how much of what was bought during the quarter is more reflection of that spillover you refer to during your commentary has obviously raised a lot of capital in this year. So as we look ahead, and considering the $300 million that’s implied in the fourth quarter, how do we square that number? How should we think about acquisitions in the near term from a quarterly runway perspective?

Well, I appreciate the question. And I tell you from the answer the latter part of the question from a quarterly perspective, I think our increased guidance with a bid point of $1.3 billion is reflective of what we are seeing in today’s environment, and I think that is reflective of our current pipeline. In terms of sustainability, I will be honest I really don’t look at sustainability as a question for us on a go forward basis where real estate opportunities that are core, we will take advantage of all of the good transactions and execute on those transactions in the marketplace whether it is development acquisitions partner capital solution, or a myriad of other opportunities for us. So sustainability back really to Nate’s question in terms of being able to support the infrastructure, we will continue to invest in the infrastructure, but we are real estate sharpshooters, we are not simply spread investors and that’s why you see the portfolio construction as is and we will be positioned from a balance sheet and capability perspective to execute on anything we find and hit our investment criteria.

Okay, fair enough. Maybe shifting to the election and anything from perhaps a policy perspective that’s on your radar screen that concerns you, including but not just limited to potential 1031 repeal. And on the potential repeal here, I am curious what your view is on the direct and perhaps indirect consequences of a potential repeal to the industry overall and then more specifically to the public companies act?

I think most notably in 1031 and I have talked about it at length, I think we sold nearly 40 franchise restaurants into that environment, a significant number year-to-date, I think the number year- to-date was 12 or 13 in the prepared remarks. And so we have – that is the lower price point assets where we see the significant 1031 activity. That said, I am always hesitant with regulatory or tax structural changes to imply go forward material changes in the overall environment. What I think is more important and which I think will frankly outweigh any implications of the potential repeal of 1031 real property would be just the fun flows going into net leased in the stability of net lease as a commercial real estate cat asset category. As I mentioned on the last call, underwriting suburban or CBD office, underwriting shopping centers, malls or small strip whether they are grocery anchored or power centers is very challenging, underwriting a lodging asset is very challenging, I think the stability of net lease frankly, the format of net lease in the 21st century environment and investor appetite in net lease, whether it’s primary or secondary through investing in equities is going to continue to most likely overwhelm any changes in the regulatory environment. That said the majority of time when we run up against any competition for assets, it’s typically a 1031 purchaser they need secured debt in the form of a mortgage. They are under a time constraint. So if anything, I think the elimination of the 1031 provision is going to frankly clear out some competition for us.

Got it. Got it. Thanks. It does me with one more. I guess I am curious sort of at a high level, certainly you have built a pretty strong platform with very obvious offensive and defensive attributes, but your stock flagged here and pretty conservatively the last few months relative to some of your lower multiple peers, obviously, some of that is a bit of a catch-up trade, but curious if you think the market is paying enough attention to tenant credit risk and perhaps overlooking some of the embedded issues within certain pockets of the industry certainly raising your guidance here at the third time should hopefully draw some attention for the capital. But just curious if you think perhaps the market come a little too far too fast for certain names and perhaps not paying enough attention to underlying potential credit issues? Thanks.

Look, it’s a great question. I appreciate it. I am not one to be out there complaining generally about our stock price, but I will tell you this, I think this quarter reinforces what Agree Realty is all about. We have the best balance sheet, the best tenant base, the best growth profile, and a fantastic cost of capital. And so we are a rare thing at this point. We are both a solid defensive investment to guard against the uncertainty in today’s world and there certainly is a lot of uncertainty. And we are also a best-in-class growth company at the same time. S, it’s pretty hard to find both of those things in one place. I think that may explain why some investors are missing the boat and why we are trading 2x to 3x on a multiple basis below REIT on average, while everything about our results from every direction screams that we should be outperforming. And so look, it’s – I am not on the buy side, I understand the challenges, some of the challenges that the buy side have, but I think people were missing the defensive orientation of this portfolio in this balance sheet being the best retail portfolio in the country. But then the – on the offensive side the ability for us to grow on a risk adjusted basis earnings in a sustained way that are outsized relative to our peers, but also to the REIT industry. And so we will let the market take care of itself. All we can do day-in and day-out is come in, get to work and do what we do best and that’s investing in high-quality net lease retail real estate.

