Good morning, and welcome to the Agree Realty Third Quarter 2020 Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. 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 Q3 2020 earnings call. Joey, of course, will be joining me this morning to discuss our Q3 year to date results. Please note that during this call, we will make in any forward looking statements for a number of reasons, including uncertainty related to the scope, severity and duration of the COVID-nineteen pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects 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 Form 10 ks and subsequent reports for a discussion of various risks and uncertainties underlying our forward looking statements.
In addition, we discuss non GAAP financial measures, including core funds from operations or core 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'll now turn the
call over to Joey. Thanks, Clay, and thank you all for joining us this morning. First off, I'd like to wish all of our listeners and their families' health and safety to continue to navigate a very challenging year. During the quarter, we invested a record $471,000,000 in 97 high quality retail net lease properties across our 3 external growth platforms. 91 of these properties were originated through our acquisition platform, representing record acquisition volume of more than $458,000,000 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 3rd quarter acquisition volume being comprised of ground leases and approximately 72% of 3rd quarter acquisition volume derived from investment grade retailers. The 91 properties acquired during the Home Improvement, Auto Parts, 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 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 2 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 HomeGoods 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 5 a Home Depot in Paterson, New Jersey and a Walmart in Maine, Arkansas.
Today, our ground lease portfolio 1% of our ground lease rents were derived from investment grade retailers, including Costco, Walmart, Wegmans, Aldi, 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 to leading unrated retailers. We continue to uncover exciting ground lease opportunities I look forward to updating you further next quarter. Through the 1st 9 months of the year, we've invested a record $977,000,000 across 2 27 retail net leased properties spanning 36 states across the country. Of the $958,000,000 was via our acquisition platform.
Of the 217 properties acquired year to date 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 Notably, through the 1st 9 months of the year, we've already surpassed last year's acquisition volume of $701,000,000 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 year stacked increase of 1500 basis points. As we maintain our focus 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 1st 9 months of the year that represent total committed capital of more than $37,000,000 3 of those projects were commenced during the quarter with total anticipated costs of just over $10,000,000 Construction continued during the Q3 on the company's second development with Harbor Freight Tools in Freight Tools in Weslaco, Texas, which is expected to be completed in the Q4 of this year. The company completed 2 development and PCS projects During the quarter, including the company's first development with TJ Maxx at Harlingen, Texas, adjacent to a high performing target and a Burlington Interactor supply in Columbus, Ohio. Our growing pipeline is the result of our team's effort to work with our retail partners to Green vacancies and to identify potential backfill candidates as well as partner with developers looking for a new source of capital during these uncertain times. While we've strengthened our portfolio through record year to date investment activity, we've also diversified our portfolio through strategic asset management disposition efforts.
During the Q3, we sold 2 more assets, including a franchise restaurant and a bank branch under a very short term lease Forgurus, gross proceeds were approximately $3,500,000 at a 5.6% cap rate. Franchise restaurant exposure is now down to a mere 1.3% of our portfolio. Dispositions For the 1st 9 months of the year, we've totaled 16 assets for our gross proceeds of approximately $48,000,000 with a 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 only 1% of annualized base rents at quarter end. Notably, I'm extremely pleased to announce that we executed 3 new 20 year leases with Wow Wat during the quarter that extended the lease maturities from 2021 to 2,041 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 Wow Was were acquired with limited term remaining.
These three extensions serve as a testament to our acquisition underwriting and market intelligence across 45 states. This represents a 25% increase in our total property count through only the 1st 9 months of the year, An impressive feat when you consider the quality of the assets and credits we've 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 form a for our outstanding forward equity, our fortified balance sheet stood at approximately 3.2x net debt to recurring EBITDA.
With more than $850,000,000 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 $350,000,000 of 2.9 percent 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 September rent payments from 96%, 97% 99% of our portfolio respectively. In the aggregate, we received 3rd quarter rent payments from approximately 7% of our portfolio entered into deferral agreements representing approximately 2% of 3rd quarter rents.
