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Agree Realty Corp
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Good morning, and welcome to the Agree Realty’s First Quarter 2018 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that today’s event is being recorded.
I would now like to turn the conference over to Joey Agree, President and CEO. Please go ahead, Joey.
Thank you, operator. Good morning everyone and thank you for joining us for Agree Realty's first quarter 2018 earnings call. Joining me this morning is Clay Thelen, our Chief Financial Officer.
We are very pleased to report that we are off to a strong start in 2018. During a busy quarter we further diversified and strengthened our industry leading portfolio through disciplined investment activity and proactive asset management and executed on a strategic capital market transaction that further fortified our balance sheet, positioning us for continued growth.
Capital invested across our three external growth platforms totaled $102.7 million in the first quarter among 39 high quality retail net lease properties. Of those 39 investments, 30 properties were sourced through our acquisition platform, representing aggregate acquisition volume of approximately $98.6 million for the quarter. The properties were acquired at a weighted-average cap rate of 7.2% and had a weighted-average remaining lease term of 13.6 years.
The acquired properties are located in 15 states and our leased and leading operators operating in 12 different sectors, including off-price, convenience store, auto parts, tire and auto service, grocery and crafts and novelties. Notable retailers include AutoZone, Tire Kingdom, O'Reilly Auto Parts, Hobby Lobby, T.J. Maxx, Home Goods, Panera Bread, Starbucks, Firestone and Gerber Collision.
During the quarter we are also very pleased to have closed on a sale lease back with Belle Tire, a leading regional tire and auto service retailer, with a 95 year operating history. The portfolio is comprised on seven master lease properties, a very strong tire and auto service stores.
Belle Tire is a local family owned company and the 11th largest tire retailer in the country with approximately 100 stores. They are the clear market leader in Michigan with more than a 33% share. This transaction was Belle’s first sale leaseback and we are excited to partner with a leading retailer in our own backyard that many of us have frequented over the years. We look forward to continuing to build upon our strong relationship with the Belle Tire team, as well as the Barnes family.
As our pipeline continues to ramp we remain focused on adhering to our stringent underwriting standards. Given the dynamic nature of the retail landscape and often the binary outcomes associated with second and third tier operators, we continue to emphasize high quality retail real-estate leased to industry leading operators that have a comprehensive omni-channel strategy, a value oriented business model, or a service base component. Our disciplined focus has served to strengthen our best-in-class portfolio. Today our portfolio is stronger and more diverse than it has even been in our company’s history.
Turning to our development and partner capital solutions platform, in the first quarter we had nine development and PCS projects either completed or under construction that represent total committed capital of approximately $51 million. Four of those projects were completed during this past quarter, representing total investment activity of $26.7 million.
The project completed during the quarter include Art Van Furniture's new flagship store located across IKEA in one of the states dominant retail trade areas in Can, Michigan. The store celebrated its successful grand opening on February 1. Additionally, our first two developments with Mister Car Wash in Urbandale, Iowa and Bernalillo, Mexico celebrated successful grand openings in the first quarter and rent has commenced at both locations. The projects are subject to new 20 year net leases and had aggregate total costs for approximately $6.3 million.
Lastly, the company’s first project with a leading Burger King franchisee TOMS King was completed during the quarter and rent subsequently commenced. The project is subject to a new 20 year net lease.
During the first quarter we commenced two new development and PCS projects. These projects include the company’s first PCS projects with ALDI in Chickasha, Oklahoma and the company’s first development with Burlington Coat Factory in Nampa, Idaho. We continue to find the opportunities to leverage our differentiated capabilities to partner with leading retailers to execute their expansion plans.
Construction continued during the quarter on three development and PCS projects. The development includes the company’s third project with Camping World in Grand Rapids, Michigan and our third and fourth project respectively with Mister Car Wash in Orlando and Tavares, Florida. All three projects are subject to new 20 year net leases.
While our investment activity year-to-date has served to improve the quality of our portfolio, we also look to solidify and diversify our portfolio through proactive asset management, as well as disposition efforts. These efforts continued in the first quarter as we sold five properties for gross proceeds of approximately $16.7 million.
During the quarter Meijer exercised an option to purchase their store in Plainfield, Indiana. Meijer had previously ground leased the location from the company for the past 10 years. Following Meijer’s exercise and their option to purchase the property for $3.9 million, the company realized an internal rate of return of 11% on our investment.