Thank you. I will give the floor.

Thank you.

And our next question will come from Katy McConnell with Citi. Please go ahead.

Thanks and good morning, everyone. So in the case of acquisition, how is your thought process changed around the size of transactions you are pursuing, and are you seeing more attractive in price opportunities for larger deals or any portfolios in the pipeline today?

Yes good morning Katy. I appreciate the question, I would tell you our thought process really has not changed. We are doing transactions as low as $1.2 million on a typical O’Reilly Auto Parts transaction, all the way up to the mid $30 million range for something like a Wegmans and in between, and so it’s a broad, dynamic and abroad marketplace, which we are addressing. We prefer to stay away from those $1.2 million transactions just because the inefficiencies involved. But again, we really start from a 30,000 foot perspective of the best omni-channel retailers in the world that are recession resistant and ecommerce resistant or our mission critical in an omni-channel world and then we underwrite it from the bottoms up. So price point, I would tell you is probably the last piece there, as long as we are comfortable with the residual the credit sector, the underlying real estate fundamentals, and of course, the pricing. That’s probably the last input that we’re looking at.

Okay, great thanks. And then can you talk generally about your approach to handling agencies if they were to happen in some of the less fungible box formats, like theaters or gym? And at this point what’s your expectation for tent fallout with some of the high-risk categories that you do have exposure to?

Yes, well, I think we have historically avoided those single purpose structures. Of course, we have identified those at risk categories we have done an absolute and relative basis are very de minimis for us. I tell you, both importantly in our real estate underwriting today is the fungibility of those boxes that is why you see us skewed toward ground leases. And then the 6000 square foot rectangles like AutoZone, O’Reilly, and Sherwin Williams in the Lake. And so obviously returning those boxes on a general from a general perspective is very challenging. Those are single purpose in nature. I think if you drill into our fitness portfolio, we have six LA premises. Specifically, they are extremely high quality real estate. You are talking about hard corners across from Costco’s urban assets, such as our LA premise in the nationwide headquarters in Columbus, Ohio, and some really high quality pieces of real estate. So we were very selective when we made those investments. And we think the residuals on those will pay it out. But as far as theaters go, I would tell you once a theater is probably always a theater.

Okay, great. Thanks.

Thank you.

The next question will be from Rob Stevenson with Janney. Please go ahead.

On 106,000 square foot of leasing in the third quarter, and the 436,000 year-to-date are versus the expirations. And what do you expect as you sort of roll forward over the next year, year and a half here with the lease renewal discussions with tenants?

Sorry, Rob would you repeat the first part of that question a cut out for us not sure if it was a cut off for everybody?

Yes, you did 106,000 of leasing in the third quarter and 436 year to date, where is the new rents versus expiring and what do you expect, as you are having discussions with tenants over the next, year for those type of renewals to sort of paying out it?

Yes got it. Thank you. So as I mentioned, the prepared remarks the 20-year Wawa extensions, we did not give a rent concession or TI, those are 20-year leases with contractual increases every 5 years. That was the biggest component of our maturities in 2021. As you can see on page five of the release 2021 only has 16 leases remaining that come up for expiration majority of them have 0.7% of total rents. And so it is 1% of total rent and so very de minimis in terms of square footage as well as ABR and so, our asset management team continues to monitor and proactively engage we don’t anticipate any material disruptions in the portfolio and we think occupancy is going to remain at an elevated level like it ends historically there. So, we’re in a fantastic position from a lease maturity profile. I would note, we include things even in here as temporary leases, like a Halloween pop up store this year in our four remaining leases. And so we have a couple of redevelopment opportunities embedded in there potentially will be executing on. And so we think the portfolio is in a very strong position.

