Agree Realty Corp

NYSE:ADC

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, and welcome to the Agree Realty Second Quarter 2021 Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Peter Coughenour, Vice President, Corporate Finance. Please go ahead. Peter.

[Peter Coughenour, VP, Corporate Finance]

Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's second quarter 2021 earnings call. Discussing our results on today's call will be Joey Agree, President and Chief Executive Officer; and Simon Leopold, Chief Financial Officer.

Before turning the call over to Joey, let me first run through the cautionary language. Please note that during this call we will make certain statements that may be considered forward-looking under federal securities law. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons, including uncertainty related 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 will now turn the call over to Joey.

[Joel Agree, President and CEO]

Thank you, Peter.

I'm very pleased to report that we continued our strong start to the year, achieving record investment volume of more than $750 million during the first six months of 2021. Robust and high quality investment activity further increased our investment grade concentration and raised our ground lease exposure to a record of nearly 13%.

Our investment activities during the quarter were supported by more than $1 billion of strategic capital markets transactions that fortified our best-in-class balance sheet and positioned our company for continued growth in the quarters ahead.

During the second quarter, we invested approximately $366 million in 59 high-quality retail net lease properties across our three external growth platforms. 54 of these properties were originated through our acquisition platform representing acquisition volume of more than $345 million.

The 54 properties acquired during the second quarter are leased to 32 tenants operating in 18 distinct retail sectors including best-in-class operators in the off-price, home improvement, auto parts, general merchandise, dollar store, convenience store, craft and novelties, grocery and tire and auto service sectors. The acquired properties had a weighted average cap rate of 6.2% and a weighted average lease term of 11.8 years.

Through the first six months of this year, we've invested a record $756 million into 146 retail net lease properties spanning 35 states in 24 retail sectors. Approximately $732 million of our investment activity originated from our acquisition platform. Roughly 75% of the annualized base rents acquired in the first half of the year comes from leading investment grade retailers, while almost one-third of annualized base rent is derived from ground leased assets. These metrics demonstrate our continued focus on best-in-class opportunities with leading omnichannel retailers, while still achieving record results.

Given our record acquisition activity date and visibility into our pipeline, we are increasing our full-year 2021 acquisition guidance to $1.2 billion to $1.4 billion.

During this past quarter, we executed on several unique and notable transactions, including a new small format target on the University of Georgia's campus in Athens. We are extremely pleased to expand our relationship with target, as well as add another unique street retail asset to our growing portfolio. We continue to invest in market dominant grocers during the quarter. Most significant with a five-store sale leaseback transaction with Kroger for approximately $68 million.

The stores are located in Texas, Michigan, Ohio, and Mississippi and each location is subject to a new 15 year net lease. With this transaction Kroger moved into our top 10 tenants at 3.2% of annualized base rents. Kroger's of course is a leader in the grocery space. Their fortified balance sheet, strategic omnichannel initiatives, and significant investment in e-commerce fulfillment are emblematic of our investment strategy.

Additionally, we closed on the purchase of a ShopRite, which is owned and operated by Wakefern in New Rochelle, New York. ShopRite is a tremendous operator in the real estate located at a strategic interchange of I-95 is yet another example of the diligent bottoms for analysis that we conduct on every asset that we acquired.

Finally, as you may recall we acquired our first Wegmans Ground Lease in Chapel Hill, North Carolina during the fourth quarter of 2020. We've built upon that momentum in this quarter with the acquisition of our second property ground leased to Wegmans. The store located in Parsippany, New Jersey is over 100,000 square feet and was constructed at Wegmans expense.

The ground leases over 21 years of term remaining and is a welcome addition to our growing ground lease portfolio. Through the first six months of the year we've acquired 45 ground leases for a total investment of over $240 million. The second quarter contribution to this total was 14 ground leases representing an investment volume of more than $113 million.

Additional notable ground lease acquisitions during the quarter included our first capital grow in Whippany, New Jersey. A Walmart Supercenter and Lowe's and Hooks at New Hampshire, our first Cabela's in Albuquerque, New Mexico, as well as three additional Wawa assets increasing our Wawa portfolio to 25 properties including their flagship store in Downtown Philadelphia.

As mentioned at quarter end, our overall ground lease exposure stood at a company record of 12.7% of annualized base rents and includes a very unique assets leased to the best retailers in the country.

Inclusive of our second quarter acquisition activity, the ground lease portfolio now derives nearly 90% of rents from investment grade tenants and has a weighted average lease term of 12.5 years. The majority of the portfolio includes rent escalators that result in average annual growth of close to 1% while the average per square foot rent is only $9.65. This growing portfolio continues to be a source of tremendous risk adjusted returns when reviewing the lease term, credit, underlying real estate attributes and of course the free building and improvements of a tenant wherever to vacate.

We look forward to continue to leverage our industry relationships and strong track record of execution to identify potential additions to this expanding and diversified sub portfolio. As of June 30, our portfolio's total investment grade exposure was nearly 68%, representing a significant year-over-year increase of approximately 670 basis points.

On a two-year stacked basis, our investment grade exposure has improved by more than 1,300 basis points. The continued growth of our ground lease portfolio and the investment grade exposure demonstrates our disciplined focus on building the highest quality retail portfolio in the country.

