Good morning and welcome to the Agree Realty Second Quarter 2021 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 Peter Toginaro, Vice President, Corporate Finance.
Please go ahead, Peter.
Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's 2nd quarter 2021 earnings call. Discussing our results on today's call will be Joey Agree, President and Chief Executive Officer and Simon Leopold, Chief Financial Officer. Before turning the call over to Joey, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward looking under federal securities law.
Our actual results may differ significantly from the matters discussed in any forward looking statements for a number of reasons, including uncertainty related 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 our tenants. Please See yesterday's earnings release and our SEC filings, including our latest annual report on 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 will now turn the call over to Joey.
Thank you, Peter. I'm very pleased to report that we continued our strong start to the year, Achieving record investment volume of more than $750,000,000 during the 1st 6 months of 2021. Robust and Quality investment activity further increased our investment grade concentration and raised our ground lease exposure to a record of nearly 13%. Our investment activities during the quarter were supported by more than $1,000,000,000 of strategic capital markets transactions that fortified our best in class balance sheet and positioned our company for continued growth in the quarters ahead. During the Q2, we invested approximately 3 $6,000,000 and 59 high quality retail net lease properties across our 3 external growth platforms.
54 of these properties were originated through our acquisition platform, representing acquisition volume of more than $345,000,000 The 54 properties acquired during the Q2 are leased to 32 tenants operating in 18 distinct retail sectors, including best in class operators in the off price, home improvement, auto parts, general merchandise, dollar store, convenience store, crafts and novelty, Grocery and Tire and Auto Service sectors. The acquired properties had a weighted average cap rate of 6.2% and a weighted average lease term of 11.8 years. Through the 1st 6 months of this year, we've invested a record $756,000,000 into 146 retail net leased properties Spanning 35 states and 24 retail sectors. Approximately $732,000,000 of our investment activity originated from our acquisition platform. Roughly 75% of the annualized base rents acquired in the first half of the year comes from leading investment grade retailers, While almost 1 third of annualized base rent is derived from ground leased assets.
These metrics demonstrate our continued focus on best in class opportunities with leading omnichannel retailers, while still achieving record results. Given our record acquisition activity to date and visibility into our pipeline, We are increasing our full year 2021 acquisition guidance to $1,200,000,000 to $1,400,000,000 During this past quarter, we executed on several unique and notable transactions, including a new small format Target on the University of Georgia's campus in Athens. We're extremely pleased to expand our relationship with Target as well as add another unique street retail asset to our growing portfolio. We continue to invest in market dominant grocers during the quarter. Most significant was a 5 store sale leaseback transaction with Kroger for approximately $68,000,000 The stores are located in Texas, Michigan, Ohio and Mississippi and each location is subject to a new 15 year net lease.
With this transaction, Kroger moved into our top 10 tenants at 3.2% of annualized base rents. Kroger is of course a leader in the grocery space. Their fortified balance sheet, strategic omnichannel initiatives and significant investment in e commerce fulfillment are emblematic of our investment strategy. Additionally, we closed on the purchase of a ShopRite, which is owned and operated by Wakefern in New Rochelle, New York. ShopRite is a tremendous operator and the real estate located at a strategic interchange off of I-ninety five is yet another example of the diligent bottoms up analysis that we conduct on every asset we acquire.
Finally, as you may recall, we acquired our first Wegmans ground lease in Chapel Hill, North Carolina during the Q4 of 2020. We built upon that momentum this quarter with the acquisition of our second property ground lease to Wegmans. The store located in Precipity, New Jersey is over 100,000 square feet and was constructed at Wegmans expense. The ground lease has over 21 years of term remaining and is a welcome addition to our growing ground lease portfolio. Through the 1st 6 months of the year, we've acquired 45 ground leases for a total investment of over $240,000,000 The 2nd quarter contribution to this total was 14 ground leases representing investment volume of more $113,000,000 Additional notable ground lease acquisitions during the quarter included our 1st Capital Grille in Whippany, New Jersey a Walmart Supercenter in Loews in Hooksett, New Hampshire our 1st Cabela's in Albuquerque, New Mexico as well as 3 additional Wow Wow assets Increasing our Wow!