I will highlight that our collections data includes both base rent 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 adjustments to the denominator when making these calculations. Our goal is 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'd like to take a moment to welcome Craig Ehrlich as our Chief Investment Officer. After his invaluable contributions as a Director of the company, I'm thrilled to have Craig join our growing organization as we continue to scale and develop our talent, seek to constantly improve our Marketing expertise has made an immediate impact on our organization, and I look forward to his many contributions in the future. I'm equally pleased to welcome Mike Holman 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 Consultant. We're very excited to have Mike's Finance, Total markets and REIT industry experience to our Board. To sum it up, our company is incredibly well positioned with 1 of the strongest and fastest growing retail portfolios in the country and 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 to 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'll turn it over to you Clay.
Thank you, Joey. I'll start with the 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 $350,000,000 of 2.9% senior unsecured notes due in 2,030. 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 $67.47 for more than $58,000,000 of anticipated net proceeds.
On September 28, we settled 1,500,000 shares from the forward equity offering completed with Cohen and Steers in April of this year. Upon settlement, we received net proceeds of approximately $88,000,000 At quarter end, we had approximately 6 3,000,000 shares remaining to be settled under the Cohen and Sears transaction and our ATM forward offerings, which in total are anticipated to raise net proceeds of approximately $376,000,000 upon settlement. In addition to our capital markets activities, We also generated roughly $13,000,000 through our disposition activity and free cash flow after dividend during the quarter. This capital raising in combination with nearly full access to our $500,000,000 revolver provides the company with more than $850,000,000 in liquidity. As of September 30, our net debt to recurring EBITDA was approximately 4.7x.
Pro form a for the settlement of our outstanding forward equity offerings, our net debt to recurring EBITDA was approximately 3.2 times. 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 Q3 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-nineteen 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 under GAAP related to our recent forward equity Treasury stock is 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 penny to both core FFO and AFFO per share for the 3rd quarter and approximately $0.02 for the 9 month period. General and administrative expenses in the quarter totaled $4,800,000 G and A expense was 7.5 percent 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 and A as a percentage of 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 and 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 1st 9 months of the year, the company dividends of $1.785 per share, a 5.3% increase over the comparable period in 2019.
Our quarterly payout ratios for the Q3 were 74% of core FFO per share and 75% of AFFO per share, respectively. For the 1st 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'd like to turn the call back over to Joey.
Thank you, Clay. At this time, operator, we will open it up for any questions.
Thank you. We will now begin the Q and A session. 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. Now 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're 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 It's necessarily bigger boxes, while there are some including the Wegmans and Home Depot and Walmart Brownlee's as we acquired. 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 in our increased guidance projects that forward into the current quarter here into Q4. So I think it's 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
Okay. I mean, I guess my question is, is there like an upper bound that you guys like Realistically, could achieve based on your current resources or I know you've added a few people this quarter. I'm just trying to get a sense of like what the max amount is, assuming it's busy throughout the entire quarter?
Yes, I would tell you, I don't see a maximum amount. I mean, we were as Clay mentioned, we anticipate adding 300 This portfolio this year, we surpassed 1,000 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 processes. 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 and invest in best in class retail.
Okay. That's helpful. And then just one, Can you kind of help us size what the ground lease opportunity is for you guys? Obviously, the non lease market is huge, but How big is the total addressable market for ground leases for what you're looking at? And can you kind of remind us How these deals come to you?
Yes. On your first point, I really don't have any data in terms of the addressable market, either from a dollar or property count, I'd tell you that number constantly is fluctuating with Either net new transactions entering the market or new development of new sites. 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 Typical turnkey assets also apply to ground lease assets. Most notable during the quarter, obviously, we're at about 9% Ground lease is now up from just approximately 8%, investing significant capital in our first Wegmans, 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 them in our pipeline 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 difference In the ground lease pricing versus normal acquisitions right now, has there been anything because of COVID that's Change that or have it been pretty consistent?
I'd tell you it's pretty consistent ground leases historically been valued Between 100 basis points and 200 basis points inside of like similar turnkey leases. That said, we're executing on a number of fronts With our partners, whether they're short term, long term, direct with the developer, that isn't materially different than our overall blended average in terms of acquisitions.
And the next question will come from Haendel St. Juste with Mizuho. Please go ahead.
Hey, good morning, operator. Thanks for taking my questions.
Good morning, Andrew. How are you?
I'm great, Jerry. Thank you. Hope you are too. 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 What was bought during the quarter was more a reflection of that spillover you referred to during your commentary. You've obviously raised a lot of capital early this year. So As we look ahead and considering the $300,000,000 that's implied in the 4th quarter, how do we square all that? How should we think about acquisitions in the near term from a quarterly run rate perspective?
