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spk13: Good morning and welcome to AGRI Realty second quarter 2024 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 questions, you may press star then one on your touchtone phone. To withdraw your question, please press star then number two. Please limit yourself to two questions during this call. And please note that this event is being recorded. I would now like to turn the conference over to Ruben Treatment, Senior Director of Corporate Finance.
spk12: Please go ahead, Ruben.
spk11: Thank you.
spk03: Good morning, everyone, and thank you for joining us for AgriReality's second quarter 2024 earnings call. Before turning the call over to Joey and Peter to discuss our results for the quarter, 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, including statements related to our updated 2024 guidance. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-K for a discussion of various risks, 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 our historical non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in our earnings release, website, and SEC filings. I'll now turn the call over to Joey.
spk17: Thanks, Ruben, and thank you all for joining us this morning. I'm very pleased to report that we've had a strong first half of the year as our discipline has proven warranted. On our last call, I mentioned our improved visibility into the acquisition market, and I'm pleased to say that visibility turned into high-quality closed transactions at similar return profiles. Our team's efforts continue to produce unique and proprietary deal flow, and we continue to identify attractive investment opportunities to across all three external growth platforms. As mentioned, our investment activity during the quarter was supported by capital market transactions that bolstered our fortress balance sheet with approximately $650 million of unsecured debt and equity capital. In addition, we received commitments to expand our revolving credit facility to $1.25 billion, which will provide us with pro forma total liquidity of $1.7 billion. This additional dry powder will enable us to execute our strategy for the remainder of the year and into 2025. At quarter end pro forma for outstanding forward equity, our fortress balance sheet sat at 4.1 times net debt to recurring EBITDA, providing us with unparalleled optionality as we continue to execute on our pipeline. Given our investment activity of nearly $345 million during the first half of the year, our balance sheet and liquidity position we have continued to aggregate an incredibly high-quality and robust pipeline. I am pleased to announce we have increased our acquisition guidance to approximately $700 million from $600 million previously. With a rapidly changing environment, that number could prove conservative. However, I think it is prudent given the lack of credibility into fourth-quarter acquisition activity and the rapid change in our cost of capital. We will continue to be disciplined capital allocators and maintain our stringent underwriting standards. Given our liquidity profile, strong positioning of our balance sheet, and portfolio performance, we have raised AMFO per share guidance to a range of $4.11 to $4.14 for the year. At the midpoint, this represents a 4.4% year-over-year growth. Peter will provide more details of the inputs on these numbers momentarily. Turning to our three external growth platforms, during the second quarter, we invested approximately $203 million in 70 high-quality retail net lease properties across our three external growth platforms. This includes the acquisition of 47 assets for approximately $186 million. The properties acquired during the second quarter are leased to leading retailers operating in sectors, including home improvement, off-price, auto parts, crafts and novelties, and groceries. Our completed transactions to date and current pipeline are emblematic of our dynamic approach to sourcing opportunities and include a variety of different transaction structures. Set leasebacks with relationship tenants, several unique blend and extends, shorter-term high-performing stores purchased at 50% of replacement costs, both new and repeat sellers, as well as distressed developers. We continue to be the first and last call in a highly fragmented and disjointed market. The acquired properties had a weighted average cap rate of 7.7%, a 90 basis point increase year over year, and a weighted average lease term of over nine years. Investment-grade retailers accounted for nearly 60% of the annualized base rent acquired. Note that we are not including retailers such as Hobby Lobby in this investment-grade percentage and do not imply shadow ratings to non-rated companies. For the first half of the year, we've invested $343 million across 102 retail net lease properties spanning 37 states and 24 retail sectors. Approximately $309 million of our investment activities originated from our acquisition plan. During the quarter, we also commenced five development and DFP projects representing committed capital of approximately $19 million and completed four development and DFP projects with total costs of $15 million. In total, we had 25 projects either completed or under construction during the first half of the year, representing $101 million of committed capital, inclusive of the $66 million incurred through June 30th. Our pipeline for both of these platforms continues to grow quite significantly, and we are excited to further discuss in upcoming calls. Similar to last quarter, we opportunistically disposed of assets at levels where we can redeploy proceeds at attractive spreads. During the quarter, we sold 10 properties for total gross proceeds of almost $37 million, with a weighted average cap rate of 6.4%. These dispositions were opportunistic capital recycling of non-core assets, generally leased to sub-investment grade or non-rated operators, including Mr. Carwash and Select Gerber Collisions. Our decision to bolster our asset management capabilities, including executive additions and IT investments, was prudent. On the asset management front, we executed new leases, extensions, or options on approximately 300,000 square feet of gross leaseable area during the quarter, including a Walmart Supercenter in Kimball, Tennessee. Additionally, during the quarter, we executed a ground lease with no anticipated tenant improvement allowance with a leading quick service restaurant operator, which I articulately called one of the chicken guys on last quarter's call, for a portion of the former Bed Bath & Beyond parcel in Memphis, Tennessee. We are negotiating multiple letters of intent for the remaining parcels and will move to lease this quarter. As previously discussed, we anticipate recapturing over 150% of the former Bed Bath & Beyond rent, further highlighting our ability to identify and underwrite value-add real estate. As a result of our asset management team's efforts, our 2024 lease maturities now stand at just 0.1% of annualized base rents. Given the progress achieved year-to-date, our occupancy ticked off to a company record 99.8% at period end. We are now focused on any 2025 pending maturities. With that, I'll hand the call over to Peter, and then we can open it up for questions.