Wow! Portfolio to 25 properties including their flagship store in downtown Philadelphia. As mentioned, at quarter end, our overall ground lease exposure stood at a company record of 12.7% of annualized base rents and includes some very unique assets Leased to the best retailers in the country. Inclusive of our 2nd quarter acquisition activity, the ground lease portfolio now derives nearly 90 of rents from investment grade tenants and has a weighted average lease term of 12.5 years. The majority of the portfolio includes rent escalators that result average annual growth of close to 1%, while the average per square foot rent is only $9.65 This growing portfolio continues to be a source of tremendous risk adjusted returns when we're doing the lease term credit, underlying real estate attributes And of course the free building and improvements of a tenant will ever vacate.
We look forward to continuing to leverage our industry relationships and strong track record of execution to identify potential additions to this expanding and diversified sub portfolio. As of June 30, our portfolio's total investment grade exposure was nearly 68%, representing a significant year over year increase of approximately 670 basis points. On a 2 year stacked basis, our investment grade exposure has improved by more than 1300 basis points. The continued growth of our ground lease portfolio and the investment grade exposure demonstrates our disciplined focus on building the highest quality retail portfolio in the country. Moving on to our Development and Partner Capital Solutions platforms.
We continue to uncover compelling opportunities with our retail partners. We had 6 development and PCS projects either completed or under construction during the first half of the year that represent total capital committed of more than $36,000,000 Three projects were completed during the Q2, including a grocery outlet in Port Angeles, Washington, A Gerber Collision in Beaufort, Georgia and a Floor and Decor in Naples, Florida. I'm pleased to announce we also commenced construction during the quarter on our second development with Gerber in Cougar, Georgia. Gerber will be subject to a new 15 year net lease upon completion and we anticipate rent will commence in the Q1 of 2022. We continue to work with Gerber Collision on additional opportunities that we anticipate announcing later this year and into next year.
Construction continued during the quarter and our first development was 711 in Saginaw, Michigan. We anticipate delivery will take place in the Q1 of next year, at which time 711 will be subject to a new 15 year net lease. We remain focused on leveraging our full capabilities to grow our relationships with these leading omnichannel retailers and I look forward to providing an update on our continued progress in the coming quarters. While we continue to strengthen our best in class retail portfolio through record investment activity. We're also quite active on the disposition front during the quarter.
We continued reducing Walgreens exposure and as well as franchise restaurants as we sold 7 properties for gross proceeds of approximately $28,000,000 with a weighted average cap rate of 6.7%. In total, we disposed of 10 properties through the 1st 6 months of the year for gross proceeds of more than $36,000,000 with a weighted average cap rate of approximately 6.7%. Given our disposition activities during the first half of the year, We are raising the bottom end of our disposition guidance to $50,000,000 for the year, while the high end remains at approximately 75,000,000 Our asset management team has also been proactively and diligently addressing upcoming lease maturities. Their efforts have reduced their remaining 2021 maturity to just 3 leases representing 20 basis points of annualized base rents. During the Q2, we executed new leases extensions or options on approximately 209,000 square feet of gross leasable area.
Most notably, we are extremely pleased to have executed a new 15 year net lease with Gardner White to backfill our only former Love's Furniture store in Canton, Michigan. As you may recall, this was the Art Van flagship we developed prior to the company's acquisition by T. H. Lee. We delivered the space to Gardner White in June and rent commenced in July, allowing us to recover close to 100% of prior rents with just over 1 month of downtime.
