This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Good morning and welcome to the AGRI Realty third quarter 2020 conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded I would now like to turn the conference over to Clay Thalen, Chief Financial Officer. Please go ahead, Clay.
spk05: Thank you, Operator. Good morning, everyone, and thank you for joining us for AGRI Realty's third quarter 2020 earnings call. Joey, of course, will be joining me this morning to discuss our third quarter and year-to-date results. Please note that during this call, we will make certain statements that 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 to the scope, severity, and duration of the COVID-19 pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic 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 on Form 10-K and subsequent reports, for a discussion of various risks and uncertainties underlying our forward-looking statements. In addition, we discussed 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 filing. I'll now turn the call over to Joey.
spk08: 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 as we continue to navigate a very challenging year. We've got a lot to cover, so let's get down to our many accomplishments of the quarter and a summary of our year-to-date activities. We had a truly outstanding third quarter that began to materialize early in Q2 during the depths of the pandemic. During the quarter, we invested a record $471 million in 97 high-quality retail net lease properties across our three external growth platforms. 91 of these properties were originated through our acquisition platform, representing record acquisition volume of more than $458 million. While once again achieving record volume during these challenging times, we remain intensely focused on finding best-in-class opportunities with our leading retail partners. This was once again demonstrated by 16% of third quarter acquisition volume being comprised of ground leases, and approximately 72% of third quarter acquisition volume derived from investment-grade retailers. The 91 properties acquired during the quarter are leased to 26 tenants operating in 15 distinct sectors, including best-in-class operators in the off-price, home improvement, auto 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 store located on Camelback Road. We also acquired our first Wegmans in Chapel Hill, North Carolina. Wegmans is subject to a 20-year ground lease and is currently completing construction of their new store. In addition, during the quarter, we closed on two unique TJX Combo stores in high barrier-to-entry markets, first in Eugene, Oregon, near the University of Oregon's campus, where we acquired a TJ Maxx and HomeGoods Combo, and then in Napa Valley, California, where we purchased a Marshalls and HomeGoods Combo store. We continue to source and execute on several unique ground lease opportunities. Including the Chapel Hill Wegmans, we acquired five ground lease properties for a total purchase price of $83 million during the quarter. Additional ground lease acquisitions included a Walmart and Home Depot in Pittsfield, Massachusetts, a Home Depot in Patterson, New Jersey, and a Walmart in Mena, Arkansas. Today, our ground lease portfolio spans 73 assets, or nearly 9% of our total annualized base rents. At quarter end, over 91% of our ground lease rents were derived from investment grade retailers, including Costco, Walmart, Wegmans, 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 and I look forward to updating you further next quarter. Through the first nine months of the year, we've invested a record $977 million across 227 retail net lease properties spanning 36 states across the country. Of the $977 million invested, approximately $958 million was via our acquisition platform. Of the 217 properties acquired year to date, And unparalleled, 78% of the annualized base rent acquired comes from investment-grade operators, while nearly 10% of rents acquired year-to-date are derived from ground-leased assets. Given our record year-to-date acquisition volume, our strong pipeline and fortress-like balance sheet, we are increasing our 2020 acquisition guidance to a range of $1.25 billion to $1.35 billion, from a previous range of $900 million to $1.1 billion. Notably, through the first nine months of the year, we've already surpassed last year's acquisition volume of $701 million by approximately 37%. At quarter end, our portfolio's investment-grade exposure stood at more than 62%, representing a year-over-year increase of more than 500 basis points and an impressive two-year stacked increase of 1,500 basis points. As we maintain our focus on leading retailers that are positioned to thrive in an omnichannel environment, I anticipate our investment-grade concentration will continue its upward trajectory. Moving on to our development and partner capital solutions platforms, we had 10 development and PCS projects either completed or under construction during the first nine months of the year that represent total committed capital of more than $37 million. Three of those projects were commenced during the quarter with total anticipated costs of just over $10 million. Construction continued during the third quarter on the company's second development with Harbor Freight Tools in West Laco, Texas, which is expected to be completed in the fourth quarter of this year. The company completed two development and PCS projects during the quarter, including the company's first development with TJ Maxx in Harlingen, Texas, adjacent to a high-performing target, and a Burlington Interactor Supply in Columbus, Ohio. Our growing pipeline is the result of our team's effort to work with our retail partners to screen 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 third quarter, we sold two more assets, including a franchise restaurant, and a bank branch under a very short-term lease for gross proceeds of approximately $3.5 million at a 5.6 cap rate. Franchise restaurant exposure is now down to a mere 1.3% of our portfolio. Dispositions for the first nine months of the year have totaled 16 assets for gross proceeds of approximately $48 million, with a weighted