spk16: Thank you, Joey. Starting with the balance sheet, as Joey mentioned, we had a very active quarter in the capital markets, raising nearly $650 million of capital. In May, we completed a $450 million public bond offering comprised of 5.625% senior unsecured notes due in 2034. In connection with the offering, we terminated related swap agreements of $300 million, receiving over $4 million upon termination and reducing our effective interest rate. The offering further staggers our maturities and extends our weighted average debt maturity to approximately seven years, excluding the unsecured revolving credit facility. During the quarter, we sold over 3.2 million shares of forward equity via our ATM program, raising net proceeds of approximately $195 million. As of June 30th, we had approximately 7.1 million shares remaining to be settled under existing forward sale agreements, which are anticipated to raise net proceeds of over $430 million upon settlement. Recently, we further strengthened our balance sheet with commitments to increase our revolving credit facility from $1 to $1.25 billion with strong support from our key banking partners. The facility includes an accordion option that will allow us to request additional lender commitments up to a total of $2 billion. The term of the facility will be extended to 2029, including extension options, and our cost to borrow will be reduced by five basis points based on our anticipated credit ratings and leverage ratio at the time of closing. Our capital markets transactions provide us with more than $1.7 billion of total liquidity, pro forma for the closing of our expanded $1.25 billion revolving credit facility, the previously mentioned outstanding forward equity, and more than $24 million of cash on hand. As of quarter end, pro forma for the settlement of our outstanding forward equity, net debt to recurring EBITDA was approximately 4.1 times, which is down two-tenths of a turn from last quarter. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was 4.9 times. Our total debt to enterprise value was approximately 30%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend, is very healthy at 4.7 times. We had only $43 million of floating rate exposure at quarter end via our revolver balance. And as a reminder, we have no material debt maturities until 2028. We are very well positioned to execute on our pipeline and stay well within our stated leverage range without any additional capital. Moving to earnings, core FFO for the second quarter is $1.03 per share, representing a 5.7% year-over-year increase. AFFO per share for the second quarter increased 6.4% year-over-year to $1.04. Our results for the quarter include the recognition of approximately $2 million of lease termination fees from a financial institution. The tenant agreed to pay 100% of the remaining base rent due for the primary term of both ground leases upon termination. We've taken ownership of both buildings via the termination without any incremental investment due to the ground lease structure. A letter of intent has already been executed on one of the properties and there's significant interest in the second from national operators. We view this as a great outcome for the company and indicative of our focus on identifying and acquiring high quality retail real estate with long-term demand drivers. As Joey mentioned, we have increased our full-year 2024 AFFO per share guidance range to $4.11 to $4.14. The updated midpoint represents 4.4% growth, an increase of 20 basis points from our initial guide. There are parameters on several other inputs in our earnings release, including acquisition and disposition volume, general and administrative expenses, non-reimbursable real estate expenses, plus income tax and other tax expenses. As a reminder, Treasury stock is included within our diluted share count prior to settlement if ADC stock trades above the net price of our outstanding forward equity offers. The aggregate dilutive impact related to these offerings was minimal in the second quarter. However, our updated guidance range contemplates more meaningful Treasury stock method dilution in the second half of the year and assumes that our stock continues to trade near current levels. Under that scenario, again, assuming a stable stock price, We anticipate Treasury stock method dilution will have an impact of roughly one penny on full year 2024 AFFO per share. Our ability to drive consistent earnings growth continues to support a growing and well-covered dividend. In April, we increased our monthly cash dividend to 25 cents per share, representing a 1.2% month-over-month increase. We subsequently declared monthly cash dividends of 25 cents for each of May, June, and July. The monthly dividend represents an annualized dividend amount of $3 per share and is almost 3% higher than the annualized dividend from the comparable periods last year. This growth comes as our ASFO payout ratio remains at 72% for the second consecutive quarter, enabling us to retain significant cash flow for reinvestment. As mentioned on prior calls, free cash flow after the dividend for 2024 is approximately $100 million on an annualized basis. To conclude, our well-positioned balance sheet affords us tremendous flexibility with pro forma net debt to EBITDA of 4.1 times and roughly $1.7 billion of liquidity to fund our robust investment pipeline. With that, I'd like to turn the call back over to Joey.