I would note this is the 2nd time we have released this asset at effectively full recovery since the Art Van bankruptcy. Gardner White is Michigan based, family owned and operated, has been one of the preeminent furniture retailers in the state for more than a century. The company is led by Rachel Trondstein, one of the brightest minds in the retail furniture industry and a former high school classmate of mine. We are extremely pleased to have Rachel and her team as partners in this flagship asset. I'm also pleased to announce the addition of Burlington To Central Michigan Commons in Mount Pleasant, Michigan, one of the only 2 remaining legacy shopping centers that we chose to retain during the transformation of our portfolio.
To date, we have redeveloped the former Kmart space for Hobby Lobby in Ulta and added Texas Roadhouse on an outlot via a ground lease. These transactions are emblematic of our ability to unlock embedded value within the portfolio and support our decision to hold on to this very well located legacy shopping center across from Central Michigan University's main campus. During the 1st 6 months of the year, we executed new leases, extensions or options in approximately 275,000 square feet of gross leasable area. And as of June 30, our expanding retail portfolio consisted of 62 properties across 46 states including 134 ground leases and remains nearly 100% occupied at 99.5%. With that, I'll hand the call over to Simon and then we can open it up for any questions.
Thank you, Joey. Starting with earnings, core funds from operations for the Q2 was $0.89 per share, representing a record 17.3% year over year increase. Adjusted funds from operations per share for the quarter was $0.88 an increase of 15.9% year over year. As a reminder, treasury stock is included within our diluted share count prior to settlement if and when ADC stock trades above the deal price of our outstanding forward equity offerings. The aggregate dilutive impact related to these offerings was less than 0.5 $0.01 in the second quarter.
Per FactSet, Current analyst estimates for full year AFFO per share range from $3.40 per share to $3.53 per share, which implies year over year growth 6% to 10%. As mentioned on last quarter's call, we continue to view this level of growth as achievable and expect to end the year toward the higher end of this range given current visibility into our investment pipeline and the broader operating environment. Building upon our 6% AFFO per share growth in 2020, this implies 2 year stack growth in the mid teens. General and administrative expenses totaled $6,200,000 in the 2nd quarter. G and A expense was 7.6% of total revenue Or 7.1% excluding the non cash amortization of above and below market lease intangibles.
Even as we continue to invest in people and systems to We anticipate that G and A as a percentage of total revenue will be in the lower 7% area for full year 2021, excluding the impact of lease intangible amortization on total revenues. As mentioned last quarter, G and A expense for our acquisitions team fluctuates based on acquisition volume for the year and our current anticipation for G and A expense reflects acquisition volume within our new guidance range of $1,200,000,000 to 1,400,000,000 Total income tax expense for the Q2 was approximately $485,000 For 2021, we continue to anticipate total income tax expense to $2,500,000 Moving on to our capital markets activities for the quarter. In May, we completed a $650,000,000 dual Tranche public bond offering comprised of $350,000,000 of 2 percent senior unsecured notes due in 2028 And $300,000,000 of 2.6 percent senior unsecured notes due in 2,030 3. In connection with the offering, we terminated related swap agreements $300,000,000 that heads the 2,030 3 notes, receiving approximately $17,000,000 upon termination. Considering the effect of the terminated swap agreements, the blended all in rates for the 2028 notes and 2,030 3 notes or 2.11% and 2.13%, respectively.
We used a portion of the net proceeds from the offering to repay all $240,000,000 of our unsecured term loans, the termination costs related to the early pay down of our unsecured term loans total approximately $15,000,000 Given the one time nature of the termination costs, these amounts have been added back to our core FFO and AFFO measures. The offering in combination with the prepayment of all of our term loans extended our weighted average debt maturity to approximately 9 years and reduced our effective weighted average interest rate to approximately 3.2%. In June, we also completed a follow on public offering of 4,600,000 shares of common stock. Upon closing, we received net proceeds approximately $327,000,000 During the Q2, we entered into forward sale agreements in connection with our ATM program to sell aggregate of roughly 1,200,000 shares of common stock, we're anticipating net proceeds of approximately $81,000,000 In May, we settled roughly 164,000 shares and received net proceeds of approximately 10,000,000 At quarter end, we had approximately 3,900,000 shares remaining to be settled under existing forward sale agreements, which are anticipated to raise net proceeds of approximately $259,000,000 upon settlement. Inclusive of the anticipated net proceeds from our outstanding forward offerings, Cash on hand and availability under our credit facility, we had nearly $950,000,000 in available liquidity at quarter end.
