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Agree Realty Corp
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Good morning and welcome to the Agree Realty Second Quarter 2020 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would like to turn the conference over to Clay Thelen, Chief Financial Officer. Please go ahead, Clay.
Thank you, operator. Good morning everyone and thank you for joining us for Agree Realty’s second quarter 2020 earnings call. Joey will, of course, be joining me this morning to discuss our second quarter and first half results.
Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities laws. 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 discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO, and net debt to recurring EBITDA. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release, website and SEC filings.
I’ll now turn the call over to Joey.
Thank you, Clay and thank you all for joining us this morning. I hope that all of our listeners and their families are staying healthy and safe during these challenging times. Before providing our standard update, I'd like to start by outlining the additional steps that we've taken to further strengthen our position in this ongoing crisis.
As mentioned on last quarter's call, we created a cross functional COVID response team that consists of asset management, legal accounting and tenant relations. They've done an outstanding job helping us navigate through this pandemic. Since the beginning of the year, we've raised more than $825 million in gross equity proceeds positioning our company to execute on the high-quality opportunities that are emerging throughout this crisis. At quarter end pro forma for our outstanding forward equity, our fortified balance stood at 1.6 times net debt to recurring EBITDA.
Our balance sheet and nearly $1 billion in liquidity provides us with an unparalleled optionality as we continue to execute on the numerous opportunities that we're uncovering. Given our record investment activity of more than $0.5 billion during the first half of the year, our fortress balance sheet and liquidity, we have continued to amass an incredibly high quality and robust pipeline. I am pleased to announce we have increased our acquisition guidance to a range of $900 million to $1.1 billion. As evidenced by the best in class nature of our year-to-date activity rest assured, we will maintain our disciplined underwriting standards that are focused on the premier retailers in the country.
The quality of our carefully constructed portfolio is reflected in our second quarter in July rent collections data was continued to lead the retail sector. We received April, May and June rent payments from 90% to 89% of our portfolio respectively. In the aggregate, we received second quarter rent payments from approximately 90% of our portfolio and entered into limited deferral agreements representing approximately 3% of total rents. For the month of July, our collection data has continued on this positive trajectory. Today we've received July rental payments from 94% of our portfolio, while also entering into limited deferral agreements with tenants representing an additional 3% of July rents.
What we have confirmed is that quality and discipline count. Tenant credit, real estate fundamentals and sound balance sheet management have been a mainstay of our strategy before COVID and will continue to drive our activities during and after this pandemic. Our company is positioned to emerge stronger than ever, with best in class collections, a fortress balance sheet and organizational momentum that'll allow us to execute on a myriad of high-quality opportunities that we see accelerating in this environment.
With that allow me to run through our standard update. I'm very pleased to report that despite the ongoing disruption caused by COVID-19, the second quarter represented a record quarter for Agree Realty. During the quarter we invested a record $276 million in 78 high quality retail net leased properties across our three external growth platforms. 75 of these properties were originated through our acquisition platform, representing record acquisition volume of approximately $272 million.
While achieving a record volume during these unprecedented times, we remain extremely disciplined in our approach as demonstrated by approximately 80% of acquisition volume being derived from investment grade retailers. The 75 properties acquired during the second quarter were leased to 16 tenants operating in 11 distinct sectors, including best in class operators in the off-price, general merchandise, auto parts, tire and auto service, grocery dollar stores and convenience store sectors.
The properties were acquired at a weighted average cap rate of 6.5% and had a weighted average lease term of 10.9 years. Most notably, during the quarter we acquired seven additional Walmart stores comprising more than one quarter of total acquisition capital deployed. I'm very pleased to report that Walmart remains our largest tenant at 7.6% of annualized base rents, representing a year-over-year increase of roughly 320 basis points. We continue to enjoy a very productive and strong relationship with the world's largest retailer.
For the first six months of the year, we've invested a record $507 million into 132 retail net leased properties spanning 33 states across the country. Of that 507 million invested, approximately 0.5 billion was via our acquisition platform. The 126 properties acquired in the first half of the year were leased to 24 leading tenants operating in 17 distinct sectors. An unparalleled 84% of the annualized base rent acquired in the first half of the year comes from investing grade operators. Well, almost one third of acquisition capital deployed in the first half of the year was invested into 13 Walmart stores.