spk11: Thank you, Peter. At this time, operator, we can open it up for questions.
spk12: Thank you.
spk13: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch-tone phone. Then you will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. So our first question comes from the line of Ronald Camden from Morgan Stanley.
spk04: Great. Congrats on the quarter and raising the guidance. Maybe just starting with acquisition, the guidance implies an acceleration in the second half of the year. Maybe can you give some comments of what you're seeing in the pipeline and sort of cap rate trends?
spk17: Sure. Good morning, Ron. I'll tell you, look, this has been, as I mentioned, a rapid ascent of our stock price here in a fairly dynamic market, obviously, with a lot of crazy stuff going on. And so I think most importantly, we started sourcing for Q4 yesterday, and Q3 sourcing stopped yesterday as well. And so again, given the 70 days average letter of intent execution to close with call it, give it another couple of weeks to negotiate a letter of intent. You know, there's the basic transaction timeline for you. What I'm excited about is now turning to Q4 with an improved cost of capital. It's been a 12 to 18 months here of, you know, gritted teeth and clenched jaws while we sit here and watch the stock price flounder and rates creep higher. And so, again, We don't see any material macro changes yet on the cap rate horizon, but with an improved cost of capital, we certainly can lean into transactions that are high quality and additive to the portfolio.
spk04: And just on the cap rate, any cap rate trends, any commentary? Is it flat, getting better?
spk17: For Q3, I would anticipate similar cap rates to Q2. That pipeline is effectively built subject to diligence and closing already. Q4, we're going to see what's out there. Like I said, we started yesterday.
spk04: Great. And if my second one is just gone, maybe can you comment on just the bad debt assumptions, if any change to the watch list? Have you sort of seen any sign that the low-end consumer may be under pressure? Are you hearing anything from short attendance on that front. Thanks.
spk17: I think definitely, and I'll let Peter comment on the bad debt assumptions, the low-end consumer has been under pressure, undoubtedly. We really look at the consumer in three tranches, 50,000 median household income, 100,000, then over 150. I think if you see the pressure on the 50,000, that's reflected in the dollar general performance. If you look at 100,000, the Walmart core customer, they're getting trade down. over 150 seems to be strong, just certainly due to the overall market environment and their 401ks and their portfolios being elevated with that market. And so the low-end consumer continues to struggle. You see it in the restaurant prints. You see it in the dollar general prints. But the middle of the road there, the $100,000 median household income is fairly strong, but we're seeing the trade-down effect there and Again, that's reflective in Walmart's performance to date. Go ahead, Peter.
spk16: Ron, from a credit loss perspective, in terms of what we're contemplating in guidance, we're still assuming approximately 50 basis points of credit loss in our guidance range. And again, that's fully loaded credit loss. So any form of us not receiving rent as contractually obligated is included in that 50 basis points. Year to date, we've experienced roughly 25 basis points of credit loss. And so While the portfolio continues to that 25 basis points is in line roughly with our historical average, we thought it prudent to keep 50 basis points in our guidance for the time being.
spk11: Great. Thanks so much. That's it for me. Thanks, Ron. Operator, are you there?
spk13: Oh, hi. Yeah, so thank you. Our next question comes from the line of Matus Rose from Citi. Please go ahead.
spk09: Hi, thank you. I just wanted to ask a little more about the acceleration in the pipeline. You said not a lot of change on the macro front. So, I mean, is it really driven by what you described? I think the last quarter is kind of the three Ds and then very sort of active or proactive outbound calling on your part. But it seems like the environment is maybe starting to stabilize a little bit more. I'm just wondering if there's any sort of organic pickup and transaction activity that maybe is helping you out as well.
spk17: Yes, I agree with you. We see some stabilization, obviously, in the 10-year treasury, which seems to be range-bound. That could change tomorrow. But that stabilization does help the liquidity in the market and sellers' willingness to transact. Look, that said, that can change on a dime. Our transaction volume, as we mentioned in the Q1 call, would pick up in Q2 because transactions for Q1, going back to the timeline, are generally sourced during Q4 when we saw the roller coaster of the Treasury peaking at 5%. And so that stabilization pulls through generally to the next quarter, again, given that transaction timeline. And I think we'll see some pull through to Q3. And like I said, I'm excited for Q4 now. again, assuming a normalized environment here, which can be a tough assumption. Okay.
spk09: Okay. And then I just, I wanted to ask you just, you know, you issued on the ATM during the quarter, you know, price is about 10% lower, so where the stock is now. And, you know, I realize, you know, there's some relatively modest impact in the dilution methodology, but How are you thinking about potentially continuing to issue shares here just as you maybe gear up for 2025?