Okay. And then given that your earlier comments about the 1031 market, I mean, are you sensing urgency on the part of some of these smaller players to get deals done? And if so, is your plan to accelerate dispositions of remaining franchisees and bank branches and things like that into the fourth quarter? I know that your guidance now is somewhere between $3 million and $27 million or something like that in the ballpark range for the fourth quarter implicitly, I mean is there a chance – is there a good chance you are going to hit the high-end of that range or is there something where you take a look at it and you are saying is now it’s not the time to sell? How are you thinking about disposition turning into year end and the first part of next year?

I think it’s truly the inverse. I mean franchise restaurants, as we discussed, is just over about 1% now and the majority of that is a Taco Bell franchisee on a master lease with high-performing stores. So, we have really taken our franchise restaurant exposure, I guess, just a few years ago from 4% to 5%, down to just over 1%. So, I would say we are very comfortable, you may see us selectively dispose of a couple more by year end, but we are very comfortable in terms of where that exposure stands today. On a risk adjusted basis, we just don’t think franchise restaurants or restaurants at all warrant 5.5 to 6 GAAP, unless they are on a ground lease structure and you get a building for free. I think what’s going to be more interesting is that if there is and by no means predicting anything, but if there is a democratic sweep here and Biden takes the Presidency of the democrats take the Senate is on the flipside, really. So, I am more focused on the inverse that once sellers potentially fear the repeal of real property in 1031 back to the early question, what is the – what is going to be the urgency to sell or opportunities on the flipside for us to acquire by year end, I think that could materialize obviously subject to election results in some very interesting opportunities, but only time will tell there.

Okay. And then I guess the last one from me would wind up being, I mean, what do you guys, any incremental demand out there on the part of sellers to take back units in transactions these days or they just all want cash?

OPE units?

Yes.

I would tell you, no, it’s a tool in our tool belt. We have looked at select transactions in terms of utilization of units as currency. We have never done an OPE unit holder – OPE unit transaction to-date. It’s something that we are open to doing for the right transaction. But I would tell you, we have not seen any incremental demand as of today.

Okay. Thanks, guys.

Thanks, Rob.

Our next question will be from RJ Milligan with Raymond James. Please go ahead.

Hey, good morning, guys. I wanted to follow-up on Katie’s questions on the potential fallout obviously, strong rent collections in September, but just for that small sliver of uncollected rents when you think you will have visibility, so the collectability of that rent, and more broadly, when you think we will have visibility as a sector for what the ultimate tenant fallout will be? And I am just curious, is this something that’s going to probably take another quarter or is there a much longer timeframe for the industry to resolve these unpaid rent buckets?

So, I think the at-risk sectors that have been identified, it’s going to take some time potentially from a 30,000 foot perspective for this health crisis to clear up with them to get visibility. I mean, we have tenants that are just unilaterally withholding rents and we are at different stages of collections with those tenants. I mean, obviously, The Gap and Simon has been high profile in that regard in the litigation. I think we are going to continue to see collections were at 99% in September, I anticipate October to be around rate at that level. And so I think we are going to see collections continue to be strong, especially with our portfolio, but I think the underlying health crisis here is going to drive the resolution of a number of these issues. What again I would point out is our exposure to these is extremely de minimis on an absolute and relative basis. And then secondarily, we are very comfortable with our positions. I don’t see Chapter 7 liquidation is taking place in a worst case scenario and so our underlying real estate and store performance of those limited positions with those at-risk tenants gives us great confidence there.

Okay. And then moving to cap rates, so as a company, the average cap rate going in for acquisitions has trended meaningfully lower over the past couple of years. And I am sure part of that’s a testament to what you guys have been buying in terms of higher quality Walmart type assets, but how do you expect that average cap rate are going in yields to trends as we move forward, given your thoughts on mix of what you are buying versus just market cap rates in general?