average cap rate of approximately 7%. Since the beginning of the year, we've 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 four remaining lease expirations that represent just 0.2% of annualized base rents. We have also made material progress on our 2021 lease maturities, reducing our exposure roughly 160 basis points over the course of the year to only 1% of annualized base rents at quarter end. Notably, I'm extremely pleased to announce that we executed three new 20-year leases with Wawa during the quarter that extended the lease maturities from 2021 to 2041 for all three locations. All three leases were set to expire in 2021 and represented our largest remaining 2021 lease maturity. At the time of the acquisition, the WAUAs were acquired with limited term remaining. These three extensions serve as a testament to our acquisition underwriting and market intelligence capabilities. As of September 30th, our growing retail portfolio surpassed 1,000 properties and now contains 1,027 properties across 45 states. This represents a 25% increase in our total property count through only the first nine 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 forma for our outstanding forward equity, our fortified balance sheet stood at approximately 3.2 times net debt to recurring EBITDA. With more than $850 million in liquidity, we have tremendous flexibility as we look to continue to execute on very high-quality investment opportunities. During the quarter, we, of course, completed our inaugural public bond offering, raising $350 million of 2.9% senior unsecured notes. The offering was extremely well-received and provides a new source of capital for our rapidly growing company. We received July, August, and September rent payments from 96, 97, and 99% of our portfolio respectively. In the aggregate, we received third quarter rent payments from approximately 97% of our portfolio and entered into deferral agreements representing approximately 2% of third 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 systems and processes, and position our company for future growth. Craig's operational, business development, sales, and 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, capital markets, and REIT industry experience to our board. To sum it up, our company is incredibly well positioned with one of the strongest and fastest growing retail portfolios in the country, an unparalleled balance sheet, and the people, processes, and systems that will enable us to capitalize on the innumerable opportunities that we continue to uncover in this environment. Before handing the call off 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.
spk05: Thank you, Joey. I'll start with a balance sheet update and highlights from our capital markets activities over the past quarter. We had another very active quarter in the capital markets, completing our inaugural public bond offering of $350 million of 2.9% senior unsecured notes due in 2030. As Joey mentioned, this transaction provides us with meaningful, near-term liquidity, and a new source of capital as our company continues to grow. We were again active in the equity capital markets, entering into forward sale agreements through our ATM program to sell more than 885,000 shares of common stock at an average gross price of $67.47 for more than $58 million of anticipated net proceeds. On September 28th, we settled 1.5 million 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 million. At quarter end, we had approximately 6.3 million shares remaining to be settled under the Cohen and Steers transaction and our ATM forward offerings, which in total are anticipated to raise net proceeds of approximately $376 million upon settlement. In addition to our capital markets activities, we also generated roughly $13 million through our disposition activity and free cash flow after dividend during the quarter. This capital raising, in combination with nearly full access to our $500 million revolver, provides the company with more than $850 million in liquidity. As of September 30th, our net debt to recurring EBITDA was approximately 4.7 times. Pro forma 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 4.8 times. Moving to earnings, core funds from operations for the third quarter was 81 cents per share, a 3.5% year-over-year increase. Adjusted funds from operations per share for the quarter was $0.80, an increase of 4% year-over-year. During the past two quarters, we have elected to treat COVID-19 deferrals as delinquent receivables, and our FFO measures include this revenue. On a quarterly and year-to-date basis, core FFO per share and AFFO per share were impacted by dilution under GAAP related to our recent forward equity offerings. Treasury stock is to be 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 third quarter, and approximately two cents for the nine-month period. General and administrative expenses in the quarter totaled $4.8 million. G&A expense was 7.5% of total revenue or 7% excluding the non-cash amortization of above and below market lease intangibles. Given the recent changes to the leadership team and new and recently amended employment agreements, we now anticipate G&A as a percentage of total revenue to be in the upper 7% range for 2020, excluding the impact of above and below market lease intangible amortization. Given the sheer level of investment activity and the expectation of adding approximately 300 properties this year, we continue to invest in the platform and our team to support our current and anticipated growth. We anticipate G&A expenses and percentage of revenues to continue to decline in future years. The company paid a dividend of $0.60 per share on October 9th to stockholders of record on September 25th, representing a 5.3% year-over-year increase. This was the company's 106 consecutive cash dividends since our IPO in 1994. For the first nine months of the year, the company declared dividends of $1.78 per share, a 5.3% increase over the comparable period in 2019. Our quarterly payout ratios for the third quarter were 74% of core FFO per share and 75% of AFFO per share, respectively. For the first nine 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.