spk17: Our balance sheet's in a great position. A pro forma 4.1 times levered, obviously, with pro forma $1.7 billion in liquidity, executing on the $450 million unsecured bond offering with no material debt maturities. This balance sheet is a fortress. We'll look to how we deploy in terms of your prior question in terms of uses. If we see the need for incremental capital, we'll certainly look at alternative options here. But again, we are locked and loaded from a balance sheet perspective from any angle. Okay.
spk11: Thank you. Thanks, Meads.
spk15: Your next question comes from Joshua Denarlin with Bank of America. Your line is now open.
spk00: Hi, this is Farrell Granath on behalf of Josh. I just wanted to ask specifically about the competition in the market now with the also increased acquisition pipeline, what you're seeing.
spk17: No real material changes in competition in the market. The 1031 buyers are generally sidelined. The levered individual purchasers are generally sidelined. We've seen the CMBS market come back to a degree with lower LTVs. Institutional competition in our space remains extremely muted given the price point and nature of our transactions. We're really focused on those $4 to $5 million transactions, those relationship transactions where we can create value. And so competition is extremely limited.
spk00: Great. And also just going back to the watch list, I was curious if there are any names that recently have been added or fallen off in anything that you're keeping.
spk17: Nothing material that I can think of. It's been a fairly consistent watch list. Obviously, the cons was in the news yesterday. We don't have any cons. I've never been to a cons. I'm not even sure what they sell. But we don't have these restaurant tenants that we see with the challenges in the news as well. And so it's been a consistent watch list, which We're on top of here, and the asset management team is on top of in case we get these bases back. And frankly, we're excited to get some of these bases back to redo the Memphis, Tennessee former Bed Bath & Beyond, which I discussed in the prepared remarks.
spk12: Great. Thank you so much.
spk11: Thank you.
spk12: Okay, so our next question comes from the line of Mitch Germain from Citizens J&P.
spk13: Please go ahead.
spk05: Thanks for taking my question. Joey, I'm curious, when you look at CVS versus Walgreens, and you're making a bet on one and obviously trimming exposure to the other, what are the nuances of one store versus the other that gives you confidence in that model and that brand?
spk17: Great question. We've talked extensively over the years, and there's a slide in the deck about our frankly, our dissatisfaction with Walgreens, both business model and performance. What we're looking for in a 21st century suburban pharmacy is one of three things. A high-performing store that's generally doing over $12, $13 million with limited competition, a ground lease, or a basis that makes sense in the 21st century omni-channel world. Now, I'm hesitant to compare, but I'll compare suburban pharmacies today to movie theaters. Movie theaters aren't going away, and neither are suburban pharmacies. They're just both going to be rationalized. And so we're very focused on the real estate fundamentals, the residual values, and the individual store performance. You will not see us make any incremental investments in Walgreens. Obviously, we've gone from over 40% in 2010 to negligible today for a reason. The only pharmacy we're interested in is CVS. Those, I think, our CVS exposure is most likely peak tier. But we're looking for unique transactions that aren't your prototypical suburban pharmacy, catty corner or kitty corner from a Walgreens paying $375,000 a year and $28 per square foot in a 14,000 square foot box that is infungible.
spk05: Great. Thanks for that. And obviously, I appreciate the white paper. last week that you wrote, and I'm curious about C-Stores. They're becoming, obviously, a greater emphasis of the portfolio. Is there, you know, obviously, it seems to be still a lot of competition with those types of assets. So is it, you know, kind of through developer relationships, corporate? How are you getting success and growing that business?
spk17: All three platforms. We are very active on the development front, specifically. with C-Stores, large format C-Stores, as well as the developer funding platform. Third, I would tell you acquisitions just due to the cap rates. You know, the interesting thing about the C-Store white paper is people's perception of and understanding of the large format C-Store space is generally based on where they're located regionally. And I'll tell you, here in Michigan, with Sheets just entering, come and go with now Maverick, with an entry into the space, QuickTrip entering Michigan. We're not familiar with the C-Store. The Michigan consumer is not familiar with the large format C-Store that sells food and beverage for off-premises consumption, primarily coffee, breakfast, and lunch here. And so as C-Stores, these regional operators, Wawa, Sheets, QuickTrip, we go through a number of them, expand across the country, what they're learning and what consumers are becoming accustomed to is the C-Store becoming a quick service restaurant, the C-Store becoming a place to grab something quickly, a front end which they historically grabbed in the pharmacy, a bag of chips, a soda, any of those things. And so it's very interesting to watch them continue to grow. I think Wawa alone has launched, announced seven new states. And then watch the regionalized operators expand across the country and consumers expand. flock to it. We saw it in Florida with Wawa. Now, they had the history of racetrack in Florida, so a large format operator. I tell you, from my perspective, inferior food and beverage. But Wawa's success in Florida and other states has really led the way, and we were initial developer for Wawa in the state of Florida upon their entry, has led the way in giving these C-stores confidence that consumers outside of their core region are going to continue to really be attractive to the brand.
spk11: Thank you. Congrats on the quarter. Thank you very much.