Well, I think market cap rates in general are going to be if anything will continue to compress. We are not a market buyer. And at least, we are a sharpshooter. I will tell you we continue to target 6.5 cap on an acquisition front plus or minus, obviously, that’s on a blended basis. It’s about a 200 basis point band 100 up 100 down from there, we have acquired almost 80% investment grade for the year, I think it’s basically unheard of in terms of acquisition, volume and quality. And then when you mix in the yield of 6.5%, approximately, I think it’s pretty, it’s a testament to the team. And it’s a phenomenal outcome for us. So obviously, our cost of capital over the last few years has dropped significantly, the 10 year Treasury has dropped significantly. And I think we are going to be able to maintain our performance here given all of those factors I mentioned.

Great, thanks guys.

Thanks, RJ.

And our next question will come from Linda Tsai with Jefferies. Please go ahead.

Hi, thanks for taking my question. Do you have a sense of how much you could comprise as your overall portfolio over time?

No, and we don’t have a target. Linda? It’s a good question. We don’t have a target. Obviously, that number continues to ramp it over 52% today. At the same time, we are huge fans of retailers. And I know I have talked about it at length, such as Hobby Lobby and Tractor Supply and Chick-fil-A in public. And so it’s really going to be opportunity, depending where we deploy that capital. There’s no doubt, I mentioned in the prepared remarks that we continue to anticipate that number to trend upwards. But we really start with that sandbox of 25ish retailers and the best operators in the country. This quarter, we added target and Wegmans, two of the four I had highlighted that we didn’t own in the portfolio in prior quarters. And so we will see what opportunities materialize. But I think, given the trend in trajectory, it’s very fair to say that number will continue to increase how far it increases, will really be subject to the opportunities that present themselves.

Thanks. And then can you provide some color on new developments in the pipeline and the potential for additional developments with tenants going forward what does the opportunity set have to look like for you to initiate new relationships like this?

Well, I think first and foremost, it has to be in you hit it on the head there, it has to be relationship base for us. And so as opposed to several years ago, we have no interest in doing a one off transaction on the development front, it takes 18 to 24 months for $2 million to $5 million for a single tenant. And so what you see our development team focused on is working with our existing tenants as well as new tenants and opportunities that we think are relationship based that have legs to provide outsized returns to us, we are not, of course, developing at 6.5% returns here. And that, frankly, our tenants that typically fall within our sandbox, and so we have made a number of efforts to continue to screen vacancies and work with our relationship tenants, those tenants in our sandbox to find appropriate opportunities for them to backfill we had a number of project three projects, I believe, start this quarter, our pipeline had similar activity that we anticipate announcing in Q4 and or Q1. But we are excited about the opportunities as private developers continue to struggle putting together either the capital stack and or have challenges in their own pipeline or portfolio that they are unable to execute on. So our PCS and development platform gives us two other growth prongs to take advantage of opportunities that fit the return profiles and risk thresholds that we like.

Thanks. And then how do they yield from developments compared to going in cap rates on acquisition?

Generally, at least a couple of 100 basis points higher on the development side, if we are going to put a shovel into the ground again and go through that 18 to 24-month organic development process, we are looking at a significant spread. On a PCS basis, it’s probably 100 to 150 basis points above acquisition yields. Those projects typically last from 6 to 9 months. So, we effectively cut the development cycle in half by leveraging our partners’ capability or the developers’ capabilities. And so we continue to see some unique opportunities on that front and I think in the upcoming quarters and years we will continue to potentially continue to ramp.

Thanks for that. So just one last one, you guys continue to fire on all cylinders, looking out to the year ahead, what do you see as the main risks?

Well, it’s a tough question. The main risk is very difficult to see any internal risk we update our threat with our SWOT analysis. In our risk assessments on a quarterly basis, it’s very difficult to find a risk embedded in our portfolio from a lease maturity standpoint, from a tenant credit standpoint, from a balance sheet standpoint, we are in a fantastic position. Obviously, there are macro risks that we have never anticipated inclusive now of pandemic there are on our threat matrix. But as I said, we have a defensive oriented portfolio with the best retailers in the country and a free standing basis. You combine that with our balance sheet in our ability to grow earnings, given the external growth that we have, and the opportunities that we have in front of us and I think it’s very difficult to decipher any risks, I think, most prudent is the manner in which we hedge risk and mitigate risk on the external capital raising front and we are a net lease read that the voracious the user of external capital, we have raised over a well over a $1 billion this year alone. And so using things like forward equity offerings and swaps and other derivatives, provide us the stability in terms of our cost of capital to do what we do best and that is execute on the real estate transactional front.