As previously mentioned, given our record acquisition volume today and our robust pipeline, we are increasing our 2020 acquisition guidance to a range of 900 million to 1.1 billion from our previous range of $700 to $800 million. The low end of this range would represent a record acquisition volume for our company, easily surpassing the $700 million acquired last year. We continue to source a number of ground lease opportunities with leading retailers adding 13 assets during the past year to this portfolio. Today, our ground lease portfolio spans 69 properties comprising 8% of total annualized base rents.
Our current pipeline includes several significant ground lease opportunities that we anticipate closing during the upcoming quarter. At quarter end, nearly 90% of our ground lease rents were derived from investment grade retailers including Costco, Walmart, Aldi, Home Depot, Lowe's, National Tire and Battery and Wawa. Only 1% is leased to sub-investment grade operators, and the remaining 10% of the ground lease portfolio is leased to unrated retailers.
At quarter-end our portfolios investment grade exposure stood at 61%, representing a substantial year-over-year increase of nearly 700 basis points. On a two-year stacked basis, our investment grade exposure has been improved by more than 1400 basis points. As we continue to focus on best in class operators that are poised to thrive in an omnichannel environment, I anticipate our investment grade concentration to continue its upward trajectory.
Moving on to our development and Partner Capital Solution, we had six development and PCS projects either completed or under construction during the first half of the year that represent total committed capital of more than $19 million. One of those projects was completed during this past quarter, our first development with Family Dollar in Grayling, Michigan in a vacant Rite Aid that we acquired.
Construction continued during the quarter on our first project with TJ Maxx in Harlingen, Texas, immediately adjacent to a high performing target. Rent is anticipated to commence in the third quarter of this year. We commenced construction on one new project during the quarter our second development with Harbor Freight Tools in Weslaco, Texas. The project is subject to a 15-year net lease upon completion, with rent anticipated to commence in the fourth quarter of this year.
These recent projects are the result of our team's efforts to screen vacancies, utilizing our software to identify potential backfill candidates within our sandbox of meeting omnichannel retailers. We continue to work with retailers to evaluate market vacancies and redevelop buildings at a very attractive cost basis from both ADC, as well as our retail partners. Our pipeline consists of a number of projects that I anticipate announcing in conjunction with next quarter's earnings.
While we fortified our portfolio through recent investment activity, we are again quite active on the disposition front during the quarter, as we sold eight assets for proceeds of approximately $19 million at a 6.3 cap rate, notable disposition activity during the quarter including the sale of seven franchised restaurants, further reducing our total franchise restaurant exposure to a mere 1.5%. This represents a decrease of approximately 230 basis points in the past 18 months.
Dispositions for the first six months of the year have totaled 14 assets for proceeds of just more than $44 million with a weighted average cap rate of approximately 7.2%. Given our disposition activities during the first half of this year, we're raising the bottom end of our disposition guidance to 50 million for the full year 2020. Our asset management team has also been diligently focused on addressing upcoming lease maturities. As a result of their efforts our 2020 lease maturity stands in only three remaining lease expirations and represent just 0.1% of annualized base rents.
We've similarly made significant progress on our 2021 upcoming maturities with additional announcements that I anticipate during our next quarterly call. During the second quarter, we executed new leases, extensions or options on approximately 92,000 square feet of space. We're very pleased to have executed a new 20-year net lease of Loves Furniture to backfill the former Art Van flagship store in Canton, Michigan. We anticipate recovering 100% of the prior Art Van rent upon Loves rent commencement during the latter half of the third quarter.
During the first six months of the year, we executed new leases, extensions or options on approximately 272,000 square feet of gross leasable space. As of June 30, our growing retail portfolio consisted of 936 properties across 46 states. We anticipate surpassing the 1,000-property milestone in this upcoming year. Our tenants are comprised primarily of industry leading operators operating in more than 31 retail sectors, again with 61% of annualized base rents coming from investment grade tenants. The portfolio remains fully occupied at 99.8% and as a weighted average remaining lease term of 9.7 years.
Before handing the call over to Clay, I would like to thank all of our loyal stakeholders for their continued support during these difficult and drying times. Thank you for your patience, happy to answer any questions after Clay provides an update on our balance sheet and reviews our financial results for the second quarter. Clay?
Thank you, Joey. I'll start with the balance sheet update and highlights from our capital markets activities over the past quarter, some of which we discussed on last quarter's call. We had another very active quarter in the equity capital markets raising more than $400 million of common equity for the second consecutive quarter. In addition to capital raised we also generated approximately $25 million through our disposition activity in free cash flow after dividend during the quarter.