The balance sheet continues to be a huge strength for us. As of June 30, our pro form a net debt to recurring EBITDA was approximately 3.6 times including our outstanding forward equity offerings. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was approximately 4.5 times. Total debt to enterprise value at quarter end was approximately 25%, while fixed charge coverage remained at a record 5 times. During the Q2, we declared monthly cash dividends of $0.217 per share for April, May June.
The monthly dividend reflected an annualized dividend amount of $2.60 per share, representing an 8.5% increase over the annualized dividend amount of $2.40 per share from the Q2 of last year. Our payout ratios for the Q2 were a conservative 73 percent of core $0.254 per share and 74 percent of AFFO per share respectively. Subsequent to quarter end, we declared a monthly cash dividend of 0 point 2 one seven per share for July. The monthly dividend reflects an annualized dividend amount of $2.60 per share or an 8.5% increase over the annualized dividend amount of $2.40 per share from the Q3 of 2020. With that, I'd like to turn the call back over to Joey.
Thank you, Simon. At this time, operator, we'll open it up for questions.
The first question comes from Ki Bin Kim with Chooit. Please go ahead.
Thank you. Good morning out there. So Joey, when I look back at your transaction history, you've been buying In the past, like in the mid-seven a few years ago and then 7% in the past, I think in 2019 And 2018, and that yield has gone down to the low 6s lately. So I'm just curious when you look at that, Is it because cap rate compression across the sector? Or is it that you're targeting certain types of investments like ground leases, which inevitably have lower yields?
I'm just trying to understand what was the cause of that? And if a low 6% is What we should be expecting from you guys for the foreseeable future?
Yes. No, I appreciate the question, Keith. And I think it's generally speaking, we We've seen several years of cap rate compression with cap rates at historic lows as of today. And so we continue to target high quality assets. I don't think you've seen any change there since we've launched the acquisition platform in 2010.
And we've said historically that our ground lease assets generally fall within the range the cap rate range of the turnkey acquisitions that we make. So We continue to see very aggressive capital chasing high quality retail net lease retail properties. And I think Which you'll see from us relative to other acquirers out there is that we're continuing to drive towards quality without sacrificing yield. And so It's a competitive environment. We don't see that changing, but the team is doing a fantastic job creating value through all sorts of transactions.
Okay. And second question, when can you just help me understand the ground lease portfolio strategy? I forget what the lease duration is for that segment of your portfolio. And when the lease does come due, How are you thinking about that? And is there a fair market value recess or is there contractual Rent increases built into that?
I'm just trying to understand eventually when that comes due like what will actually happen?
Yes. So the ground lease portfolio is weighted average lease term about 12.5 years as we mentioned in the prepared remarks. Rent per square foot is only $9.65 with annual embedded growth of approximately 1% And it's 90% investment grade. So when you look at our Brownlees portfolio, I'd tell you from a credit real estate and return I think it is a very unique sub portfolio that obviously is growing trending towards 13% of our overall portfolio. We continue to find Just compelling opportunities there.
Now upon expiration or failure to renew an option, we'd effectively get the building and the entire premises For free now, that's very rare. Tenants typically don't want to give away improvements that are sitting on their balance sheet. And so it's the upside On lease expiration or failure to exercise an option or rejection in a bankruptcy once that contractual lease is broken is very compelling as well. So I think when you look at the front end, the economics, the underlying credit profile, the lease duration, the embedded growth in the portfolio And you combine that with the residual value in real estate that's not on our balance sheet that the tenant paid for, for example, the Wegmans or the Capital Grille We acquired in Whippity and Precipity, New Jersey here. It's a pretty compelling risk adjusted return.