Thanks.

Thank you, Linda.

The next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.

Good morning.

Good morning, John.

Was anything new put into cash accounting or determined to be doubtful receivables during the quarter and if so, how much?

Good morning, John. We had two new tenants added are now being reflected on a cash basis. That’s it. So, that brings a total to 5 in addition to the 3 from last quarter, the total impact for 3Q is roughly $500,000, so very immaterial impact for us.

Okay, understood. And then maybe as we think about the $5.9 million or so of transferred and on uncollected rent in the first 9 months of this year, how much of that today comes from kind of the higher risk kind of industries, and maybe how much is from theatres specifically?

That’s what we have given the theatre at a monthly basis, we have given the this theatre collection rate, I think my challenge to the question is I think it doesn’t give an accurate picture really to shareholders and we are talking about half of the deferred rent is to an credit retailer on a relationship basis, I can guarantee you that gets paid back in total deferred and uncollected rent is under $6 million. If we are looking at conservative assumptions, you are talking about 1.5% pro forma potential 2021 ABR. And so it’s really a de minimis amount, and I would be hesitant to even focus on it given the de minimis exposure, we have to theatres with five total theaters in this portfolio in our theatre exposure and what 1.5% in the aggregate. I mean, I think we have been very clear that 99% collections in September, anticipating 99% collections in October, I think we have been very clear with all of our disclosures to-date. And I think a focus on theatres with this company is misguided.

I mean, I guess there was kind of a default, either in the theater space or maybe on DMB or Dave and Busters and what was kind to be the one time impact to kind of financial?

Well, Dave and Busters yesterday launched a $500 million unsecured bond offering they raise $200 million in equity earlier in the year. So again, I think I mean, Clay can get into the specifics, but I think we have three Dave and Busters total in the portfolio, experiential retail or entertainment retail in this portfolio is a total of 1.2%.

Okay, I guess one last kind of detail one, maybe what drove the impairment in the quarter?

That’s related to one health and fitness asset. The 24 Hour Fitness, the 24 Hour Fitness that filing a bankruptcy which is included the one 24 Hour Fitness in our portfolio, which was included in our collection or non-collection data embedded in that 99%.

Okay, that’s it for me. Thank you very much.

Thanks.

And the next question comes from Todd Stender with Wells Fargo. Please go ahead.

Hey, thanks. Most of my questions have been answered on the pricing front. But just looking at the weighted average lease term that you guys acquired at in Q3 is about 11 years. Can you kind of expand on that maybe what the ground leases were, they are probably pretty lengthy and it might shakeout some of the shorter term leases of the acquisitions in the quarter? Thanks.

Yes, good morning Todd the ground leases range from 10 years to the full 20 years I mentioned with the Wegmans. So I would tell you, they were add are significant or slightly above the 11.5 years weighted average lease term, we do did make some shorter term acquisitions, including shorter term being four to six years, including the Napa Valley, HomeGoods, TJ combo as well as the Eugene, Oregon, we will continue to look for shorter term opportunities with our relationship retailers, and our partners, understanding obviously store performance under the underlying real estate, but it is a as I mentioned, with the Wawa acquisition, it is a core competency this organization to use our market intelligence for our relationships to make those shorter term acquisitions, but no material deviation, given the ground leases there from the overall 11.5 years.

Thanks. That kind of leads me to the next piece. Is that what we look at it you guys is that value creation component? Can you speak more about that Wawa lease renewal? How many years were left on the original lease when you acquired the properties? And then maybe you kind of touched on the lease renewal before, but we didn’t hear about what maybe where the rents were and what they are going to?