On April 22, we closed an underwritten public offering of 6.2 million shares in connection with a forward sale agreement in which the shares were sold to Cohen & Steers. Commensurate with the Cohen & Steers transaction, we settled all of our then outstanding ATM for equity offerings, realizing net proceeds of approximately $267 million.
Following the Cohen & Steers transaction, we were again active on our ATM program, entering into forward sale agreements to sell more than 740,000 shares of common stock at an average gross price of $66.61 for approximately $48 million of anticipated net proceeds.
To date, we have not settled any of the Cohen & Steers or second quarter ATM forward offerings and have approximately $411 million of anticipated net proceeds available to us upon settlement. This capital raising activity further bolsters our balance sheet and provides the company with nearly $1 billion in liquidity.
In addition to the $411 million of net proceeds available to us upon settlement of our outstanding foreign equity. We ended the quarter with full availability on our $500 million revolver and approximately $36 million in cash on hand.
As of June 30, our net debt to recurring EBITDA was approximately 3.5 times. Pro forma for the settlement of our outstanding forward equity offerings, our net debt to recurring EBITDA was approximately 1.6 times. Total debt to enterprise value at quarter end was approximately 18.2%, while fixed charge coverage, which includes principal amortization, stood at a company record 4.6 times.
Moving to earnings, core funds from operations for the second quarter was $0.76 per share, a 2.1% year-over-year increase. Adjusted funds from operations per share for the quarter was $0.76, an increase of 3% year-over-year.
During the quarter we elected to treat COVID-19 deferrals as delinquent receivables and our FFO measures include this revenue. Please refer to the supplemental disclosures within the FFO table for our press release and 10-Q that provide enhanced disclosure regarding the amount of rent subject to deferral.
On quarterly and year-to-date basis core FFO per share and AFFO per share were impacted by dilution required under GAAP related to recent forward equity offerings. Treasury stock has been 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 second quarter and the six-month period.
General and administrative expenses in the second quarter totaled $4.6 million. G&A expense is 8% of total revenue or 7.5% excluding the non-cash amortization of above and below market lease intangibles. We continue to anticipate G&A as a percentage of total revenue to be an approximate 50 basis point improvement from 2019 or in the lower 7% range for 2020, excluding the impact of above and below market lease intangible amortization in total revenues.
Income tax expense for the quarter totaled approximately $260,000. For 2020, we continue to anticipate total income tax expense to be in the range of $1 million to $1.2 million. The company paid a dividend of $0.60 per share on July 10 to stockholders of record on June 26, representing a 5.3% year-over-year increase. This was the company's 105th consecutive cash dividend since our IPO in 1994.
For the first six months of the year, the company declared dividends of $1.185 per share, a 5.3% increase over the comparable period in 2019. Our quarterly payout ratios for the second quarter were 79% of core FFO per share and AFFO per share respectively. For the first six months of 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 mid to low end of the company's targeted ranges and continue to reflect a very well covered dividend.
With that, I'd like to turn the call back over to Joey.
Thank you, Clay. Operator, at this time we will open it up for any questions.
Thank you. And we will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Rob Stevenson of Janney. Please go ahead.
Good morning, guys. Joey, what's the discussion like with tenants that are not paying and not under deferral agreements these days? Is there just an inability to come to an agreement or does come into any agreement with you limit their options going forward? Can you give us an idea of what's really going on behind the scenes there in internal terms?
Good morning. Good morning, Rob. I think it spans the full spectrum there. I think there's an inability, obviously to come to an agreement. We have tenants that are obviously in cash conservation mode. And then there are tenants that continue to be opportunistic in terms of seeking abatements, deferrals or other types of concessions. So obviously, it's the minority of our portfolio today, but we continue to make progress there. But at the same time, we've been very clear that we are not going to give up any contractual rights without consideration.
Okay, and so does that statement sort of lead you to just waiting it out rather than any benefit to moving now on these tenants and locations versus waiting for the bankruptcy filing, if that's, indeed what the sort of end results or just let it play out at this point in your positions better and bankruptcy?
Well, I think it's a case by case basis. I think the majority of our holdouts aren't - or I will tell you are not near-term bankruptcy threat. So our COVID response team evaluates every lease and every tenant with different options here in terms of legal options, and different remedies that we can pursue, but I would tell you, we will pursue litigation and collections and/or eviction in certain circumstances. At the same time, we'll work toward a mutually acceptable conclusion in others, but we'll remain flexible there with all our options on the table.