It’s important to note that this was the only purchase option in our portfolio. Meijer’s exercise of their option to purchase and our disposition activities in the first quarter have resulted in a net gain of $4.6 million.
Our disposition efforts, portfolio management and continued growth continue to strengthen the composition of our leading portfolio. Our exposure to the top three tenants now stands at 14.4% of rental income, a decrease of 360 basis points year-over-year. Similarly our top 10 tenant concentration has been reduced to 32.4% of annualized base rents, a 360 basis point decrease from this point last year.
Our asset management team has also been proactively addressing upcoming lease maturities. As a result of these efforts we had just six remaining lease maturities in 2018, representing 0.6% of annualized base rent. Roughly half of the annualized base rent expiring in 2018 is attributable to our two Kmart locations in Mount Pleasant, Michigan and Frankfort, Kentucky. Kmart has failed to exercise options at both locations and we look forward to the opportunity to redevelop both sites and will unlock additional value.
I am pleased to announce we have executed a 15 year lease with Hobby Lobby in Mount Pleasant for the construction of a new 50,000 square foot prototype. Entitlements have been fully secured and we anticipate demolition on the former Kmart will begin in the third quarter of this year with rate commencing in the second half of 2019.
We are also working with a number of leading retailers in Frankfort, Kentucky. As you may recall, both of these former Kmart locations we’ll retain because of the below market rental rates, as well as the strong underlying real-estate. We look forward to updating you on these redevelopment opportunities later this year.
As of March 31 our growing retail portfolio consisted of 463 properties located in 43 states. Our tenants are comprised primarily of industry leading retailers in more than 28 diverse retail sectors with 46% of annualized base rents coming from tenants with an investment grade credit rating. The portfolio remains effectively fully occupied at 99.7% and has a weighted average remaining lease term of 10.3 years.
On last quarter’s call we highlighted the quality of our ground lease portfolio, which is comprised of leading retailers including Lowe’s, Wal-Mart, Wawa, ALDI, AutoZone, Chick-fil-A [ph], McDonalds and Starbucks. At quarter end nearly 90% of our ground lease portfolio derived its rent from retailers that carry an investment grade credit rating.
To conclude, the first three months of the year marked another very strong quarter for our growing company. Our high quality portfolio continues to improve and our fortress like balance sheet positions us to execute in 2018 and beyond.
With that, I’ll turn it over to Clay to discuss our financial results for the first quarter. Clay?
Thank you, Joey. Good morning everyone. I’ll begin by quickly running through the cautionary language. As a reminder, 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.
In addition, we discuss non-GAAP financial measures, including funds from operations or FFO and adjusted funds from operations or AFFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release.
As announced in yesterday's press release, total rental revenue, including percentage rents for the first quarter of 2018 was $31 million, an increase of 27.8% over the first quarter of 2017.
General and administrative expenses in the first quarter totaled approximately $2.9 million. G&A expenses were 8.3% of total revenue in the first quarter and we anticipate G&A expenses to be roughly 8% of total revenue for the year.
Funds from operations for the first quarter, was $22 million, representing an increase of 29.3% over the comparable period of 2017. On a per share basis FFO increased to $0.71 per share, a 9.3% increase as compared to the first quarter of 2017. Adjusted funds from operations for the first quarter was $21.8 million, a 27.7% increase over the comparable period of 2017. On a per share basis AFFO was $0.70, a 7.8% increase as compared to the first quarter of 2017.
Now moving to our capital markets activities. During the first quarter we completed a follow-on public offering of 3.5 million shares of common stock in connection with the forward sale agreement. The offering included the full exercise of the underwriters’ option to purchase additional shares and is anticipated to raise net proceeds of approximately $163 million after deducting season expenses.
Today the company has not received any proceed from the sale of shares of its common stock. Selling common stock through the forward sale agreement enabled us to set the share price while delaying the issuance of such shares in receipt of the net proceeds by the company. We have the ability to settle the transaction in whole or in trenches at any time between now and March 1, 2019.
The forward offering provides the company the capacity to invest an incremental $500 million and stay within our stated leverage range of net debt to recurring EBITDA of 5x to 6x. We view this transaction as a unique way to further bolster our balance sheet in the intermediate term, lock in our cost of capital and mitigate external risks.