Yes, so there was about 7.5 years when we acquired 7 to 7.5 years when we acquired those I believe in 2013 remaining 3 stores Wawa, typical Wawa gas and convenience store in the Mid-Atlantic. We bought them at the time from a non-traded REIT about 3 years after launching the acquisition platform. Obviously at the time, we are also working in Florida on development aspects with Wawa. Those leases were set to expire with an option notice period. Last quarter, they were set to expire in mid-2021. Those leases are now full 20-year leases with fixed contractual bumps every 5 years and the year one rent is same as the current rent. So, it was a big win for us, our largest lease maturity in the aggregate in 2021, with no TI dollars, no expenses out the door and increased rental rates, fixed increase rental rates over the 20-year period.

Great. Thank you, Joey.

Thank you, Todd.

The next question will be from Chris Lucas with Capital One Securities. Please go ahead.

Hey, good morning, guys. Just two follow-ups. Starting with a dividend policy, Joey, you mentioned you guys are significant acquirer, of the external capital or user of external capital, I guess just in terms of thinking through the dividend policy, any thoughts to growing the dividend at a slightly slower pace of FFO per share growth and trying to you know, retain more cash or is that, but of what you have targeted in the past as a payout ratio? Is that how should we be thinking about it going forward?

No, I appreciate the question, Chris. I think we are at the lower end of our stated range of 75% to 85%. We understand that there are obviously it’s a material first I should say it’s a material now source of capital, which Clay mentioned in the prepared remarks. But we understand as they are investors ranging from individual to rededicated that have different dividend and yield requirements or investment objectives. And so, the board which I anticipate raising the dividend in Q4, the board continues to believe that predictability, sustainability and transparency in terms of dividend policy is the number one objective to hopefully satisfy or at least find a middle ground from those that think we should reduce payout to increase payout because there is obviously a broad range of desire there.

Okay, thanks for that. And then just as it relates to going back to the transactions for the quarter, I guess, just trying to understand, are you guys underwriting more deals? Is there a better hit rate as competition pullback? Is there something going on that, we should be thinking about that is, sort of leading to the success you had this quarter?

Well, I think we are definitely underwriting more deals. The acquisition team has grown in headcount also has grown and experience and tenure and capabilities simultaneously I think our market presence and our market positioning is has only improved we have taken market share and mindshare from sellers, developers, brokers in the Lake and so the only thing that has not changed is our underwriting itself. This is a company that’s growing in scale and in dynamics as in every direction with every constituency in terms of real estate transactional end I tell you a big piece of that also is our relationships with our retailers, we are an active partner for them, not just a coupon clipper, we are on the ground, we are with them, we are talking to them. And we serve to frankly, a full service approach. And I can’t tell you the best compliments I get are about our lease administration, our asset management team, whenever there is a problem or a retailer has a challenge jump on, and I get those from CEO’s and heads of real estate from retailers frequently, so I would tell you, our hit ratio is probably about the same. But everything about this company is scaling and growing, as you can see in the results.

Great. Thank you.

And the next question is a follow-up question from Katy Mcconnell with the Citi. Please go ahead.

Hey, Joey, it’s Michael Bilerman. Good morning.

Good morning, Michael, how are you?

Great. To – last May you bought the Wawa on Market Street, one of the flagship properties $15 million, clearly you have a very close relationship with them. Is there opportunities for you to go further into urban street retail either buying locations from third parties or direct from retailers that make control that that are looking for liquidity? And is that an area that you would sort of see as an opportunity for you to deploy more capital?

It is it’s a timely question. During the Biden time Town Hall, they hit on showing the Wawa in the background, which I thought was pretty fun. Look, it’s not outsized for us. It’s a component of what we do, I will tell you that we do have some urban type college town transactions. I tell you the teacher acts in Eugene, Oregon is just north of the campus there. But we are not going to be urban explorers here. I don’t think it’s the appropriate time to do so. It is not the majority of what we do. But when we do find credit opportunities and unique pieces of real estate, whether they are on college campuses or urban environments, we certainly have the capabilities to typically dig through the condo documents structure, revise the lease, because they typically need some types of revisions to create an A truly net lease and then execute on the transaction. So it’s an opportunity for us there are one or two opportunities, like similar in the pipeline, but I don’t think it’s a necessarily a near-term growth catalyst.