Okay, and then Clay, the uncollected contractual rents not subject to deferrals, I think it's like 3.5 to 7 million on page 14. Is that the amount that's fallen below the sort of 75% collectability test and had to be moved to cash accounting? Or is that sort of bucket somewhere else or another number?
No. So the $3.5 million you're highlighting on page 14 is included in revenues and was still accrued for purposes of FFO and AFFO.
Have you had to move anybody into cash accounting because they've fallen below the collectability standards?
We did. We moved three tenants to cash basis in the quarter, had an immaterial impact on our financials for the quarter, roughly $500,000, but it was three tenants in total.
Okay, and then Joey, I mean, you guys have been scooping up a bunch of Walmart's and obviously they're a great tenant and great credit quality. When you look at the portfolio just from a risk management standpoint, what's the sort of feeling in terms of the amount of Walmart exposure that's sort of prudent and that you guys are willing to take? I mean, if we keep going, seven, eight Walmart's a quarter on the last few quarters trend. You're going to be getting up there pretty high pretty soon.
Yeah, we're cognizant of all - of any tenant exposure in the aggregate. Obviously, Walmart Supercenters were extremely confluent. We started really pursuing Walmart Supercenters aggressively in Q4, which led to the Q1 acquisitions earlier this year. I mean, I'd remind everybody that many of these are ground leases. So beyond even the Walmart credit here, they're ground lease structures, and then we're targeting high performing stores. We enjoy a fantastic relationship with Walmart, as I mentioned the prepared remarks and we'll continue to target high performing stores with great underlying real estate and frankly, a low basis in terms of rental rates as well as our cost basis. So we're extremely comfortable, especially given the circumstances of the macro environment that we're in today, with Walmart being in that mid upper single digit range.
Okay, thanks, guys. Appreciate it.
Thanks, Rob.
Our next question today will come from Christy McElroy of Citi. Please go ahead.
Hey, good morning, guys. Just a quick follow up on Rob's question. So just thinking about the 3.5 million that was accrued, but remains unresolved and that's net of what you wrote off, which you said was immaterial about 500,000. As you think about sort of that collectability assessment going forward and you don't keep a general reserve. I guess the question is, of that 3.5 million, is there a risk that more could be written off in future quarters, right?
Well, I think, yeah, there is a risk. I'll tell you that the bulk of that is two tenants, one in the health and fitness industry and one in the entertainment retail, you can see in terms of the collection data on page seven of our release, and I think you can imagine who those two are. So yeah, there is a risk. I'd tell you that both are leading operators in the spaces. I think the risk here is truly only probably maybe Dr. Fauci knows. The risk is really how long this ongoing health crisis goes on and then their ability to reopen. And so you'll see we did have some rent collection, specifically in the health and fitness sector in Q2 20%. The entertainment retail sector specifically at 0% is our three Dave & Buster's.
And I guess, what's the risk that any of those tenants might fall out, right. How should we be thinking about potentially modeling a dip in occupancy as we move forward later in the year?
Yeah, Christy, again, I think it really comes down to the health crisis here, right. It really comes down to the underlying COVID-19 pandemic and the ability for these operators to open their doors and/or get alternative financing. And we've seen Dave & Buster's raise, I think it was $200 million in equity. And so there are sporadic openings, obviously sporadic closings now or re-closings and so I would hate to predict here the underlying health crisis. I'll tell you obviously, the July collections at 94% were stronger. So we all know and we see states, municipalities counties, closing doors on certain types of establishments here and those two types of establishments still are in that wheelhouse for doors being shut.
Okay and then just a bigger picture question on acquisitions. I guess, in regard to the transaction, market and understand that you're buying high quality investment grade stuff. You're sticking with a narrow band of tenants. Just as you think more broadly about the next year and you have significant dry powder to invest. Do you anticipate further changes to the investment landscape, any sort of big changes in terms of pipeline and pricing? What do you see as the biggest opportunity to take advantage of here in terms of disruption that is occurring or could occur?