So when you say That option the tenant has an option, is that option based on like a contractual rent increase of whatever stated X percent? Or is it Is it a fair market value reset type of option?
The vast majority is the former. So contractual increases Throughout the base term then contractual increases pursuant to exercising any options. Okay.
Thank you, Jordan.
Thanks, Ki Bin. Operator, I think we can go to number 2.
The next question comes from Nate Crawford with Berenberg. Please go ahead.
Hey, good morning guys.
Good morning.
Maybe just following up on that ground lease question. What can you maybe provide us in terms of helping us value That optionality of the ground lease portfolio, like do you guys track kind of your cost basis versus the appraised value Of everything that's on top of the ground, Nees?
No, I think look, first off, we're not going out Appraising every single asset. We're not getting asset level financing. We're not looking at valuations really in that perspective. We're looking at price per pound that we're Acquiring the building, if and when we were to get that back, we're looking at price per acre and then we're looking at replacement rents for that specific use. So again, the ground leases range, just to give you a sense, the ground leases range from McDonald's or a Chase ground lease on a 1 acre parcel of 3,500, 4,000 square foot building to a Walmart 2 percent or a Costco, it's sitting on 20 acres.
And so those are very different constructs. Obviously, if we were to get one of the Walmart or in this case our first Cabela's Building back, we would have effectively a 20 acre parcel with 600 feet of frontage where we could develop 5 to 6 out lots Plus 100,000 or 200,000 square foot building back for free in the rear, which used to formally house obviously the store. And so They're very different analyses in comparison to a Wow! Wow! C Store.
That's a C Store, always a C Store. And I think it really takes an individual bottoms up real estate analysis to be able to understand each and every asset. But at the end of the day, We are always getting the improvements in the building back for free if the tenant were to vacate for any reason. Okay.
That's helpful. Maybe I was wondering if you could parse out, I think the average yield in the quarter was 6.2. What was the yield on the ground lease stuff versus the non ground lease stuff?
Yes, just right in that range. I don't have the exact number In front of me, Nate, but it's really right in that range. We're buying generally speaking between 5 of the low end and 7. Sometimes they're sometimes higher frankly and we were doing things with tenants such as blend and extends or early exercises of options or working in conjunction. But that's the general range here.
We acquire a number of shorter term ground leases or medium term ground leases With asymmetric information and or working in conjunction with the tenant on a longer term prospect.
Okay. Maybe just one last one on pricing. I was just curious on what the leasing spreads were like on the renewals And kind of what's the expectation for what's left this year? I know it's not a lot, but
Yes. I mean, really, Effectively every single option has been exercised this year. Asking, we're extremely pleased to have Burlington added to Mount That was a former JCPenney where they were paying $2.50 a foot or something ridiculous. And so obviously it's a significant positive leasing spread, but in the overall scheme of things it's very de minimis Obviously. And then with the former Art Van, then the former Loves Furniture, we're thrilled to have Gardner White in there.
As I mentioned in the prepared remarks, Gardner Weitz betting business for over 100 years, I think since 1914 or 1916. It's led by a 4th generation leader in Rachel Trondstein today. This store is now their flagship. They have are effectively relocating a store from down the street. They've been in the market.
They've been in the state. And this is a stable family owned company and we recaptured essentially 100% of rent for the second time from Art Van to Love's and now Love's to Gardner White which We're thrilled to have take over that asset.
Okay. Thanks guys.
Thanks, Nate.
The next question comes from Katie McConnell with Citi. Please go ahead.
Great. Thank you and good morning everyone. So on the GroundLeach acquisition, were there any other portfolios acquired this quarter? And then just looking at the future pipeline, would you expect to keep up similar pace of deals relative to the total deal volume?
Yes. Good morning, Katie. We did acquire some Small portfolios of just diversified assets during the quarter, nothing overly material. In terms of on a go forward basis, Look, our Q3 pipeline has a significant ground lease exposure. We're excited about those opportunities, many of them very similar to what we've executed in the past Couple of quarters here.