spk13: Thank you. Our next question comes from the line of Eric Borden from BO Capital Market. Please go ahead.
spk06: Hey, good morning. Thanks for taking my question. Just building off the comment on the white paper, you know, just given that, you know, C stores are growing presence and You highlighted how they're potentially taking share from QSRs in coffee shops. How high are you willing to take your exposure to C-stores? Could they eventually become a top one or two sector for you? And does this change your view on your current exposure to your QSR portfolio?
spk17: I believe, correct me if I'm wrong, Peter, C-stores are number four at approximately 8% of the overall portfolio. We don't have a C-Store tenant in our top 15. I believe Wawa is our largest, just under 15, at approximately 1.7%, 1.8%, I believe. Sorry, 7-Eleven, we have in there above them, too, at about 2.4%. There is lots of room for us to continue to add C-Stores. I mean, just taking them from, let's call it the 8% to 10% of our overall portfolio from a sector perspective would be a very significant jump as the underlying portfolio and denominator continues to grow. So we will aggressively continue to pursue those transactions. Many of them are on ground leases. We have very strong relationships and are growing additional relationships in that space. And I think C-stores are going to be amongst them in off-price, the highest growth sectors in overall in retail for probably the next five to ten years. In terms of QSR, it's very negligible in our portfolio. We quickly divested of the Burger Kings and the other things in the 1031 markets when private equity entered and purchasers were paying five caps for them. I think we have, Peter, our QSR exposure is what?
spk16: It's roughly 1% today and similar to our C-Store exposure. If we are acquiring or if we own a quick service restaurant or any type of restaurant, we're looking to do so on a ground lease basis.
spk17: And I believe Chick-fil-A is number one or number two, and those are all ground leases in terms of QSRs. But we have stayed away from the Popeyes and the Burger King franchisees and the Wendy's franchisees and all the Yum! Brand franchisees. One, we don't like the real estate. The buildings are disposable, Inspector Gadget style, if you recall. And then two, private equity just came into the space, levered up balance sheets to drive costs down because they were unable to raise prices fast enough to drive EBITDA and the rent coverage post-sale leaseback and divesting of the real estate. So we don't like food here in terms of selling it. We like to eat it. Food is an ancillary product in the QSR space for convenience. We're big fans of. But you will not see us make any significant investments in the restaurant space absent a brown lease.
spk06: That's helpful. And you touched on this a little bit in your prepared remarks, you know, as it relates to the 24 and 2025 lease expirations, you know. Are your conversations with tenants for the 25s, you know, are there tenants looking to renew early just given the limited availability for retail real estate? And the second part of my question is, are there potential move-outs that we should have on our radar?
spk17: Generally, tenants don't renew early unless you give them something in exchange. We're confident of the 64 lease expirations. The vast majority will be exercising options. Those notifications, frankly, start in the fourth quarter of this year. If not the end of the third quarter of this year, there's generally a minimum of a 90-day lease notification. or option notification that's required. And so we'll be patient. At the same time, if we see any vulnerabilities from either the store-level data that we receive, the store-level conversations, corporate conversations, or market dynamics, we will definitely be in front of it. And the asset management team led by our COO, Nicole Witteveen, is on top of it. And no material move out that you should be aware of that are on our radar as of today.
spk11: Appreciate it. Thank you.
spk15: Your next question comes from Brad Heffer with RBC Capital Markets. Your line is now open.
spk02: Yeah, thanks. Morning, everyone. You have this discipline capital allocator slide in the deck, slide 12. I think your own WAC calculation and the cap rates from the second quarter would put you in the pedal to the metal category. Would you say that that's what you were thinking, pedal to the metal for the fourth quarter and for 2025, assuming nothing changes? Or is there something that would moderate that view?
spk17: Great question, Brad. If you look at our spot cost of capital, it's down approximately 50 basis points in the last, fair to say, 90 days, Peter, 50 days. 80 days. I do mention that the $700 million in guidance and the prepared remarks could prove conservative. We have full optionality given our balance sheet and our cost of capital. So one, either maintain the 150 basis point spread, we'll call it mid-sevens cash, or to put the pedal to the metal and keep it to the 100 basis point spread, which is the lighter green. Now, we'll look at that on a case-by-case basis, on a qualitative basis. We'll also look at larger transactions, if those make sense in context of our portfolio. I think the interesting thing here is for fourth quarter, we maintain full optionality. And as I mentioned earlier, sourcing started yesterday, given our clock in ARC. So ARC tells us we have 92 days left to source for 2024. We are excited about those 92 days, what it brings. Our cost of capital and balance sheet affords us full flexibility now. And we're going to see how that materializes. So I think next quarter we'll have much more visibility into it. And again, the $700 million could prove conservative, or we could push for that 150 basis point spread and say we're going to maintain discipline. That's going to be subject to the transactions that we're able to dig up.