Well, I think we're investing in the 99 percentile of retail. From my perspective, 99% of retail is almost on investable or very difficult to underwrite, if you're willing to invest in it. And so we're playing the top 1% that is what we call our sandbox, the 20 to 30 tenants, we acquired I think 17 different tenants this quarter. My expectation frankly is the cap rates could or lease remain stable for that one percentile for that 99 percentile, I should say or even potentially compress. So and I'm sitting here looking at the 10-year unsecured bonds for many of the retailers that we are acquiring and reminds me very similarly of the Great Recession. Different interest rates, different cap rates. But if we think back to the Great Recession over 10 years ago, the 10-year Treasury was approximately 3%. We're acquiring – and high credit quality, we're trading at approximately 8% on a transactional basis.
So basically about a 500 basis points spread. Today, when you look at the landscape, Walmart 10-year paper today is trading at 112, Costco is at 13, TJ Maxx at 165. We're acquiring again at a 500 basis points spread to where they're unsecured 10-year paper is trading. And so it's a very similar situation, obviously a much lower interest rate environment, a different cost of capital for us specifically, but for some acquirers out there in the marketplace. And so I think we're going to see high demand for high credit quality, the unique capabilities that we bring in the table is obviously our balance sheet, our cost of capital and liquidity. But most importantly, I would stress to everybody is the relationships we have with our retail partners and our ability for our team, which has done a fantastic job to source opportunities that fit within their long-term strategy.
Thanks, Joey.
Thank you.
Our next question is from Nate Crossett of Berenberg. Please go ahead.
Hey, good morning, guys. I was wondering if you could just touch on competition over the last three months. Obviously, your cost of capital is a lot better than most of the peers in this space. So any color on competition over the last month or two would be helpful.
I appreciate the questions Nate, I mean, undoubtedly there is less competition right now, given that many potential purchases are on their heels or dealing with defensive oriented measures due to COVID-19. Look, so this is a broad, broad fragmented space. It's a huge space as we talked about before, 65% of US retail GLA is net leased. So we face competition. That said the team here is second to none. Our relationships, as I mentioned with Christy's question, are second to none. And frankly, we're not having trouble finding opportunities to strike out.
Okay, and just on the more challenged tenants, we're obviously following all of those and some of those guys have gotten funding from either the public markets or PEE. So I'm just wondering, have you noticed kind of a change in the dialogue once that funding is secured?
It's a good question. It's a broad question. I tell you, there's such a range of conversations that our COVID response team is happening, led by Laith Hermiz, our COO and Danielle Spehar, our General Counsel that it's tough to paint with a broad brush. I think that isn't the case for many of our tenants where private equity has stepped in or outside the Dave & Buster's equity raise. I think there was a block trade. That isn't the case, so I'd be hesitant to really draw any conclusions therefore.
Okay and I'm just wondering on the G&A, you guys are obviously acquiring quite a bit and that's ramping up. In terms of the workforce do you see many additions next year? Are you kind of all set?
No, we will continue to grow the team in all aspects as I mentioned. We'll surpass the 1,000 properties in short order here. We'll continue to grow. We were very pleased to be named one of the best places in real estate to work recently and we'll continue to attract and retain talent and we're very focused on the full talent management cycle. That said, in terms of G&A, we have also spent several hundred thousand dollars and we'll continue to invest in IT and our systems. That's been a huge push for us over the last three years, and probably will never end, but we're obvious – we are seeing a lot of efficiencies from our IT improvements. We anticipate seeing additional efficiencies and capabilities from them. But there's no question this team will continue to grow as the platform continues to grow.
Okay, great quarter. Thanks, guys.
Thank you. Appreciate it.
Our next question is from Linda Tsai of Jefferies. Please go ahead.
Hi, thanks for taking my question. Those three tenants you moved into cash accounting totaling $500,000. What industries were those three tenants in?
Go ahead Clay.
The vast majority was related to a tenant in the health and fitness sector. The other two were pretty small.
Got it, maybe this answers the next question. The 3.5 million of uncollected rents not subject to deferral, in your view, do those – the entertainment fitness tenants, do they fall more in the category of inability to pay or unwillingness to pay?
That's a good question, Linda. I would tell you, it's more unwilling necessarily at this time to pay. We've had different and varied proposals, which included partial payment, included deferred payment or partial abatements and so this is in binary where they are unable to pay. That said are they conserving cash, definitely. But I think we'll continue to see as we did in July, additional collections and then we're just dealing with effectively rehearse or unless they are really re-shutdown. And then again, decide not to pay.
Thanks for that. And then last one on selling the Art Van store. I think you said in the past you were a little bit more bearish on commoditized furniture stores. So what kind of due diligence did you do for this tenant or what makes you comfortable that they're sustainable?