Was there anything in third quarter that would have fit that type of purchase [indiscernible] tend to be chunkier deals, so…

Yes, no, no, I would tell you that the notable purchases during the third quarter, we went through with the TGS combo stores the Home Depot and Paterson, obviously, the Walmart ground leases, and then the Wegmans, but nothing urban that comes to mind in the quarter.

And then if we dial back to July, when we had the second quarter call, your implicit guidance for the back half was $500 million of acquisitions. Clearly, that’s now raised to $800 million, some increases $300 million, are you at least able to sort of identify at that moment in time, what you were looking at in terms of pipelines, and effectively what you closed on to drive that $300 million increase in overall activity?

So, I would tell you, I would take it back even further during the depths of the pandemic with the merge overnight and then the, what’s called the private placement transaction with Conan steers. We recognize very early on, that we had an opportunity that and a window that we wanted to attack. The pipeline grew very quickly commensurate or simultaneously with those trends with those two transactions plus the ATM activity. And so it’s been a very dynamic year since literally, the end of March when we effectively reopened the read equity markets. The pipeline continues to grow. Obviously, this quarter, was a remarkable quarter for us. Our Q4 pipeline is strong or Q1 pipeline is already growing. But I would tell you, it’s extremely fluid, it changes day to day. And we have nine people on our acquisition team and growing and they are out there scouring the earth for opportunities that fit within our sandbox. Does that answer your question?

Yes, I should know if there was something in July the lens that you had was we are going to do $500 million of deals in the back half. You are sitting here today, you are now forecasting $800million. Clearly, I don’t know if it was just a closed ratio versus what the pipeline is, or just how much the pipeline just rose, to allow you to do it. And just – there has been a number of questions around this is just trying to understand the dynamics, being 3 months later and almost doubling of the pipeline?

I know as the time of the guidance increased, we had visibility into the depth and breadth of the pipeline. Now, we obviously provide a range, because things can both fallout during diligence, but also get added in. Our average transaction is approximately 70 days from Letter of Intent execution to close. So, when we give increased guidance, we are not buying into that guidance after we give it. We have visibility into a pipeline that we believe will fall into that range. Hence, the increased guidance this time as well.

Great. And then I just want to talk a little bit about equity capital raising and how investors should think about timing but also structure, you have obviously capped a lot of different ways forward ATM, straight ATM marketed deal and then you did a direct deal with a single investor, a quite large one as well, which obviously was good for that investor, good probably, in terms of cost, but also didn’t provide the opportunity for all your other shareholders to maintain their stake in the company on an undiluted basis?

Right.

Given the pipeline that is coming forward, how should we think about replenishing the equity and the cash in terms of timing, is there a certain level of capacity that targeting to always have given a one or two quarter look at the acquisition volumes and then how do you think about executing that equity?

Well, I think Clay did a fantastic job and Peter Coughenour as well on Page 9 of our release with the table that shows given all the myriad of equity raising activities that you that you articulated at table on page nine is helpful. We still have $376 million in anticipated proceeds undrawn and unsettled from forwards. So we still have several hundred call it $800 million in buying power to stay within our targeted leverage range. So the flexibility and optionality provided by the myriad of transactions that are on that table, that you discuss gives us the flexibility and optionality to frankly take our time and raise capital when we think when and if we think it is needed, in terms of mechanisms to raise that capital, obviously, the unsecured and although they are offering was a great success, it was many times oversubscribed, we upsized it by $50 million. And then we have been I would tell you creative in ways to source equity, using all the different tools you talked about. And we will continue to be opportunistic and take advantage of opportunities when we think we are frankly, we were confident we are going to need that capital to fund our growing pipeline.

Right, but you are sitting here probably with two quarters of acquisitions, just given the pace of $300 million to $400 million, you effectively by the what was called February or March of next year, if you keep on the same pace, all of that will be utilized. And so it’s a question of how many quarters ahead, do you want to lock in that capacity? And whether investors should at least be mindful of likely another $300 million $400 million? I just don’t know how you’re thinking about how many quarters of runway, do you want to have and right now you have two?