As of March 31 our net debt to recurring EBITDA was approximately 4.8x and below our stated range. Furthermore, our total debt to total enterprise value was approximately 27% and our fixed charge coverage ratio which includes principal amortization remains at its highest level in the company’s history at 4.2x. These metrics continue to be amongst the strongest of our peers and demonstrate the ongoing strength of our balance sheet, which is an excellent position for 2018 and beyond with significant capacity and flexibility in regards to capital sources.
Our conservative approach to leverage provides us with the ability to be opportunistic when making capital markets decisions. The company paid a dividend of $0.52 per share on April 13 to stockholders of record on March 30, 2018. The quarterly dividend represents a 5.1% increase over the $0.495 per share quarterly dividend declared in the first quarter of 2017. This was the company’s 96th consecutive cash dividend following its IPO in 1994 and it represents a five year increase of 27% over the company’s first quarter 2013 dividend.
Our quarterly payout ratios for the first quarter of 2018 were conservative 74% of both FFO and AFFO. These payout ratios are at the low end of the company’s targeted ranges and reflect a well covered dividend.
With that, I’d like to turn the call back over to Joey.
Thank you, Clay. To wrap it up, I’m very pleased with our performance during the quarter. We are in a fantastic position to execute for the remainder of the year with a strong portfolio, a talented and growing team and a fortified balance sheet.
At this time operator, we will open it up for questions.
Thank you. [Operator Instructions] Our first question comes from George Hoglund of Jefferies. Please go ahead.
Good morning guys.
Good morning George.
Just first question, in terms of you know the asset sales that happened during the quarter, if you could give a little bit more color on that and then just also going forward kind of what type of assets will you be targeting in terms of you know either retail categories or you know types of situations that you would be targeting.
Yeah, generally I think our asset sales fall into a couple of distinct buckets. First and foremost we’ll continue to target reduction of our Walgreens exposure. We pretty well telegraphed what we perceive that exposure to be at year end. Then we sold one Walgreens in Grand Rapids, Michigan during the quarter and then we’ll look both at opportunistic sales, most notably in the franchise restaurant space, but then opportunities to improve our portfolio as we talked about in the prepared remarks.
I know our restaurant exposure is down 6.8%, that’s the aggregate restaurant exposure. Year-over-year our quick service is down 150 basis points at 5.3%. Casual dining similarly is down 105 basis points to 1.5% this quarter. We really focused it on that casual dining exposure. It’s not a space that we’re overly comfortable with, and so you will continue to see us execute on disposition transactions in those buckets.
Okay. And is there any change in sort of the tenant watch list, any noticeable you know deterioration in any of the tenants that you have an eye on?
No, in fact our watch list continues to shrink. The Walgreens acquisition of the two Rite Aid stores, obviously that was significant for us. The pending Kmart lease expirations that we touched on there, obviously Kmart will be gone from our portfolio fairly shortly here.
You know as I mentioned in our prepared remarks, our portfolio has never been stronger; it’s never been more diversified. The team here is doing a fantastic job sourcing opportunities across all three of our external growth platforms and you know I’ll add, you’re only going to see our portfolio continue to improve. We’re working on a number of very high quality transactions as well as those non-core dispositions with the goal of continuing to strengthen our leading portfolio of retailers here.
Yeah, thanks guys.
Thanks George.
Our next question comes from Collin Mings of Raymond James. Please go ahead.
Hey, good morning guys.
Good morning Collin.
First question for me, just as you think about the flexibility offered by the forward equity offering. How are you thinking about accessing the debt markets over the balance over the year versus utilizing just the revolver for maybe a little bit more than you had in the past?
No, hi Collin. This is Clay, I appreciate the question. I’ll maybe start from a debt perspective in terms of – just in terms of sizing based on our guidance and the way we started the year. I anticipate sizing you know maybe in terms of a private placement to be more consistent with last year. For reference last year we executed on a 12 year deal in September.
I would say the forward offering provides us some certainty that is really unique and that having a takeout or a back stop if you will from an equity perspective and having real intermediate cost of capital certainty in the intermediate term. I would say we’ll be a more active user on the line of credit given that certainty and given the inherent cheaper cost of capital with the line of credit and where we are able to borrow at. And so we’ll continue to use the line of credit and then ultimately replace that with longer term, fixed rate, low leverage financing throughout the year or later this year.