In terms of on a go forward here, we're going to continue to evaluate all opportunities whether they're excuse me ground lease or turnkey and then execute on the best Opportunities that weren't able to originate. And so it's hard to predict the future. Never thought we'd see the ground lease portfolio approaching 13%. But again, the team continues to do a tremendous job originating opportunities.
Okay, great. Now that you've addressed almost all of your 2021 lease expirations, what percentage of that space was ultimately renewed? And how did that compare to historical
Effectively 100% was ultimately renewed. Obviously, we had the Loves bankruptcy. So that was a unique situation. And JCPenney bankruptcy where they rejected, I believe the actual rejection took place in 2020. The JCPenney rejection in Mount Pleasant where we signed on Burlington.
And so I caution everyone, our activity is probably not emblematic of any broader trends in retail. We have very de minimis remaining leases Expiring obviously this year at only 0.2% of ABR and 1.1% of ABR in 2022. And so Again, I would caution everybody not to see any larger trends on that.
Okay, great. Thanks.
Thanks, Katy.
The next question comes from Rob Stevenson with Janney. Please go ahead.
Good morning, guys. Joey, I know it's a relatively small piece of the portfolio, but how are your movie theaters doing these days? Where are rents rebounding to? And then also, have you seen any theater assets trade in the market and where are those asset values versus pre pandemic if you wanted to sell down some of your portfolio?
Good morning, Rob. Full transparency, I haven't been to the movies or looked at a movie theater since the pandemic started. Look, we've got 5 movie theaters in the portfolio today. They're all paying rent. The Reddit mafia is helping a number of these operators obviously in the portfolio.
We have no interest in movie theaters adding additional movie theater exposure. We weren't adding movie theater exposure for several years before the pandemic. My kids do want to see Space Jam too. So we'll have to put that on the docket here. But besides that, we just don't think the fundamentals of the business Plus the residuals on the real estate makes sense in context of this portfolio.
But I guess if you wanted to sell that today, is it A significant haircut or is it rebounded enough that you could sell those plus or minus a bit of where you'd want to or is this a Hold for 2022 or 2023 and hope for a bigger rebound to get out of those?
It's a good question. I'd tell you there isn't a lot in the theater market today, we're very comfortable with the 5 theaters that we have in the portfolio. It's again Large operators AMC, Regal Cinemark. I wouldn't anticipate that pricing was at pre pandemic levels by any means, but I think you saw pricing Pre pandemic as well in the sector in general. And so if we see an opportunity to divest of 1 of the theaters like we divested of the Dave and Buster's in Austin.
We will do so, but we're very comfortable holding them. Again, it's a fairly de minimis It's a very de minimis piece of our portfolio and we're comfortable with the 5 assets.
Okay. And then how are you feeling about The furniture segment going forward as a whole these days and you still want to be there longer term on a risk adjusted basis. And then I guess with 15 years Now on this Gardner White lease, is now the time to sell that asset as well?
We have very de minimis Yes. Exposure to furniture, I believe we have 1 Ashley Furniture and now a Gardner White in the portfolio. So We've never been overly acquisitive in the furniture space. It's obviously highly cyclical related to the housing market, the broader macroeconomic trend. The bigger problem with the furniture space generally in real estate is the lack of parking for most of the stores.
And so you take the average furniture store, it's parked 1 per 1,000. And so a 40,000 square foot furniture store frankly can't park for a grocery operator or a softwood operator. So that's the biggest challenge. So it effectively becomes almost a single purpose building similar to a movie theater or a gas station. And so we've never been overly attracted to the furniture Obviously, we developed the Art Van flagship in conjunction with Art Van predating obviously his death in T.
H. Lee. We're thrilled to have Gardner White here. We'll look at all opportunities. I think if everybody who hasn't seen this asset goes to the YouTube video, I think it still has our van on it.