I think it’s a great question. It’s not binary in terms of quarters of runway, it’s all I think it’s multi dimensional in terms of how large the pipeline is, in maybe two quarters and maybe three quarters and maybe one quarter, at the end of the day, to be honest. And so it is how large that pipeline is what the cost, obviously is, can we do it as an absolute share price basis? How can we raise equity on an efficient basis. So I think all the tools you articulated give us to do it that point in time, regular way on a forward basis. And so I look at our equity strategy similar to our strategy on the debt side, in terms of mitigating external volatility, not necessarily in totality to fund X number of quarters. But taking some of that risk off of the table because the one thing we do not control obviously, is the capital markets interest rate in our stock price. So it’s an overall hedging strategy that we deploy here. What I would tell you and I can guarantee us we are never going to lever this balance sheet and put herself in the position that we can’t execute on our pipeline. That said, we will continue to use different tools at our disposal to keep this balance sheet as one of the strongest to re-lend.

And then the last one, your health and fitness entertainment, obviously, you collected a significant amount during the quarter, the entertainment going from not getting paid to 100% being paid and health and fitness going up to 82% from 20% last quarter. I would assume most of the tenants may not be fully open. And so how did you come to agreed upon no deferrals getting paid, when most I would say of the industry are not finding the same fortunes? How much of it is asset specific? How much of it is you believe your lease contract does maybe help walk us through a little bit and I recognize it’s a much smaller amount in your portfolio than others, but you still had the success of being able to collect it when others haven’t? I don’t know if you are showing up the door with like two other big guys, specific for what are you doing to get better?

Yes, me, Clay and Peter – Clay and Peter are the collectors, the collection agency here. No, I would look, first I tell you given our de minimis exposure to these tenants we are not a critical piece of their payables here, right. And so we are not holding a significant number of assets of theirs. At the same time, we can be fairly aggressive in our collection efforts, we know of the underlying real estate that we have, we are very confident in that underlying real estate as well as the different remedies we have embedded in those leases. And so I tell you we took a hard line approach at the beginning of the pandemic, that we number one, we aren’t going to save a company, we are not your largest landlord, we have de minimis exposure to these at-risk tenants. Number two, we will not – we are not going to hand out things that aren’t for the benefit of our shareholders. If you want to give something in consideration, we will look at it and we can make a deal, but we have contractual rights that we are going to adhere to and we anticipate that you adhere to as well and that most notably the payment of rent. And so I would tell you, tenants have understood that. We have engaged in consistent and constant dialogue. Some of it has involved Clay and Peter’s collection agency. Some of it has been more friendly. But I think most notably, I would point out is we aren’t a significant creditor in terms of landlord to most of these tenants. It’s de minimis and frankly to deal with us in the headaches that we potentially could cause or pay us, I think it’s a lot easier just to pay us at the end of the day.

Alright. Thanks for the time, Joey.

Clay and Peter are tough guys, tough collectors. Thank you, Michael.

The next question is also a follow-up from Linda Tsai with Jefferies. Please go ahead.

Hi, just on your comment in terms of the amount of forward equity and liquidity available to remain within your targeted leverage range. What is that range again? And is there a different range you have thought about internally on a pro forma basis?

No, we have – we have – we have effectively lowered our range from 5x to 6x our stated range to 4x to 5x. I think that’s appropriate. As of September 30, we are at 4.2x pro forma for the settlement of that $376 million in equity. We were at 3.2x. So again, we have significant flexibility there in terms of optionality and to deploy that capital, which we will deploy of course. And so 4x to 5x, we think is appropriate given the environment, the uncertainty, this has never been a company if you look at our most recent investor deck that’s operated notably above that. It shouldn’t be a shock to anybody. Adding leverage is easy. Keeping a balance sheet in position to execute on a company that’s growing at this trajectory I think is more critical, especially when we are able to deliver the returns we can at that conservative leverage profile.

Thanks.

Thank you, Linda.

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

Well, I thank everybody for their patience. Good luck with the rest of earnings season and best wishes to you and your family during the holiday season. We will talk soon. Thank you.

Thank you, sir. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.