Okay. So for like modeling purposes if we were thinking of maybe $100 million, $150 million, call it in the back half of '18 that might be fair from your standpoint?
That’s right, that’s exactly right.
Okay. And then just in terms of maybe how do you think about the shift in the pricing environment relative to what you were able to do last year?
Yeah, no it’s a good question. Last year we executed a 12 year deal as I mentioned where as you know 160 basis points over the curve. I would say today the balance sheet is even further improved; the portfolio is even further diversified. We continue to operate under an investment grade mentality and approach and I anticipate pricing will be reflective of that. We’re very close with our private placement lenders and relationships and that’s continued dialogue that we have. And so I anticipate pricing will be reflective of our continued growth and growth done in a meaningful and prudent way.
Thanks Clay, I appreciate the detail there. Joey, just one big picture question for you real quick. As you think about your feeder portfolio, it looks like now 3% of the AVR. Just update us on how you are thinking about your exposure there?
Yeah, sure. I’ll start by saying we have a grand total of five movie theatres now in our portfolio with no near term plan to add any additional. We have three AMC’s with the completion of this transaction in the first quarter, one Cinemark [ph] and one Regal. So the portfolio, it’s fairly diversified. With that said, we are real estate opportunists at our core. When sentiment goes one way we have no problem taking advantages of any dislocations that we see out there in the market.
Now this quarter’s transaction was a very good example. The AMC that we acquired was more than two times average revenue per screen and it has fantastic coverage, very strong sales. We see them consistently rise year-over-year; there is no national competitor in the market. If you combine that with that 16.5 years of remaining lease term, as well as the increases in the base term, as well as the options, then we think this fits well into our strategy.
Movie theaters we think is a minority piece of our overall exposure. You will continue to see it be a minority piece, so we think that it’s at its peak right now.
Okay, I appreciate the color there Joey.
Thanks Collin
Our next question comes from Nicholas Joseph of Citi. Please go ahead.
Thanks. Joey, some active acquisitions this quarter. Have you seen an impact on the transaction market or cap rates due to the rising interest rates?
Yeah, good morning Nick. We really haven’t seen cap rates in the product that we are chasing move by any material way. We have seen some gapping out in secondary or tertiary product that really doesn’t fit. Some larger boxes, frankly we have seen cap rates gap out. It’s really a binary world today. There is capital chasing at a high quality asset and then frankly there is significantly less capital chasing lower quality assets. And so our ‘Sand Box’ we haven’t seen any material movement in cap rates yet.
What we have seen is we’ve seen some transactions come back to us that frankly sellers were either are holding out for higher pricing or went the way of a 1031 purchase who failed to execute, and then we’ve seen what we call flow back. But in terms of material moving cap rate we haven’t seen anything of substance.
Did you’re underwriting standards or return hurdles change at all?
They haven’t. I would tell you, if anything they’ve become more stringent. We are acutely and intensely focused here on the highest quality of real-estate and the highest quality of operators.
I just don’t feel – given the dynamic nature of the environment that we are in, I just don’t feel it’s the right time to go up the risk curve and we have the ability to execute with the best of the best across our three external growth platforms and you see that across acquisitions development, as well as partner capital solutions. So look, it’s a highly fragmented market, it’s a huge base. Our focus continues to be very tight.
Thanks, and finally what was the cap rate on the AMC Theater this quarter?
I can’t disclose because there is some confidentiality provisions. I’ll tell you it’s in line with our historical acquisitions. We’ve got some confidential provisions in both the purchase agreement as well as the lease. We’d love to give some more detail, but we have been advised not to.
Thanks.
Thanks Nick.
Our next question comes from Rob Stevenson of Janney. Please go ahead.
Hi, good morning guys. Joey, what was the rough revenue or annualized based rent that you guys were getting from the two Kmart locations and what alone is Hobby Lobby roughly going to wind up doing?
Yes so specifically to Mount Pleasant, that was a gross lease with Kmart, a $175,000 a year in annual rent, effectively on a gross lease. So Kmart on a net basis there was really paying at de minimis amount of rent. You are talking about $40,000 plus or minute on an annual basis.