Well, I appreciate the question. And I tell you from to answer the latter part of the question, from a quarterly perspective, I think our increased guidance with a midpoint of It's reflective of our current pipeline. In terms of sustainability, I'll be honest, I really don't look at sustainability as a question For us on a go forward basis, we're real estate opportunists that are core. We will take advantage of all of the good transactions and execute On those transactions in the marketplace, whether it's 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'll continue to invest in the infrastructure, but we are real estate sharpshooters.
We're 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 that hit our investment criteria.
Okay, fair enough. Maybe shifting to The election and anything from perhaps the 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'm curious what your view is on the direct and perhaps indirect consequences of the potential appeal to the industry overall and then more specifically to the public company side?
Well, I think Most notably in 10/31 and I've talked about it in length. I think we sold nearly 40 franchise restaurants Into that environment, a significant number year to date. I think the number of the year to date was 12 or 13 in the prepared remarks. And so that is the lower price That's where we see the significant 1031 activity. That said, I'm 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 for repeal of 1031 Real Property Would be just the fund flows going into net lease and the stability of net lease as a commercial real estate asset category. As I mentioned on the last call, underwriting suburban or CBD office, underwriting shopping centers, malls or small strip, whether they're grocery anchored or power centers It's very challenging. Underwriting a lodging asset is very challenging. I think the stability of net lease, frankly, The format of net lease in the 20 percent surety 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 a secured debt in the Mortgage, they're under a time constraint. So if anything, I think the elimination of the 1031 division is going to frankly clear out some competition for us.
Got it. Got it. Thank you. And you all indulge me with one more. I guess I'm curious at a high level, certainly you've built a Pretty strong platform with very obvious offensive and defensive attributes, but your stock flagged 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 3rd time should hopefully draw some attention from 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'm not one to be out there complaining generally about our stock price. I'll tell you this, I think this quarter reinforces what Avery Realty is all about. We have the best balance sheet, the best tenant base, the best growth profile Fantastic cost of capital.
And so we are a rare thing at this point. We're both a solid defensive investment to guard against the uncertainty in today's world and there certainly is a lot of uncertainty. And we're also a best in class growth company at the same time. So it's pretty hard to find both of those things in one place. I I think that may explain why some investors are missing the boat, and why we're trading 2 to 3 turns on a multiple basis below REITs 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 And the challenges, some of the challenges that the buy side have, but I think people are missing the defensive orientation of this portfolio and 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. All you look for.
Thank you.
And our next
question will come from Katy McConnell with Citi. Please go ahead.
Great. Thanks and good morning everyone. So as you've increased the pace of acquisition, how has your thought process changed around the size of transactions And are you seeing more attractive and priced opportunities for larger deals or any portfolios in the pipeline today?
Yes. Good morning, Katie. I appreciate the question. I would tell you, our thought process really hasn't changed. We're doing transactions as low as $1,200,000 on O'Reilly or Auto Parts transaction all the way up to the mid $30,000,000 range for something like Michael Wegmans and in between.
And so it's a broad dynamic in a broad marketplace, which we're addressing. We prefer to stay away from those 1,200,000 Dollar transaction just because of 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 e commerce resistant or are mission critical in an omnichannel 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're 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 vacancies if they were to happen in some of the less Fungible box formats like theaters or gyms. And at this point, what's your expectation for tenant fallout with some of the higher risk categories that you do have
Of course, we've identified those at risk categories, which on an absolute and relative basis are very de minimis for us. I tell you, Most importantly in our real estate underwriting today is the fungibility of those boxes. That's why you see a skew toward ground leases and then the 6,000 square foot rectangles like Auto Owens O'Reilly and Sherwin Williams and the like. And so I would say retenanting those boxes on a general from a general perspective is very challenging. Those are single purpose Nature, I think if you drill into our fitness portfolio, we have 6 LA businesses.
Specifically, they are extremely high quality real estate. You're talking about Hard corners across from Costco's urban assets, such as our LA Fitness 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, would tell you what's a theater is probably always a theater.
Okay, great. Thanks.
Thank you.
And the next question will be from Rob Stevenson with Janney. Please go ahead.