This is a premier retail location in the state of Michigan sharing a traffic signal with IKEA heads up On one of the 3 largest retail thoroughfares in Southeast Michigan. So Gardner White is going to do fantastic here. They've been in that submarket for A long time right down the street and this store is going to do fantastic and we'll look for any opportunities if it makes sense for us to divest a bit or move on from it.
Okay. Thanks guys. Appreciate it.
The next question comes from John Massocca with Ladenburg Jonathan, please go ahead.
Good morning. Good morning, John.
With regards to your balance sheet strategy, what should we With regards to forward issuance under the ATM, is there an absolute or relative amount that you're targeting to have outstanding on a forward basis at any one time?
I'll touch on it and hand it over to Simon. I think, look, we'll continue to be opportunistic with capital sources, seeking to maintain a balance sheet that's going to enable our growth, Like we have historically in the 4 to 5 times range, inclusive of forward settlement of any equity. And then We'll continue to look to reduce our cost of capital at attractive pricing. Simon go ahead.
Yes. I mean just Sort of echoing what Joe is saying, obviously, the balance sheet is in great shape. We got very low leverage and great access to efficiently priced capital. And we've raised over $1,200,000,000 this year in a combination of institutional debt, forward equity, straight common equity and we're generating very strong AFFO growth while improving an already high portfolio. So I think at the end of the day, it's working and we don't plan to change it.
If we can find other ways that make sense to give ourselves some more tools In our toolbox to keep funding this company and its growth the right way then we'll certainly look at them. But we think what we're doing is working and we're going to keep doing it.
But is there like
a level you have in mind? Because I
just think about that issuance in terms of it gives you kind of a set cost of capital No matter what the equity markets do in terms of volatility, but obviously, it's kind of a reserve to hold in some ways. So is that
Is there a number you have in mind? Could we see that
decline over time given the amount you kind of raised on the ATM on a forward basis In this quarter or sorry, 2Q versus as well as having the kind of follow on offerings in the quarter as well? Or is it kind of just going to be an opportunistic thing on your end?
Well, John, I wouldn't think of it as an absolute or a relative level generally. Forward equity is part of an overall hedging policy we have That we utilize to maintain medium term visibility into our cost of capital. So very similar and this is why we derived the forward equity strategy several years ago and we've seen a number of net lease REITs follow suit either through regular way or ATM is that we looked out in the marketplace. We knew we were growing at a have historically used forward starting swaps on the debt side. We said, well, 75% of our balance sheet is equity.
Why don't we take an overall hedging Policy to have a more stable perspective of the larger piece of our capital stack, the equity side. And so it's part of an overall hedging policy. The last two transactions I believe we've done have been regularly transactions. They haven't been forward. And then we've utilized the Forward 8 structure on the ATM in conjunction with it.
And again, the goal here is we know we're going to grow, right? We have visibility in the 60, 70 days of our pipeline, hence the increased acquisition guidance We're still just working on Q4. And it gives us that visibility beyond Q4 into our cost Of capital, whether it's COVID-twenty or the Martians come down or who knows what happens or inflation runs rampant, We're going to have the ability to execute on our strategy as is.
Okay. That makes sense. And then, I know you already touched a little bit on kind of disposition outlook. But
with regards to the restaurant space, Has that it sounded like that was
a focus on dispositions in
the quarter. Is that something we could see on the casual dining side go down to 0 eventually? Or is there
Kind of a lower bound for where that may end up in terms of exposure.
Well, Yes. We will continue to opportunistically divest of generally speaking franchise fast food restaurants into a very aggressive environment. In Q2, we closed The sale of 2 Wendy's, a Burger King, I think you'll see us continue Selling those assets. We don't have very many left frankly. We've sold the vast majority of them.
And so The franchise fast food restaurant space is effectively winding down for us. In terms of casual dining, we have very few assets that are casual dining. And then the vast majority absent I think 1 or 2 in the entire portfolio are on ground leases. And so we're very comfortable with those positions. As I talked about on the call, in the prerecorded part, the Capital Grove ground lease is a very Right.