The Hobby Lobby transaction will be a reverse build-to-suit. Hobby Lobby will construct their own building, pretty typically for Hobby Lobby. It’s a 15 year base term. Obviously we are getting a significant credit upgrade, additional term, 50,000 square foot prototype store. Our investment there will be approximately $4 million, including the tenant improvement allowance for their reverse build-to-suit and we are looking rents at in upper mid single digits there with growth every five years.
And does the swap between the Hobby Lobby building and the Kmart also leave you with additional space there to develop either there or at the outparcel?
Yes, so we are going to completely demolish the existing Kmart structure. Its 80,000 square feet approximate. I grew up on that site driving a bulldozer as an original project that my father developed pre-IOP. So we are going to scrape that building. Hobby Lobby will build their new turnkey and then we’ll have a 20,000 feet, a pad of 20,000 feet adjacent to the Hobby Lobby which we are confident is very marketable there.
Then moving on to Frankfort, Kentucky – we’ll come back to Mount Pleasant if you have another question. Moving on to Frankfort, Kmart was paying $2 gross in Frankford, Kentucky, so about $165,000 a year on a net basis. We anticipate again that lease expired, Kmart failed to exercise their option there. We anticipate demolishing that building as well and are working with a number of tenants that we had hoped to be able to announce if not next quarter, fairly shortly here.
Okay, and then second question. Can you talk to us about how the board is thinking about the dividend? I mean looking at it today I mean and where you guys are versus taxable net earnings, because you guys how have by far and away the lowest dividend yield in the triple net space. Your payout ratio is low. You guys have been increasing the dividend you know every couple of quarters or so, roughly 3%-ish or something like that.
Are you at a point where you are able to keep doing that or are you going to be forced to increase a dividend by a more substantial amount of specialty if your earnings growth continues to run at this rate.
I think – I’ll tell you from the board’s perspective and I’ll speak on behalf of the entire board. I think there’s a few important principals in terms of the dividend. One is predictability, two is transparency into our thinking, so I appreciate the question and then three is sustainability, and current sustainability as well as growth sustainability. The board generally thinks about the dividend in line with the AFFO growth.
We’ve moved effectively to a two times a year dividend raise. I don’t think that’s any secret here. You can just look at the history, which gives better visibility for the board in terms of AFFO on an annual basis. And we have a number of different constituencies as all net lease REETs do from individual shareholders and retirees that live off the dividend, to the other side of dedicated investors who see it as a cheapest from of capital or retained earnings.
So we like to strike a balance there obviously. I’m a significant shareholder. My family is a significant shareholder. We appreciate the dividend, at the same time we understand that it’s our cheapest from our capital. So I think you will see us continue to strike that balance. Our stated range of 75% to 85% payout ratio of AFFO and FFO maintains and you are right, we are at the low end of 74% and there is obviously an opportunity to consistently be raising that dividend.
Okay, thanks guys.
Thank you, Rob.
Our next question comes from Ki Bin Kim of SunTrust. Please go ahead.
Good morning. This is actually Ki Bin’s associate Alexei.
Good morning.
Two quick questions for you. First one is, how do you think about the deployment of capital. Do you prioritize acquisitions or developments or do you see developments becoming larger part of the business over time?
I would tell you we look at each individual opportunity across all three platforms. They stand on their own, and so obviously they have different return thresholds, they have different parameters, different time horizons to execute on the development from an acquisition.
Typical development from start to finish takes approximately 18 months. Our acquisition activity from LOI execution of closing average is 71 days and so we look at every opportunity on its own. We don’t have distinct – I would tell you, we don’t have distinct buckets that we need to deploy a certain amount of capital across. We give our guidance for acquisitions because of that fragmented space, but development is really a function of relationships as well as partner capital solutions is the same.
Okay, thank you and a second follow-up. What kind of yield are you projecting on these developments?
So we really haven’t changed any yields in the development. We are still targeting, call it 9% returns on development or on a variable basis, 250 basis points wide of where we can buy a life time product on the acquisition market. If we are going to deploy our capital, what I would tell you more importantly, our human capital into a project and into a relationship we have to be able to deploy one, a material amount of capital and then two, bring true value to the table and be value add to all stake holders there, including our tenants.
Okay great, thank you.
Thank you.
Thank you. Our next question comes from R.J. Milligan of Baird. Please go ahead.
Hey, good morning guys, most of my questions have been answered, but I hoping Joey maybe you could give us a little more color on Belle Tire, which is now one of your top tenants and maybe just a little bit more background on how you think about underwriting that investment and the attributes that you saw there going forward?