On the 106,000 square foot of leasing in the 3rd 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 year with the lease renewal Discussions with tenants?
So Rob, will you repeat the first part of that question? I think it cut out for us. I'm not sure if it cut out for everybody.
Yes. You did $106,000 of leasing in the 3rd quarter and $436,000 year to date. Where's the new rents versus expiring? And where do you expect As you're having discussions with tenants over the next year for those type of renewals to sort of pan out at?
Yes, got it. Thank you. So as I mentioned in 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 5 of the release, 2021 only has 16 leases remaining that come up for expiration, majority of them have asked.
It's 0.7% of total rents. And so it is or 0.1% sorry, 1% of total rents. And so Very de minimis in terms of square footage as well as ABR. And so our asset management team continues to monitor We don't anticipate any material disruptions in the portfolio and we think occupancy is going to remain at an elevated level like Historically, sir. 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 This year in our 4 remaining leases. And so we have a couple of redevelopment opportunities embedded in there potentially we'll be executing on. And so we think the portfolio It's in a very strong position.
Okay. And then given 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 Is your plan to accelerate dispositions of remaining franchisees and bank branches and things like that into the 4th quarter? I know that Your guidance now is somewhere between $3,000,000 $27,000,000 or something like that in the ballpark range for the Q4 implicitly. I mean, is there a chance is there a good chance you're going to hit the high end of that range? Or is there something where you take a look at it and you're saying is now is not the time to sell?
How are you thinking about dispositions heading into year end and the 1st part of next year?
I think it's truly the inverse. I mean franchise restaurants as we discussed is just over about 1 percent now and the majority of that is a Taco Bell franchisee on a master lease with high performing stores. So we've really taken our franchise restaurant exposure, I guess, Just a few years ago from 4% to 5% down to just over 1%. So I'd say we're very comfortable. You may see us selectively So, a couple more by year end, but we're very comfortable in terms of where that exposure stands today.
On a risk adjusted basis, we just don't think franchise Restaurants at all warrant 5.5 to 6 cap unless they're 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 I'm by no means predicting But if there is a Democratic sweep here and Biden takes the presidency and the Democrats take the Senate is on the flip side really. So I'm more focused on the inverse 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 flip side for us to acquire by year end? And 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 for 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?
Oh, you mean OP units? Yes. I would tell you, no, it's a tool in our tool belt. We look at select
transactions in terms of utilization of units as currency.
We have never done an Actions in terms of utilization of units as currency, we have never done an OP unit holder OP 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.
The 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 do you think you will have visibility So the collectability of that rent and more broadly, when do you think we will have visibility as a sector for what the ultimate tenant fallout Will be. I'm 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?
Well, I think the at risk sectors that have been identified, it's going to take some time potentially from a 1,000 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're at different stages Of collections with those tenants. I mean, obviously, the gap in Simon has been high profile in that regard in the litigation. I think we're going to continue to see collections. We're at 99% in September.
I anticipate October to be around rate at that level. And so I think we're going to see collections continue to be strong, especially with our portfolio. But I think the underlying health crisis year is going to drive the resolution of a number of these issues. What again, I'd point out is our exposure to these is extremely de minimis on an absolute and And then secondarily, we are very comfortable with our positions. I don't see Chapter 7 liquidations taking place in a worst case scenario.
And so Our underlying real estate to 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'm 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 going in yield to trends As we move forward, given your thoughts on mix of what you're buying versus just market cap rates in general?
Well, I think market cap rates in general are going to be, if anything, we'll continue to compress. We're not a market Buyer in the least, we are a sharpshooter. I'll tell you, we continue to target 6.5% cap on an acquisition for a 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've acquired almost 80% investment grade for the year. I think it's It's basically unheard of in terms of acquisition volume and quality. And then when you mix in the yield of 6.5% at 6.5 Said 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're 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 IG could comprise of 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 at over At the same time, we're huge fans of retailers and I know I've talked about it at length such as Hobby Lobby and Tracker Supply and Chick Fil A and Publix.
And so it's really going to be opportunity dependent where we deploy that capital. There's no doubt, as I mentioned in In the prepared remarks, we continue to anticipate that number to trend upwards, but we really start with that sandbox of 25 ish retailers The best operators in the country, this quarter we added Target and Wegmans, 2 of the 4 I had highlighted that we didn't own in the portfolio in prior quarters. And so we'll see what opportunities materialize. But I think given the trend and 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 relationships like this?