spk02: Okay, got it. And then do you think cap rates will react to kind of the broader change in cost of capital for the public names, and will they be as slow to go down as they were to go up?
spk17: I try to avoid predicting cap rates always on these calls and in any forum. Predictions always seem to be wrong. If I had my money, they'd put my money on it. They've peaked. That said, just given the craziness of the world that we live in today, we're not going to place it either way, and we're going to bet either way and maintain our discipline here. The volatility out there from a macro, from a geopolitical, from a domestic perspective is something like I've never seen in my career, obviously. And so we're going to maintain our agility and flexibility here. I wouldn't anticipate cap rates materially moving up, but I could be wrong.
spk11: Okay. Thank you.
spk13: Thank you. Our next question comes from the line of Renata Laurier from Baird. Please go ahead.
spk08: It's Alex Fagan. Thank you for taking my question. How much has the transactable TAM increased by at your current cost of equity relative to the beginning of the year?
spk17: The beginning of the year, we were laying out do-nothing scenarios. So that was, look, it's been a dramatic shift here. Again, that ties into the hesitancy of guidance and acquisition guidance for the year. This has been somewhat of a roller coaster. Frankly, we were on a defensive mindset here. We executed on a number of internal initiatives to, frankly, prepare for a slowdown. We deployed the do-nothing scenario and articulated that to the street, followed by our initial guidance or inaugural guidance, I should say, with the approximately 600 million dollars Since then, as we've talked about on prior questions here, our cost of capital has decreased almost 10% materially here. And so it's been a roller coaster of the year. I'm extremely proud of the team, the discipline they've maintained. It is never easy for a team or a company to go through these types of strategic changes and these types of market-based changes. But we buckled down. We maintained their discipline. We ramped up our efforts, and now I anticipate we see the fruits of that waiver.
spk08: Got it. Thank you. And second one for me, I also enjoyed reading your most recent white paper. Seems like a few of the questions have been asked already, but if you can just kind of tell us what the percentage of your current C-Store exposure is large format versus small or regular format.
spk17: It's all large format. We don't believe in small format C-stores. There may be one or two odd ones that we have for some reason. We don't believe in the small format C-store. Again, just hearkening back to my comment about the state of Michigan, historically, gas stations, we didn't call them C-stores, had an auto base, sold cigarettes, gum, and a cooler. We weren't familiar with that. Now, some local operators in 7-Eleven have expanded to offer food and beverage. We don't believe in the small format C-stores. As the white paper articulates, the margin is not in fuel. The margin is in food and beverage. Liquid gold is coffee sitting in front of me right now. That is where C-stores drive margin and EBITDA. And so we do not invest in small format C-stores absent a ground lease or some unique circumstance.
spk08: That's helpful. Thank you for the time.
spk11: Thank you.
spk13: Thank you. Our next question comes from the line of Upal Rana from KeyBank Capital Markets. Please go ahead.
spk07: Great. Thank you. Joey, with the possibility of a September rate cut being high at this point, how would that maybe impact your strategy leading up to that cut or even after, assuming we get one?
spk17: Look, I think a rate cut, a short-term rate cut, is most likely already priced into the market today. I mean, we are approaching August here now. So I would anticipate that's already approaching. You can see it priced in at the 90-plus percent probability today. So I would tell you that has no impact on our overall strategy here.
spk07: Got it. Okay. And then just as a follow-up, what's your opinion on the current state of retailers broadly? We continue to hear some more of these companies either filing, restructuring, closing stores. I just want to get your view on the current state of the market and maybe what you may be hearing. And obviously, you don't own a lot of these names, but just want to get your two cents.
spk17: We are back to capitalism today. in retail or Darwinism in retail. The strong will survive. The large players, which we're focused on in our sandbox, with the balance sheets to invest in labor, in price, and in fulfillment strategies. And we're in the fifth inning, sixth inning max of a transition to an omni-channel world. The legacy retailers that were frankly bolstered by COVID are by the access to cheap capital or IPOs, we're going to see them continue to fade and go away. This is something that we fully anticipated. It's back to a normal cycle, a normal business cycle that was, frankly, averted during COVID and in a post-COVID world where money was free. And so now it's about balance sheet, it's about execution, it's about value proposition for consumers. And that's irrespective of where the macroeconomic or consumer health lies. Dollar General, we talked about how they have had a more difficult time because the $50,000 median household income is obviously challenged. Dollar General is going to be just fine here, guys. They are a... provider of food for rural America today that probably would be a national security threat if they went out of business. At the same time, they have a huge balance sheet. They have a growing demand on an overall basis, inclusive of their new store count, for their goods, primarily now servicing food and essentials, all of them. And so we're going to go back to a world. We're in the world again. I had a conversation yesterday with a turnaround consultant who was very busy working with retailers. We're back in the world where the strong survive and the weak will die off. And that's a good thing. That's capitalism.