Sure, good morning R.J. So what we are extremely drilled out at Belle Tire to our portfolio. We are talking about a company where frankly three generations of my family have been getting their tires fixed and changed. My wife was there three weeks ago, thanks to our fantastic Michigan roads with potholes all over them.
I’ll tell you, Belle is a top tier customer service organization. Net promoter scores that are on par with Apple and Costco, that is pretty tough to accomplish when most of your customers come in in a pissed off mode and you are in the tire and automotive service business.
The portfolio has seven properties and we acquired first transaction with Belle Tire, the first time they’ve ever executed on a sale leaseback. The company is a family owned effectively all 100 stores. Our master lease, they very well covered at over three times. Great real-estate, main retail thoroughfares, very attractive brick buildings and most importantly, a great operator that we are intimately familiar with; dominant in South East Michigan, 33% market share and brand awareness here in South East Michigan, that’s really off the chart. It’s a company that frankly I’ve grown up frequenting and seeing their commercials online.
That’s helpful. Is it something that you see potential further opportunities for more sale leasebacks with the operator?
Potentially we look forward to working with Belle across our external platforms, our growth platforms. It’s a growing company, it’s a family owned company. It’s a very prudent and disciplined company. They are opening five to seven stores per year historically and so we look at any opportunity to work with Belle Tire and the Barnes Family there.
That’s helpful. Thanks guys, that’s it from me.
Thank you R.J.
Our next question comes from John Massocca of Ladenburg Thalmann. Please go ahead.
Good morning gentlemen. Just got a follow-on to R.J’s question, was there anything specific that kind of drove the burst of acquisitions in the tire auto service in auto part sectors in 1Q ’18. Obviously Belle was a factor, but you seem to make a number of other acquisitions, similar acquisitions in this space outside of just that sale leaseback.
Look, I try to continue to work with all the top operators in the space, just in the broader space I’ll talk about that, but the Belle Tire transaction was the notable transaction for us in the tire and auto service space in the quarter.
In regards to the auto space and congenital spaces generally I think what you see is we are working with the best of the best. I mean we are working with Mister Carwash in the carwash space; O'Reilly and AutoZone in the auto parts space; Belle Tire today and Bridgestone and TVC and the tire auto service base historically and now you see Gerber Collision in the Collision space. Again, a company that’s owned by the Boyd Group of Canada; conservative, disciplined, leader in the collision space.
And so we like all of these spaces. They are fantastic operators that we are working with; they are machine critical brick-and-mortar assets. Obviously they have an Internet resistance to them. They are fungible boxes; they are smaller price point assets, but again most importantly we are picking we think the strongest horses in those spaces. I think you will continue to see us execute on transactions in auto parts, in tire and automotive service and related spaces, and we think it’s a core piece of our investment philosophy.
And there is, you know kind of cap on the exposure you wanted to you know tire and auto service and it’s the second largest retail segment now. Do you think you can go beyond that 7.7%?
Oh definitely! I think there is an opportunity to go beyond 7.7%. I don’t think you are going to see it get outside of a range that’s frankly a rational range, but it’s a broad space. It’s obviously a national space with a lot of fantastic operators, again that internet resistance too, that brick-and-mortar presence being integral.
I don’t think there is any cap in our minds. I think the real cap is finding the amount of transactions – the right transactions with the right operators for us. So it’s up to 7.7% tire auto service generally from 5.6% year-over-year. We would have no problem growing that exposure going forward with the right transactions and the right operators.
Understood and then on the development side, how did you originate the two new developments less PCS deals. And is there an opportunity to add more, all these specifically given how much growth there is for them in North American?
Yeah, I’ll take your last question. ALDI is a fantastic operators. I think there are opportunities for to add potentially additional ALDIs in the portfolio. We look at opportunities all the time. We are big fan of ALDI. Most of our ALDI assets frankly are ground leased where they built their own building on their own expense and so we’ll continue to look for opportunities to add ALDI to the portfolio. Discount and grocery in general is a space that we are very fond off and ALDI we think is a leader in that space.
What was your first John, of how ..
Just kind of maybe some color on how you originated these two deals, fetching new deals?