That's fine dining. I'm not sure we have a category or a sector designated for that. It's the only one in the portfolio, But it's sitting there in Precipity, New Jersey Capital Grills already built the entire building. And obviously, it's a beautiful build out. And so It's a ground lease similar to the rest of the casual dining assets in our portfolio.
Okay. And I guess is there
any kind of low hanging fruit then maybe
as I think beyond 2020 1 in terms of dispositions, as you kind of solidify into maybe more ground leases in the restaurant space that you're not going to end up selling and obviously We'll see where theater pricing is. We talked about that earlier on the call, but anything else that kind of stands out as a potential source of dispositions Category wise?
I tell you our disposition activity over the last several years has reduced our pharmacy exposure, obviously reduced our Walgreens The restaurant exposure, the Dave and Buster's now where we only have 2 including effectively their flagship in New Orleans. I think the portfolio as a whole has never been in a better place. We'll continue to opportunistically divest of assets. That being said, I think if we roll back the clock to 2010 when we had 70 properties, I would bet you we have less than 20 remaining Of those legacy assets of the entire portfolio today. So we have it's a new portfolio that's been Constructed with an omnichannel future in mind since the advent of our acquisition platform in 2010.
And it frankly doesn't have a lot of legacy challenges. And so We're in a good
place. Makes sense. And that's it for me. Thank you very much for taking the question.
Thanks,
The next question comes from Linda Tsai with Jefferies. Please go ahead.
Hi, good morning. With grocery now your largest tenant type at almost 11%, how does the credit quality of these tenants compare to the overall portfolio average? And would you expect it to grow as a percentage of your whole?
Yes. Good morning, Linda. Our grocery exposure is now led obviously by Kroger. Walmart doesn't fall into the grocery stores for us. They're in general merchandise.
It's now led by Kroger. And it's effectively 100% or nearly 100% investment grade. So the ShopRite acquisition is Wakeford and Credit. The Amazon Freshs we acquired are Amazon. The Kroger portfolio obviously has Kroger credit.
We have 1 or 2 publics in the portfolio in HEB. Now the 2 Wegmans inclusive of the New Jersey asset on a ground lease. And Our focus in grocery, we think there's going to be significant shake up in the grocery industry over the next several years is on best of breed operators who have the balance sheet To invest in price and invest in an omni channel future through both macro and or micro fulfillment or whatever that may take. So it's a highly competitive industry with 2% historic margins. It's going to be continue to be very competitive with Amazon Fresh continuing to roll out stores and full Price transparency.
And so we think the best of breed whether the super regional or national is going to shake out and be on top here and that's the only place we'll invest capital In the grocery space.
Thanks. And then there's a lot of headlines on rising COVID cases in the Delta variant. What kind of conversations do you have internally or might have had with your tenants on the potential impact of the case counts continue?
We're in a very unique position outside of the off price retailers, TJX being amongst them. The retailers in our portfolio thrive during the pandemic generally speaking. And so Walmart, Tractor Supply, Dollar General, Even Best Buy, the auto parts guys, the home improvement guys, they were thriving during the portfolio to agree during the pandemic, Frankly do agree that I wouldn't have anticipated. And I think I mentioned on the last call, I never knew there were so many people that could perform home improvement projects Or fix their cars on their own out there, but it was the sales were absolutely tremendous at the four wall level. I think the biggest challenge for every retailer in the conversations we It's labor challenges today.
It's staffing. That's obviously apparent to everybody who goes out to eat or goes shopping today is the staffing challenges out there continue to persist. Most retailers in our portfolio have figured out a way to navigate it, That's the biggest challenge, but nothing specific to the Delta variant or any other variants in terms of impact on their business.
Thanks.
This concludes our question and answer session. I would like to turn the conference back over to Jerry Eddy for any closing remarks.
Thank you very much. Hopefully, we see everybody in person soon and stay safe. Thank you everybody.
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