spk08: Thank you, Clay. At this time, operator, we open it up for any questions.
spk06: Thank you. We will now begin the Q&A session. To ask a question, you may press Star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. And our first question will come from Nate Crossett with Barenburg. Please go ahead.
spk02: Hey, good morning, guys. Morning, Nathan. Hey. Wondering if you could characterize the deal flow a little bit. You know, what's kind of causing the acceleration in your view? Was there some bigger boxes in the quarter or because 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?
spk08: Well, I think, as I mentioned in our prepared remarks, we acquired upwards of almost 100 properties during the quarter. So I don't think it's necessarily bigger boxes, while there are some, including the Wegmans and Home Depot and Walmart Groundleys, 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, you know, our balance sheet enables it, our cost of capital enables it, but really it's a testament to the team uncovering unique opportunities really across the country.
spk02: 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. Um, I'm just trying to get a sense of like what the max amount is. Um, assuming it's busy throughout the entire quarter.
spk08: Yeah, I would tell you I don't see a maximum amount. As Clay mentioned, we anticipate adding 300 properties to 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. 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.
spk02: 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 night 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?
spk08: Yeah, 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 tell you that number constantly is fluctuating with either net new transactions entering the market or development of new sites. Now, there are a number of ways those transactions come to us, direct from developers, through brokers, directed by retailers. And so I would tell you our traditional sourcing methodologies for turnkey or typical turnkey assets also apply to ground lease assets. Most notable during the quarter, obviously, we're at about 9%. Ground lease is now up from just approximately 8%, investing significant capital in our first wagons. notably the Home Depot in Patterson, New Jersey, a long-term Home Depot ground lease, and then both the Home Depot and the Walmart in Pittsfield, Massachusetts, outside of the Berkshires. 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.
spk02: Okay. Is there any differences in the ground lease pricing versus normal acquisitions right now? Has there been anything because of COVID that's changed that, or has it been pretty consistent?
spk08: I tell you it's pretty consistent. Ground leases have historically been valued between 100 and 200 basis points inside of 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.
spk02: Okay. Thanks, guys. Thank you, Nate.
spk06: And the next question will come from Handel St. Just with Mizuho. Please go ahead.
spk07: Hey, good morning out there. Thanks for taking my questions. Good morning, Handel. How are you? I'm great, Jerry. Thank you. I hope you are too. I wanted to follow up on Nate's question here on the acquisition during a quarter. Certainly a level that surprised many of us, and I guess the question is trying to figure out what the sustainable run rate is going forward. How much of what was bought during a quarter is more a reflection of that spillover you referred to during your commentary? You obviously raised a lot of capital earlier this year, so as we look ahead, And considering the $300 million that's implied in the fourth quarter, how do we square all that? How should we think about acquisitions in the near term from a quarterly runway perspective?
spk08: Well, I appreciate the question. And I tell you, to answer the latter part of the question, from a quarterly perspective, I think our increased guidance with a midpoint of $1.3 billion is reflective of what we're seeing in today's environment. And I think that... is 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 at our 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. 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 capability perspective to execute on anything we find that hit our investment criteria.
spk07: Okay, fair enough. Maybe shifting to the election, and anything from perhaps a policy perspective that's on your radar screen that concerns you, including but not just limited to potential 1031 repeal. And on the potential repeal here, I'm curious what your view is on the direct and perhaps indirect consequences of a potential repeal to the industry overall, and then more specifically to the public company side.