Well, I think 1st and foremost, it has to be and you hit it on the head there, it has to be relationship based And so as opposed to several years ago, we have no interest in doing a one off transaction on the development front that takes 18 months to 24 months For $2,000,000 to $5,000,000 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 on opportunities that we think are relationship based that have lagged to provide outsized returns to us. We're not, Of course, developing at 6.5% returns here, and that frankly are tenants that typically fall within our sandbox. And so we've made a number of Efforts to continue to screen vacancies and work with our relationship tenants, those tenants in our sandbox Find appropriate opportunities for them to backfill. We had a number of projects, 3 projects I believe start this quarter.
Our pipeline has similar activity that we Putting together either the capital stack and or have challenges in their own pipeline or portfolio that they're unable to execute on. So Our PCS and development platform gives us 2 other growth prongs to take advantage of opportunities that fit the return profiles and risk thresholds That we like.
Thanks. And then how do the yield fund developments compared to going in cap rates on acquisitions?
Generally, at least a couple of 100 basis points higher on the development side. If we're going to put a shovel into the ground again and go through that 18 to 24 month organic development process, We're looking at a significant spread. On a PCS basis, it's about, call it, 150 or 100 basis points 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' or the developers' capabilities. And so we continue to see some unique opportunities on that front.
And I think in the upcoming quarters years, we'll That could potentially continue to ramp.
Thanks for that. Sorry. Just one last one. You guys continue to fire on all cylinders. Looking out to the year ahead, what do you
Well, it's a tough question. The Main risk, it's very difficult to see any internal risks. We update our threat, our SWOT analysis and 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're in a fantastic position. Obviously, there are macro risks that we were never anticipated, inclusive now of pandemics that are on our threat matrix.
But as I said, we are a defensive oriented portfolio with the best retailers in the country on a freestanding basis. You combine that with our balance sheet and our ability to grow earnings, given the external growth that we have and the opportunities that we have in front of 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. We are a net lease REIT that's a voracious The user of external capital, we've raised over well over $1,000,000,000 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,
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 2 new tenants added or now being reflected on a cash basis. So that brings the 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.
Understood. And then maybe as we think about the $5,900,000 or so of kind of deferred and uncollected rent In the 1st 9 months of this year, how much of that today comes from kind of these high risk tenant industries? And maybe how much is from theaters specifically?
We've given the theater on a monthly basis, we've given the theater collection rate. I think My challenge to the question is, I think it doesn't give an accurate picture really to shareholders. I mean, we're talking about half of the deferred rent is an A credit retailer on a relationship basis, I can guarantee you that gets paid back. In total deferred and uncollected rights is under $6,000,000 If we're looking at Conservative assumptions, you're talking about 1.5 percent pro form a 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 theaters with Five total theaters in this portfolio and our theater exposure at what 1.5% in the aggregate.
I mean, I think we've been very clear that 99% collections in September, In September, anticipating 99% collections in October, I think we've been very clear with all of our disclosures to date. And I think a focus on theaters with this company is misguided.
But I mean, I guess if there was kind of a default either in the theater Space or maybe on D and B or Dave and Buster's, I mean what would kind of be the one time impact to kind of financials?
Well, Dave and Buster's yesterday launched a $500,000,000 unsecured bond offering. They raised $200,000,000 in equity earlier in the year. So Again, I think I mean Clay can get into the specifics, but I think we have 3 Dave and Buster's total in the portfolio experiential retail or entertainment retail in this portfolio Is a total of 1.2%.
Okay. And then I guess one last kind of detail one. Maybe what drove the impairment in the quarter?
That was related to one health and fitness asset.
The 24 Hour Fitness. Yes. 24 Hour Fitness, that filing in bankruptcy, which is included the 124 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.
And the next question comes from Todd Stender with Wells Fargo. Please go ahead.
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 And Q3 is about 11 years. Can you kind of expand on that maybe what the ground leases were? They're probably pretty lengthy And it might shake out some of the shorter term leases of acquisitions in the quarter. Thanks.