Yeah. So Loves obviously took a number of the Art Van stores. I think given the difficulty in the overall leasing environment in the midst of a pandemic, with minimal landlord costs here on our end, we felt comfortable allowing Loves to take that space at 100% of the firmer rents. Now, we are hopeful that Loves will thrive as a company. We are very confident in the underlying real estate and specifically this unit, this store and so look, I guess that we're hopeful that they'll thrive. If not, this is a fantastic piece of future real estate, but given the overall leasing environment, given the minimal landlord cost here and investment and frankly $0.100 [ph] on the dollar that we recovered, we thought it made sense to enter into this transaction.
Got it, thanks.
Thank you, Linda.
Our next question is from Todd Stender of Wells Fargo. Please go ahead.
Hi, thanks. And Joey, you gave some bond coupons as some of the larger tenants who have access to capital in the debt markets have been fairly open. How about other tenants who may not have that kind of access? How is the trajectory I guess, of sale leaseback discussions gone through this COVID period?
Very few and far between for us Todd, the only sale leaseback we've entered into the National Tire and Battery sale leaseback. And so again, we're playing in a really tight sandbox here with the best and brightest retailers in the country. The vast majority of those have access to both the debt and equity markets. The debt markets are obviously very favorable today and so very few sale leaseback discussions. Again, it's a capability. We'll deploy selectively and we're more than happy to discuss it, but it's really not our MO.
Okay and how about visibility for tenants and/or I guess, for you guys with your PCS platform to maybe break ground this fall. How are you viewing your pipelined and breaking ground and maybe tenants thinking about their growth?
So as I mentioned in the prepared remarks, we have a number of projects that we anticipate announcing commensurate with our third quarter earnings. They're either going through the entitlement of permitting process currently. There are tenants in this country that continue to grow. The dollar stores obviously, are growing. The auto parts retailers, the discount grocers are continuing to grow. Tractor Supply is continuing to grow amongst others. And so we'll continue to work with those retailers in our sandbox on either development or PCS projects. At the same time, we will deploy that capable very selectively. Given the robust nature and high-quality nature of our pipeline right now, this is a very busy team and we want to be careful where we spend our time, which is our most precious commodity.
All right, just last one from me. You have pretty good acquisition volume obviously, in the quarter and you've raised it and the cap rate was a 6.5. Can you discuss what the range of cap rates were in the quarter just to see how far you'll go maybe into the fives and maybe how high you'll go? Thanks.
Yeah, I tell you generally we're operating between a 5.5 and 7.5 dependent upon lease structure, term credit, underlying real estate, we made some very unique acquisitions during the quarter inclusive of the Walmart's, the CarMax, the QuikTrip portfolio, amongst others. And so I will tell you, that kind of averages out into that 6.5 range there. And that's kind of what we see going forward. Now, our Q3 pipeline, which I mentioned in the call, is sizable. It has some very unique qualities to it. We're very excited about it. It has a number of ground lease opportunities in it where we've been able to find some really one of a kind opportunities that we're excited about. And so that 6.5 will vacillate up and down, call it maybe 10 basis points. But again, that's kind of the midpoint of our stride per say.
Thank you.
Thanks Todd.
[Operator Instructions] Our next question is from John Massocca of Ladenburg Thalmann. Please go ahead.
Good morning.
Good morning John.
So maybe building a little bit on that kind of last line of questioning. Can you provide a little color on how much of your kind of investment opportunities today come from – on the acquisition side, come from developer sellers? And is there a possibility that maybe you see some headwinds in terms of that opportunity set as you look out maybe six to three months from now, maybe even nine months from now?
Yeah, I can't give you an exact number. I'll tell you we work with a number of developers slash repeat sellers on a direct basis. I don't anticipate that that would – typically those are smaller price point assets, the auto parts retailers of the world amongst them. So I wouldn't anticipate that becoming any headwind for us in terms of acquisition volume. It's a piece of what we do, but I'd remind everybody that we're acquiring from large institutional sellers all the way for the individual owners who own a single piece of net lease real estate. And so it's a wide range and a myriad of transaction types that really has no rhyme or reason on a quarter-to-quarter basis.
Okay, and then just specifically, though, with the developer sellers, they – and they kind of bounce back or are they relatively healthy or do a little bit of stress on there and they don't – it doesn't affect your in place portfolio, just kind of think about that acquisition vertical.