Yeah, it’s a good question, very different, very different sources. I’ll tell you that the ALDIs in Chickasha, Oklahoma is through our PCS platform with a private developer. It’s a former Staples box that that developer is converting to an ALDI and so we are working hand-in-hand and we’ll obviously own that asset piece of the one balance sheet upon completion with that developer.
The Burlington Coat which is our first turnkey Burlington Coat, we acquired the land from a large cap shopping center REIT who had been working on the transaction historically with Burlington. Obviously they have some other areas of – they have some other areas of focus and so it is a REIT that we work with historically, we have a great relationship with. We took the transaction, ran with it, and then obviously broke ground this quarter.
Understood and then, kind of shifting gears to the balance sheet. Understanding that you probably kind of get through the entire forward – you know issuance under the forward by March 2019. How does that affect your ability to utilize the ATM if your cost to capital was more attractive maybe than the forward price?
So no…
Go ahead.
Go ahead, I’m sorry.
So I’m just saying, basically would you be able to utilize the ATM if your stock price got above 48 and you thought that maybe you could use more than just the equity you have under the forward deal?
Yeah, it’s a good question. We have no – there are no restrictions on our ability to raise equity, whether it’s through the ATM or anything. So it really is just another tool in our tool belt and the ATM, we could turn the ATM on at any time obviously, so during the customer blackout periods and then just touching on the forward.
I will tell you, from our perspective it was a unique transaction and just building upon what Clay said, this is a transaction that allowed us to lock in our intermediate cost of capital, frankly to avoid the twitter battles, the trade wars, the Mueller investigation, the fed speak and all of the external noise that we have out there that all of us are subject to on a daily basis.
Our number one job is capital preservation. We believe that this transaction accomplishes not only that, but it also provides us complete optionality in regard to the balance sheet and so the ATM is still able to be open at any time or traditional over night offering is still accessible to us. I think there is three clear takeaways for investors from the forward transaction.
One, we are focused on delivering per share results for the short intermediate and long term. We are significant shareholders sitting in this room; we are aligned, I think that shows. Two, we will think strategically and then execute tactically to mitigate those external risks that I spoke of, and things that are outside of our control to eliminate or mitigate those to the best of our ability. And then three and I think most importantly is this transaction shows that frankly I have complete confidence in our team to be able to source high quality opportunities across our three investment platforms, because we are not fortuitous capital raisers here.
And so I think those three things are what we looked at and the forward falls for those three things and so, all tools remain in our tool belt. What this does is mitigate external risks, lock in a cost of capital for an intermediate term and frankly allow us to focus on what we do best and that’s source of high quality real-estate transactions that actively manage our portfolio.
I appreciate the color. That’s it from me, thank you guys very much.
Thanks.
Our next question comes from Todd Stender of Wells Fargo. Please go ahead.
Hi, thanks guys. Just back to Belle Tire, I think you gave the rent coverage, but how about the lease term and the initial lease yield that you entered at?
Yes, so these are our 20 year absolute net master lease. I can’t give the exact cap rate or dollar amount to it Todd, but I’ll tell you, its inline with historical transactions for us, seven stores, master lease, annual escalations. So it’s a strong lease, again three times coverage like you said.
Okay, thank you. And then how about the ALDI, it’s a build-to-suit project. I think the lease term is 10 years, which seems a little shorter than what we are used to seeing from you guys. Maybe a little color around there?
Yeah, sure. So it’s really a retrofit of former Staples box that the developer is really driving the bus on. Those retrofits for backfield second generation phase, 10 year transactions with ALDI are standard. Frankly they don’t – we typically don’t go beyond 10 years, except on their typical build-to-suites which are typically ground lease structures that I mentioned, which go up to 20 years. So it’s a retrofit of a former Staples box, 10 year base term, obviously ALDI Corporate Credit and has a lower basis due to the retrofit nature of the former Staples.
And you already own ALDIs, did I hear that right?
We do. I believe all of them are actually ground leases where ALDI constructed their buildings and those were 20 year leases.
So no existing master lease that this would go into?
No, no existing master lease and I would – I think it would be fair to bet that ALDI has absolutely no master leases, because frankly they don’t even really like to lease generally speaking unless they are backfilling, but they don’t typically master lease.
Okay, great. Thank you.
Thanks Todd.
This concludes our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.
Well, thank you everybody for joining us. Good luck for the remainder of the earnings season and we look forward to seeing everybody at the upcoming May Week Conference. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.