spk11: Great. Thank you. Thank you.
spk13: Thank you. The next question comes from the line of Michael Goldsmith from UBS. Please go ahead.
spk10: Good morning. Thanks a lot for taking my question. We appreciate the guidance and increased visibility into the algorithm. Now, I think as the investment community tries to digest your approach to the outlook, you've talked about the acquisition guidance of $700 million being conservative. You may have mentioned that at least three times on the call, and you took it up with this quarter. So just trying to get a sense of how are you looking at setting that guidance? You know, for instance, like does that reflect your visibility into the third quarter and then a haircut of what you think is reasonable for fourth quarter, just trying to get some better understanding of the, like the mindset when, when putting that piece of, when they're putting that number on the piece of paper.
spk17: Yeah, look, it reflects the current visibility we have and then gives us flexibility to deploy capital subject to our cost of capital. I mean, This is all packaged together. So if you look from 30,000 feet, we're assuming treasury method of dilution in our guidance, as Peter articulated. At the same time, we're not incorporating any assumptions that are non-static based. When I talk about it being potentially conservative, I'm just not willing to go out there on a limb, given the volatility we've had with a presidential candidate being attempted assassination, another one dropping out of the race. The volatility we have in this world to go out on a limb and tell everyone we're going to do some wild number in the fourth quarter of this year when acquisition sourcing for fourth quarter started yesterday. We have $1.2 million in our fourth quarter pipeline for acquisitions. That is normal. That is our normal cycle. We don't want any more than that because we don't want to be on a forward basis. And so we just don't have visibility. This is a conservative company all around. whether it's our guidance, our balance sheet, our management philosophy, and then how we message to the street. And so we're going to stick to that philosophy through and through. Now, again, I hope fourth quarter proves much more, you know, much more, much larger, I'll call it, than our conservative underlying assumptions here. But again, we maintain the willingness to stick to now 150 basis points spread. and be strategic and surgical about the acquisition pipeline and what we execute on, or step on the gas if qualitatively transactions warranted.
spk10: Thank you very much for that. I think we can all appreciate that. And my second question is related to the dispositions in the quarter. It included Mr. Carwash and Gerber, similar to last quarter. What are the characteristics of the properties you're looking to recycle? And should we read anything into the cap rates on the dispositions moving up 20 basis points sequentially?
spk17: No, I appreciate the question. This was part of our disposition program and capital recycling of non-core assets on a very aggressive basis. So as you can see in the mid-sixes here, these were Gerber collisions and basically Florida-based stuff with Florida-based money that is overheated. And so this was the first half of the year capital recycling program that has now most likely transitioned given our cost of capital here. Our goal was to dispose of assets that were non-core and recycle that north of 100 basis points wide. Obviously, that has changed. We were prepared not to enter the equity markets and the do nothing scenario. And so we bolstered our asset management disposition capabilities. We've now executed on, I believe, $60 million of that type of asset recycling. Not that anything is not for sale here. All real estate is for sale at the right price. But at the same time here, we're focused on offense now.
spk10: Thank you very much. Good luck in the back half.
spk17: Appreciate it.
spk13: Ladies and gentlemen, as a reminder, should you have any questions, please press 1. Our next question comes from the line of John Kniechowski from Wells Fargo. Please go ahead.
spk18: Hi. Thank you. So early on the call, you mentioned that distress is picking up in the market as it relates to acquisition opportunities. Are these idiosyncratic or are they specific to certain geographies or asset types?
spk17: I don't recall saying distress is picking up in the market. I mean, we think distress is pretty static throughout the market based upon what we call the three Ds, death, divorce, and debt, whether it's asset-specific debt or just overall capital structure of an entity or an institution or individual. And so I think there's a level of distress in the market. Refinancing obviously is down. LTBs are down. Proceeds are down. Local and regional banks are challenged here. Developers are challenged. There's a level of distress that we continue to work through and take advantage of across all three platforms. But I wouldn't say we've had, I've seen a notable increase in distress throughout the course of the year.
spk18: Okay, understood. Maybe it was just the mention of distress. So second question here, have you noticed a material change in seller behavior following either the most recent CPI print or how sentiment has changed around the elections?
spk17: Sentiment change here on the election, that's hot off the press. I can't tell you anything on that front. In terms of the most recent CPI print, this is such a large and fragmented space. I think sellers today, if they're waiting for one cut or two cuts from the Fed, then correlate it to the 10-year Treasury and cap rates thereafter are looking at tertiary effects. I tell you, look, I think sellers have come to the realization now with the stabilized or semi-stabilized treasury in the 4-2 to 4-3 band here that we're in a higher for longer period. Reality is amongst us, guys. And so what we tell our team members is that is our working assumption. If a seller does not have that or a potential seller does not have that working assumption, move on to the next one.
spk11: Got it, thank you. My pleasure.