Yes. Good morning, Todd. The ground leases range from 10 years to the 20 years I mentioned with the Wegmans. And so I would tell you they were at or slightly above the 11.5 years weighted average Lease term, we did make some shorter term acquisitions, including shorter term being 4 to 6 years, including the Napa Valley HomeGoods TJ combo as well as the Eugene, Oregon. We'll continue to look for shorter term opportunities with our relationship retailers and our partners, Understanding obviously store performance, the underlying real estate, but it is a as I mentioned with the Wow Acquisition, it is a core competency of this organization to use our market intelligence 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 you guys as 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 maybe where the rents were and what they're going to?
Yes. So there was about 7.5 years when we acquired 7 to 7 We acquired those, I believe in 2013 remaining. Three 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 were 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-twenty 21. Those leases are now full 20 year leases with fixed contractual bumps every 5 years And the year 1 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 increased rental rates over the 20 year period.
Great. Thank you, Joey.
Thanks, 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 the dividend policy, Joe, you had mentioned you guys are a significant Acquirer of 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 AFFO per share growth and trying to retain more cash or is that Sort of what you've targeted in
the past as a payout ratio, is
that how should we be thinking about it going forward?
No, I appreciate question, Chris. I think we're at the low 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 that there are investors ranging from individual to rededicated that have Dividend and yield requirements or investment objectives. And so the Board, which I anticipate raising the dividend in Q4, the Board continues We 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 who think we should reduce payout to increase payout because there's obviously a broad range of desires there.
Okay. Thanks for that. And then just as it relates 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? Has competition pulled back?
Is there something going on that we should be thinking about is sort of leading to the success you had this quarter?
Well, I think we're definitely underwriting more deals. The acquisition team has grown in headcount, also has grown in Market share and mind share from sellers, developers, brokers and the like. And so the only thing that hasn't changed is our underwriting itself. This is a company that's growing in scale and in dynamism in every direction with every constituency in terms of real estate transactional end. I'd tell you a big piece of that also is our relationships with our retailers.
We are an active partner for them, not just the coupon clipper. Compliments I get are about our lease administration, our asset management teams, whenever there is a problem or a retailer has a challenge, jump on. And I get those from CEOs 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 Citi. Please go ahead.
Hey, Joey, it's Michael Bilerman. Good morning.
Good morning, Michael. How are you?
Great. Last May, you bought The Wawa on Market Street, one of their flagship properties, dollars 15,000,000 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 may control that, that are looking for liquidity. And is that an area that you'd sort of see as an opportunity for you to deploy more capital?
It is. It's a timely question during the Biden I'm Tom Hall. They said I'm showing the wawa in the background, which I thought was pretty fun. Look, it is It's not outsized for us. It's a component of what we do.
I will tell you that we do have some urban I'd tell you the TJACs 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 And unique pieces of real estate, whether they're on college campuses or urban environments, we certainly have the capabilities to Typically dig through the condo document structure, revise the lease because they typically need some types of revisions to create a truly net lease And then execute on the transaction. So it's an opportunity for us.
There are 1 or 2 opportunities like similar in the pipeline, but I don't think Necessarily a near term growth catalyst.
And there wasn't a was there anything in the Q3 that would have fit that Type of purchase? You said you tend to be chunkier deals.
No, I would tell you that the notable purchases during the Q3, we went through with the TJXCOMBO stores, the Home Depot in Patterson, 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 Q2 call, your implicit guidance for the back half was $500,000,000 of Sai, at that moment in time, what you were looking at in terms of pipeline and effectively what you closed on to drive $300,000,000 increase in overall activity.
So I would tell you,
I mean, I would take
it back even further. During the depths of the pandemic with the March overnight and then the let's call it the private placement transaction With Kona and Sears, we recognized very early on that we had an opportunity that and a window that we wanted to attack. The pipeline grew very quickly commensurate 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 REIT Equity markets. The pipeline continues to grow.
Obviously, this quarter was a remarkable quarter for us. Our Q4 pipeline is strong. Our Q1 pipeline is already growing. But I would tell you, it's extremely fluid. It changes day to day.
We have 9 people Our acquisition team is growing, and they are out there scouring the earth for opportunities that fit within our sandbox. Does that answer your question? Yes.
I just didn't know if there was something in July, the lens that you had was we're going to do $500,000,000 of deals in the back half. You're sitting here today, you're now forecasting $800,000,000 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 that's just there's been a number of questions Around this, I was just trying to understand the dynamics being 3 months later and almost doubling of the pipeline.