spk08: Well, I think most notably in 1031, and I've talked about it at length, I think we sold nearly 40 franchise restaurants into that environment, a significant number year-to-date. I think the number year-to-date was 12 or 13 in the prepared remarks. And so that is the lower price point asset to 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 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, is very challenging. Underwriting a lodging asset is very challenging. I think the stability of net lease, frankly, the format of net lease in a 21st century environment and investor appetite in net lease, whether it's primary or secondary through investing in equities, is going to continue to most likely overwhelm any changes in the regulatory environment. That said, the majority of time when we run up against any competition for assets, it's typically a 1031 purchaser. They need secure debt in the form of a 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.
spk07: Got it, got it. Thanks enough, Yolanda, to be 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's lagged here and pretty conservatively the last few months relative to some of your lower multiple peers. Obviously, some of that's a bit of a catch-up trade, but curious if you think the market's 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 a third time should could hopefully draw some attention to the capital, but just curious if you think perhaps the market come a little too far too fast for certain names and perhaps not paying enough attention to underlying potential credit issues. Thanks.
spk08: Look, it's a great question. I appreciate it. I'm not one to be out there complaining generally about our stock price, but I'll tell you this. I think this quarter reinforces what Agri Realty is all about. We have the best balance sheet, the best tenant base, the best growth profile, and a fantastic cost of capital. And so we're 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 think that may explain why some investors are missing the boat. and why we're trading two to three 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, I am not on the buy side. I understand 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 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.
spk09: Thank you. All you look for. Thank you.
spk06: And our next question will come from Katie McConnell with Citi. Please go ahead.
spk03: Great, thanks, and good morning, everyone. So you've increased the pace of acquisition. How has your thought process changed around the size of transactions you're pursuing? And are you seeing more attractively priced opportunities for larger deals or any portfolios in the pipeline today?
spk08: Yeah, 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 $1.2 million on a typical O'Reilly or auto parts transaction all the way up to the mid $30 million range for something like a Wegmans and in between. And so it's a broad range. dynamic and a broad marketplace which we're addressing. We prefer to stay away from those $1.2 million transactions just because of the inefficiencies involved. But again, we really start from a 30,000-foot perspective of the best omnichannel 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, the sector, the underlying real estate fundamentals, and, of course, the pricing. That's probably the last input that we're looking at.
spk03: 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 exposure to?
spk08: Yeah, well, I think, look, we have historically avoided those single-purpose structures. Of course, we've identified those at-risk categories, which on an absolute and relative basis are very de minimis for us. 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 AutoZone's, O'Reilly, and Sherwin-Williams and the like. And so I would say re-tenanting those boxes from a general perspective is very challenging. Those are single purpose in nature. I think if you drill into our fitness portfolio, we have six LA Fitnesses specifically. They're 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 pan out. But as far as theaters go, I will tell you, once a feeder, it's probably always a feeder.
spk03: Okay, great. Thanks.
spk02: Thank you.
spk06: And the next question will be from Rob Stevenson with Jannie. Please go ahead.
spk04: On the 106,000 square foot of leasing in the third quarter and the 436,000 year to date, are versus the expirations and what do you expect as you sort of roll forward over the next year, year and a half here with the lease renewal discussions with tenants?
spk08: So, sorry, 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.
spk04: Yeah, you did $106,000 of leasing in the third quarter and $436,000 year-to-date. Where's the new rents versus expiring, and where do you expect, you know, as you're having discussions with tenants over the next, you know, year for those type of renewals to sort of pan out at?
spk08: Yeah, got it. Thank you. So, as I mentioned, the prepared remarks, the 20-year Wawa extensions, we did not give a rent concession or TI. Those are 20-year leases. with contractual increases every five years. That was the biggest component of our maturities in 2021. As you can see on page five of the release, 2021 only has 16 leases remaining that come up for expiration. Majority of them have options, 0.7% of total rents. And so it is 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 and proactively engage. We don't anticipate any material disruptions in the portfolio, and we think occupancy is going to remain at an elevated level like it has historically. We're in a fantastic position from a lease maturity profile. I would note we include things even in here as temporary leases like a Halloween pop-up store this year in our four remaining leases. And so we have a couple of redevelopment opportunities embedded in there potentially we'll be executing on. And so we think the portfolio is in a very strong position.