spk13: All right, our next question comes from the line of Linda Tai from Jefferies. Please go ahead.
spk14: Hi, just to follow up on C-STORs in your white paper, you highlighted several Wawa sheets, QuickTrip, 7-Eleven. What does term look like for these deals, and what do cap rates look like across these different concepts? And then I guess last question is like who would you consider your main?
spk17: competition and competing for these games The term is generally 15 to 20 years many of them are on ground lease structures That's why was preferred format is a ground lease structure. You can see that reflective in our investor deck with just our Wow exposure there Sheets is very similar generally on ground lease structures 7-eleven Generally on a turnkey basis. Cap rates vary. There's a lot of regional purchasers for these operators. By the way, I should apologize to all the Buc-ee's fans that we didn't include them in the white paper because I got lots of emails. But where's Buc-ee's? Where's Buc-ee's? Where's Buc-ee's? Amazing operation if you're not familiar, but only about 100 stores. We didn't want to make it the white encyclopedia. It's a white paper, so we couldn't include everybody. So I apologize to those Buc-ee's fans. We'd love to do business with Buc-ee's. Cap rates range. You get a lot of local buyers that fall in love with the Wawa down the street or the Sheetz or the Quick Trip down the street from them. And so cap rates range. We still see trades in the fives. We don't pay attention to that stuff. Again, I'd remind everyone, Linda, that we're working across all three external platforms here, growth platforms, to source C-store opportunities. So for us to buy a full-term new Wawa sheets or Quick Trip would be very rare.
spk14: And then just a quick question on drugstores with Rite Aid and Walgreens closing stores, and I know you were very aggressive in reducing your Walgreens exposure in recent years, but do you have thoughts on where this market share gets reallocated?
spk17: Great question. Where it gets reallocated. The front end of the stores have been reallocated to C-stores, the front end of the pharmacies. Chips, drinks, right? Those of candy reallocated to C-stores.
spk11: The fragrance, beauty has been reallocated to the altas, the the forum rose plus I'm plus online of the world while simultaneously that Simultaneously that share has exited the first floor of the department's stores as we see shrinkage. we see shrinkage there generally I'll tell you has has stayed somewhat fairly stable but the problem is the
spk17: the generic pressure on drugs as well as the third party government reimbursement rates for there. And we haven't seen an online penetration of pharmacy that is material. Now, Costco, Walmart, all those operators also, grocery stores operate pharmacy. But the business has never driven EBITDA from the pharmacy. The business is driven from 11,000 square feet of the front end space. And that front end is under pressure. As I mentioned, I think, on a last call, I go to the pharmacy. absent picking up a script three times a year. Valentine's Day, my wife's birthday, and my anniversary, and I stand there and get a $9 greeting card, and I can't believe it's $9. If you're going to run in for any convenience items, you're going to a convenience store. It's faster, they have more checkout lanes, and it's cheaper.
spk11: When I need new toothpaste, I hit order again on Amazon. It shows up cheaper the next day for free. So, you know, you see... You see that... The dis-intermediation across the aisles as you walk around the farm. It's not going to one specific competitor. It's being disintermediated by multiple competitors. mediated by multiple different by multiple different retail sectors sector yours plus Amazon and so there's There's no turning back from this Right there is no merchandise
spk17: strategy that takes the pharmacy front end and makes it successful that would not be a wholesale change. Pharmacies, inclusive of Walgreens, have explored and experimented with things like the Walgreens Cafe. The challenge there is to man food and beverage for off-premises consumption. If you have soda fountains and slurpee machines, if you have coffee stations, They break, people have spills, and there are challenges to manage. And when you have three FTEs max, exclusive of the pharmacy, three full-time employees checking out, stocking, and a manager, you cannot service and maintain that type of equipment.
spk11: equipment and so that has worked Walgreens also experiment into the wall green boots alliance with cousin clients with cosmetics and fragrance making the big could replicate boots aligned experience in Western Europe. the underestimated the American consumer. Women in this country don't go to the traditional pharmacy for Beauty. Makeup. Fragrance. Alta has taken that chair from the department stores. Very dissimilar. That chair from the department stores. very very dissimilar Western Europe so next Next time you walk around a pharmacy, just look around the aisles. Say, where can I buy this stuff?
spk17: The stuff in the middle that's seasonal, go to five below, it's cheaper. Go to the dollar store, it's cheaper. The Halloween junk, the Christmas stuff, that stuff has a better assortment, it's better organized probably, and it's cheaper at the dollar store. You walk around the perimeter, think of a C-store. So that's kind of what we do here and how we figure out what sectors and retailers we think make sense in 2024 and beyond.
spk13: helpful thank you Linda all right so there are no further questions at this time as Niall like to turn it all back over to Ruben for some closing comments all right thank you very much great job decision I hope everybody enjoys the rest of the summer we look forward to seeing you soon thank you
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