It varies from developer, right. I mean, there are developers that got outside of their typical wheelhouse and maybe got into shopping centers or mixed use, but it really varies upon individual developers. I don't have much insight. Again, it's – we don't rely upon any single developer for a large piece of our pipeline or I tell you even a small piece of our pipeline and so I really don't have insight into their individual financial situations today. But again, it's – we continue to see those opportunities, but they're just a small piece of what we do.
Okay and then switching gears a little bit to the in place portfolio. Can you provide some color maybe on your rent collections, the movie theatre industry? I just noticed because there was kind of a significant increase in the quarterly collection versus what you had collected in April.
Yeah, we had guys say. I mean, that's the bottom-line guys decided. Guys decided to pay. And so I think that has a – both the re-openings, their willingness to pay, our ongoing negotiations and tactics the COVID response team is taking resulted again. I'd remind everybody we only have five movie theatres here. AMC, Regal and Cinemark and so it's not a big subset obviously, of our portfolio and probably not representative of the overall theatre industry. But in July, you saw that payment activity definitely tick up there.
Was that kind of unprompted or was that maybe potentially given kind of conversations you had had with them relatively expected?
I would say nothing is overly unprompted. We're engaged in active dialogue with all of our tenants, most notably probably the non-payers or the late payers, so it definitely not unprompted. In terms of expectations I think it varies across the board, some are surprising. These conversations – to be frank, these conversations are very fluid. They're very dynamic. And sometimes frankly, a check or a wire just shows up out of nowhere. And so there really is no rhyme or reason sometimes for these conversations. I think everyone has to remember that here – the default is that tenants are responsible for their rent. This pandemic was not a force majeure event.
We have not breached quiet enjoyment. Their unilateral unwillingness to pay is a breach. It will eventually turn into a default and then we have a host of remedies based upon the contractual right, contractual remedies in the leases. And so there are tenants that are – we had one this weekend that just decided after four months of nonpayment and partial payment and all different types of payment that they're just going to pay everything now because frankly, I think they've realized that they have bigger problems to deal with in our three or four stores that we owe. So we anticipate that these collection numbers will continue to tick up. And a lot of them, frankly, are just a function of extended conversations here with these tenants.
Okay, and as we kind of think about the July collections versus 2Q, was there any specific industries that drove that or was it pretty broad based?
I think it's pretty broad based. I think, notable in there obviously, was the theatre collections 71%. But I think –
I was thinking from kind of June to July.
Yeah, I think it was pretty broad based, I think between gyms and theatres, you're right. You have some additional collection activity in there. And other tenants that were either potentially either able to open in certain regions and/or decided that payment was appropriate at this time, given the different pressures that they face.
Okay, that's it for me. Thank you all very much.
Great, thanks John.
Our next question is a follow up from Christie McElroy of Citi. Please go ahead.
Hey, it's Michael Bilerman here with Christy. So Joey, I was wondering if you think about sort of acquisitions, are you willing to do any sort of larger portfolios or even larger scale M&A where you would obviously, not get 100% of this top 1% in terms of the type of assets that you normally buy, but given the size of the company portfolio today, are you willing to take on some non-core properties to be able to get a larger set of investments that fit your criteria? I guess are you willing to take the risk of selling non-core to deploy more capital?
Yeah. No, I appreciate the question, Michael. We are consistently looking at larger opportunities, diversified portfolios and the challenge we always run into is, again is, are we willing to take on and/or have to dispose of that bottom tier. And that is typically our largest challenge. Now, given the organic nature of our pipeline, given the depth, breath and I would tell you the quality of the pipeline right now, I mean, this is a conservative organization to take our midpoint of our guidance up 33%. People should take that with a – pretty strongly. It obviously isn't necessary for us. So it's something that we will look at, we will continue to look at, it's always been a challenge. My number one threshold here has always been we are not going to dilute the quality of this portfolio. And we are on a significant march, 1,400 basis points in terms of investment grade exposure. I think qualitatively this portfolio is improved. You're going to see it consistently improve quarter-over-quarter. And my biggest challenge with larger portfolios, as you mentioned, is always been taking on the bottom quartile of assets there or sometimes even larger.