spk04: 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 so, is your plan to accelerate dispositions of remaining franchisees and bank branches and things like that into the fourth quarter? I know that your guidance now is somewhere between 3 and 27 million or something like that in the ballpark range for the fourth quarter. I mean, 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 first part of next year?
spk08: I think it's truly the inverse. I mean, franchise restaurants, as we discussed, is just over about 1% now, and the majority of that is a Taco Bell franchisee on a master lease with high-performing stores. So we'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'll tell you, we're very comfortable. You may see us selectively dispose of 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 or restaurants at all warrant five and a half and six caps, 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 anything, but if there is a Democratic sweep here and Biden takes the presidency and the Democrats take the Senate, it's on the flip side, really. So I'm more focused on the inverse, that Once sellers potentially fear the repeal of real property in 1031, back to the early question, what is going to be the urgency to sell or opportunities on the flip side for us to acquire by year end? And I think that could materialize, obviously subject to election results, in some very interesting opportunities, but only time will tell there.
spk04: Okay. And then I guess the last one from me would wind up being, I mean, what do you guys – Any incremental demand out there on the part of sellers to take back units in transactions these days, or they just all want cash?
spk08: Oh, you mean OP units?
spk04: Yeah.
spk08: I would tell you, no, it's a tool in our tool belt. We've looked at select transactions in terms of utilization of units as currency. We have never done an 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.
spk04: Okay. Thanks, guys.
spk08: Thanks, Rob.
spk06: Our next question will be from R.J. Milligan with Raymond James. Please go ahead.
spk09: 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 as to 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?
spk08: I think the at-risk sectors that have been identified, it's going to take some time potentially from a 30,000-foot perspective for this health crisis to clear up and for 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 right 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 here 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 relative basis. 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, the store performance of those limited positions with those at-risk tenants gives us great confidence there.
spk09: 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?
spk08: 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 six and a half cap on an acquisition fraud, plus or minus. Obviously, that's on a blended basis. It's about a 200 basis point band, 100 up, 100 down from there. You know, we've acquired almost 80% investment grade for the year. I think it's basically unheard of in terms of acquisition volume and quality. And then when you mix in the yield of 6.5% at 6.5% approximately, I think it's pretty, it's a testament to the team and it's a phenomenal outcome for us. So obviously our cost of capital over the last few years has dropped significantly. The 10-year treasury has dropped significantly. And I think we're going to be able to maintain our performance here given all of those factors I mentioned.
spk09: Great. Thanks, Jason.
spk08: Thanks, RJ.
spk06: And our next question will come from Linda Tsai with Jefferies. Please go ahead.
spk00: Hi. Thanks for taking my question. Do you have a sense of how much IG could comprise of your overall portfolio over time?
spk08: 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 62% today. 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 the prepared remarks, that we continue to anticipate that number to trend upwards. But we really start with that sandbox of 25-ish retailers and the best operators in the country. This quarter we added Target and Wegmans, two of the four I had highlighted that we didn't own in the portfolio in prior quarters. And so we'll see what opportunities materialize. But I think, you know, 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.
spk01: Thanks. And then can you provide some color on new developments in the pipeline and the potential for additional developments with tenants going forward? What does the opportunity set have to look like for you to initiate new relationships like this?
spk08: Well, I think first and foremost, it has to be, and you hit it on the head there, it has to be relationship-based for us. 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 to 24 months. for $2 to $5 million for a single tenant. And so what you see our development team focused on is working with our existing tenants as well as new tenants on opportunities that we think are relationship-based, that have legs, that provides 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, to find appropriate opportunities for them to backfill. We had a number of projects, three projects I believe start this quarter. Our pipeline has similar activity that we anticipate announcing in Q4 and or Q1. But we're excited about the opportunities as private developers continue to struggle putting together either the capital stack and or have challenges in their own pipeline or portfolio that they're unable to execute on. So our PCS and development platform gives us two other growth prongs to take advantage of opportunities that fit the return profiles and risk thresholds that we like.
spk01: Thanks. And then how do the yield fund developments compare to going in cap rates on acquisitions?
spk08: Generally, at least a couple hundred 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, call it 100 to 150 basis points above acquisition yields. Those projects typically last from six to nine months. we effectively cut the development cycle in half by leveraging our partner's capability or the developer's capabilities. And so we continue to seize
Disclaimer