At the time of the guidance increase, we had visibility into the depth and breadth of the pipeline. Now we obviously provide a range because things can both Fall out during diligence, but also get added in. I mean, our average transaction is approximately 70 days from letter of intent execution to close. So when we give increased guidance, we're not buying into that guidance after we give it. We have visibility into a pipeline And we believe we'll fall into that range, hence the increased guidance at this time as well.
Right. 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've obviously tapped 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 Company on an undiluted basis. Given the pipeline that's 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 1 or 2 quarter look at acquisition volumes, and then how do you think about executing that equity?
Well, I think Clay did a fantastic job and Peter Koganauer as well on Page 9 of our release with the table that shows Given all the myriad of equity raising activities that you articulated, that table on Page it's helpful. We still have $376,000,000 in anticipated proceeds undrawn and unsettled from forwards. So We still have several 100, call it, dollars 800,000,000 in buying power to stay within our targeted leverage range. So the flexibility and Provided by the myriad of transactions that are on that table that you discussed gives us the flexibility and optionality To frankly take our time and raise capital when we think when and if we think it's needed in terms of mechanisms to raise that Capital, obviously, the unsecured inaugural offering was a great success. It was many times oversubscribed.
We upsized it by $50,000,000 And then We have been, I'd tell you, creative in ways to source equity, using all those different tools you talked about. And we'll continue To be opportunistic and take advantage of opportunities when we think we are frankly, we're confident we're going to need that capital to fund our growing pipeline.
Right. But you're sitting here probably with 2 quarters of acquisitions, just given the pace of $300,000,000 to $400,000,000 you effectively by the let's call it February or March of next year, if you keep on the same pace, All of that will be utilized. And so it's just 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 $300,000,000 $400,000,000 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 2.
I think It's a great question. It's not binary in terms of quarters of runway. I think it's multidimensional in terms of how large the pipeline is. It may be 2 quarters, it may be 3 quarters, it may be 1 quarter at the end of the day, to be honest. And so it's how large that pipeline is, what the cost Obviously is, can we do it at 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 at 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 and our stock Right. So it's an overall hedging strategy that we deploy here. What I will tell you and I can guarantee you is we're never going to lever this balance sheet and put ourselves in the position that we Execute on our pipeline.
That said, we'll continue to use different tools at our disposal to keep this balance sheet as one of the strongest
And then just the last one, your health and fitness entertainment, obviously, you collected a significant amount during the quarter, Yes, about 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? Just 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're showing up the door with like 2 other big Guys, what are you doing to get that done?
Yes, me, Clay and Peter. Clay and Peter are the collectors. Yes. The collection agency here. No, I would look, first I'd tell you given our de minimis exposure to these tenants, we're not a critical piece of their payables Right.
And so we're not holding a significant number of assets up there. So at the same time, we can be fairly aggressive in our collection efforts. We know of the underlying real estate that we have. We're very confident in that underlying real estate as well as the different The remedies we have embedded in those leases. And so I tell you, we took a hard line approach at the beginning of the pandemic Number 1, we aren't going to save a company.
We're not your largest landlord. We have de minimis exposure to these at risk tenants. Number 2, We will not, right, 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're going to adhere to and we anticipate that you adhere to as well and that most notably payment of rent. And so I would tell you tenants have understood that.
We've 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 and the headaches that we potentially could cause or I think it's a lot easier just
to pay us at the end of the day.
All right. Thanks for the time, Joey.
Question is also a follow-up from Linda Tsai with Jefferies. Please go ahead.
Hi. Just on your comment in terms of the amount What is that range again? And is there a different range you've thought about internally on a pro form a basis?
No. Yes, we have we've effectively lowered our range from 5 to 6 times our stated range to 4 to 5 Times, I think that's appropriate. As of the September 30, we are at 4.2 times. Pro form a for the settlement of that $376,000,000 in equity, We were at 3.2x. So again, we have significant flexibility there in terms of optionality and to deploy that Which we will deploy, of course.
And so, 4 to 5 times, 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're 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 Egry for any closing remarks.
Well, I thank everybody for their patience. Good luck for the rest of earnings season And best wishes to you and your family during the holiday season. We'll talk soon. Thank you.
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.