All right, but even taking, let's say you find an M&A deal of let's say $1 billion, right and bottom quarter will be 250 million, all of a sudden, 250 million over perform a portfolio 4.5 billion is not that much, right. And I would argue 25% is probably a high number in terms of non-core in a portfolio. So I just don't know – I can understand maybe two years ago or even three, four years ago, and the company was a lot smaller, those sorts of transactions would have a much higher hurdle rate. I just don't know if we've sort of crossed the Rubicon at this point where you would pursue those because the resulted non-cores is not a significant enough of a percentage just as the pro forma total.
I agree, I think it's obviously with the growth of the company and the portfolio. And then the de minimis exposure to that non-core, they would – that a pro forma transaction would result in gives us more ability to look at those transactions and to scrutinize them. That said, we have no problem and I'll tell you the other challenge with these types of portfolios, the team here, the acquisition team here is the best team in the business period. We can go assemble most of these portfolios, frankly, at higher cap rates when we combine them on a one-off basis. Now, we save frictional costs, obviously, in time and transactional costs and everything else. But there isn't a portfolio in this country that we can assemble. I would tell you probably within 120 days if we just went notate and so given everything that you said and I think there is merit and I think there will be – the size of this company now does open up different avenues for us, potential avenues like say to grow. I think what's more interesting is just the sheer success. And frankly, the velocity of the success we're having on the organic one-off nature right now make those transactions I think even less attractive on the portfolio basis right. That's the struggle we have.
And then are you able to break down in terms of the pipeline by sort of one off single asset, portfolios, types of retailers just to give a cent and then how large it is because obviously, some stuff will fall out, just as we think about the next six to 12 months in terms of deployment.
Did you ask if we could break it down?
Yeah, just give more color around the pipeline where you talked about the largest pipelines organic.
Yeah, it's in full transparency. It's the largest pipeline that we've ever had. It is of similar quality to what you've seen from us from Q1 and Q2, over 80% in investment grade. I tell you, there are some small portfolios typically single credit that is two, three, four assets, for example, for O'Reilly Auto Parts or to Tractor Supply's. There are some larger price point ground leases that we are very excited about. There are some unique pieces of real estate, I would tell you not overly dissimilar from the Hamptons, Home Goods that we acquired. So it's really an aggregation of very different property types. But I tell you, its top tier. There's no question about that.
And then just lastly, I guess if you're not willing to buy non-core to get to a core portfolio, are you going to accelerate the disposition volumes of what remains non-core today and what is that estimate in your mind? Is it 10%, 15%, 20% of the portfolio? I guess if you had your druthers and you're able to execute it prices that you feel comfortable with, what percentage of the portfolio would you seek to liquidate? Thanks.
So we've been very aggressive obviously in the franchise restaurants space with that down to 1.5% we sold for Taco Bell, the Buffalo Wild Wings, the Burger King and Wendy's during Q2. Subsequent to quarter end, we have a couple additional sales that are very similar. I would love to sell the LA Fitness to Dave & Buster's and the movie theatre. So if anyone would like them, please give us a call. I mean, that's what I truly view as non-core today. The marketability of those assets obviously, is in question, but we really pared back fairly aggressively here and at aggressive cap rates at a six three in Q2. The non-core, generally lower price point 1031 transactions that we sell into that market, but I think the distressed tenants are the watch lists that everyone is focused on is what we've effectively – is our non-core portfolio.
And so what percentage remains?
Let's a call it 6%, 7% when you take the three entertainment retail assets, the five movie theatres and the health and fitness operator we have.
Are you worried about the 1031market at all and potential changes?
No, I think I think frankly, we were very aggressive. We sold 30 plus restaurants, franchise restaurants into the 1031 market over the past call it 50 months. And so we were very aggressive, I think, taking the 1031 market or I wouldn't say taken offline, but shifting dynamics, the 1031 market. It'll be interesting to see the implications. But I think those implications will be for the lower price point assets potentially like those restaurants, which we really divested of. I would tell you our average transaction this year has picked up from the $4.2 million last year with intent, really driven by that 13 or 14 Walmart's, we've already announced the acquisition of, as well as some Home Depot and Lowe's activity, typically ground leases. And so we don't see a lot of 1031 competition in that space. That was typically dominated by more institutional purchasers who we really don't see competing at the same level anymore.
All right, Joey. Thanks for the time.
Thank you, Michael.
Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Joey Agree for any closing remarks.
Well, thank you for your patience. Everyone, please be safe and good luck to the rest of earning seasons and we will talk to you shortly. Thank you.
The conference has now concluded. We thank you for attending today's presentation. And you may now disconnect your lines.