Moving on to our Development and Partner Capital Solutions platforms, we continue to uncover compelling opportunities with our retail partners. We had six development in PCS projects either completed or under construction during the first-half of the year that represent total capital committed of more than $36 million.

Three projects were completed during the second quarter, including a grocery outlet in Port Angeles, Washington, a Gerber Collision in Buford, Georgia, and a Floor & Decor in Naples, Florida.

I'm pleased to announce we also commenced construction during the quarter of our second development with Gerber Collision in Pooler, Georgia. Gerber will be subjected to a new 15 year net lease upon completion and we anticipate rent will commence in the first quarter of 2022. We continue to work with Gerber Collision on additional opportunities that we anticipate announcing later this year and into next year.

Construction continued during the quarter on our first development with 7-Eleven in Saginaw, Michigan. We anticipate delivery will take place in the first quarter of next year at which time 7-Eleven will be subject to a new 15 year net lease.

We remain focused on leveraging our full capabilities to grow our relationships with these leading omnichannel retailers. I look forward to providing an update on our continued progress in the coming quarters. While we continue to strengthen our best-in-class retail portfolio through record investment activity we're also quite active on the disposition front during the quarter.

We continue to reducing Walgreens exposure and as well as franchise restaurants as we sold seven properties for gross proceeds of approximately $28 million with a weighted average cap rate of 6.7%.

In total, we disposed of 10 properties through the first six months of the year for gross proceeds of more than $36 million with a weighted average cap rate of approximately 6.7%. Given our disposition activities during the first-half of the year, we are raising the bottom end of our disposition guidance to $50 million for the year, while the high-end remains at approximately $75 million.

Our asset management team has also been proactively and diligently addressing upcoming lease maturities. Their efforts to reduce the remaining 2021 maturity to just three leases representing 20 basis points of annualized base rents.

During the second quarter, we executed new leases, extensions or options on approximately 209,000 square feet of gross leasable area. Most notably, we are extremely pleased to have executed a new 15 year net lease with Gardner White to backfill our only former Loves Furniture store in Canton, Michigan.

As you may recall, this was the Art Van flagship we developed prior to the company's acquisition by TH Lee. We delivered the space to Gardner White in June and rent commenced in July, allowing us to recover close to 100% of prior rents with just over one month of downtime. I would note this is the second time we have released this asset on effectively full recovery since the Art Van bankruptcy.

Gardner White is Michigan-based family-owned and operated, has been one of the preeminent furniture retailers in the state for more than a century. The Company is led by Rachel Tronstein, one of the brightest minds in the retail furniture industry and a former high school classmate of mine. We are extremely pleased to have Rachel and her team as partners in this flagship asset.

I'm also pleased to announce the addition of Burlington to Central Michigan Commons in Mount Pleasant, Michigan, one of the only two remaining legacy shopping centers that we chose to retain during the transformation of our portfolio.

To date we have re-developed the former Kmart Space for Hobby Lobby and Alta and added Texas Roadhouse on an outline via ground lease. These transactions are emblematic of our ability to unlock embedded value within the portfolio and support our decision to hold on to this very well located legacy shopping center across from Central Michigan University's main campus.

During the first six months of the year we executed new leases, extensions or options and approximately 275,000 square feet of gross leasable area and as of June 30, our expanding retail portfolio consisted of 1,262 properties across 46 states, including 134 ground leases and remains nearly 100% occupied at 99.5%.

With that, I'll hand the call over to Simon and then we can open it up for any questions.

[Simon Leopold, CFO]

Thank you, Joey.

Starting with earnings core funds from operations for the second quarter was $0.89 per share, representing a record 17.3% year-over-year increase. Adjusted funds from operations per share for the quarter was $0.88, an increase of 15.9% year-over-year.

As a reminder, treasury stock is included within our diluted share count prior to settlement if and when ADCs stock trades above the deal price of our outstanding forward equity offerings. The aggregate dilutive impact related to these offerings was less than half a penny in the second quarter.

Per FactSet, current analyst estimates for full year AFFO per share range from $3.40 per share to $3.53 per share, which implies year-over-year growth of 6% to 10%. As mentioned on last quarter's call, we continue to view this level of growth as achievable and expect to end the year toward the higher end of this range given current visibility into our investment pipeline and the broader operating environment. Building upon our 6% of AFFO per share growth in 2020 - this implies two year stack growth in the mid-teens.

General and administrative expenses totaled $6.2 million in the second quarter. G&A expense was 7.6% of total revenue or 7.1% excluding the noncash amortization of above and below-market lease intangibles. Even as we continue to invest in people and systems to facilitate our growing business, we anticipate the G&A as a percentage of total revenue will be in the lower 7% area for full year 2021 excluding the impact of lease intangible amortization on total revenues.

As mentioned last quarter, G&A expense for our acquisitions team fluctuates based on acquisition volume for the year and our current anticipation for G&A expense reflects acquisition volume within our new guidance range of $1.2 billion to $1.4 billion.

Total income tax expense for the second quarter was approximately $485,000 for 2021. We continue to anticipate total income tax expense to be approximately $2.5 million. Moving onto our capital markets activities for the quarter, in May we completed a $650 million dual tranche public bond offering, comprised of $350 million of 2% senior unsecured notes due in 2028 and $300 million of 2.6% senior unsecured notes due in 2033.

In connection with the offering, we terminated related swap agreements of $300 million that hedged for 2033 Notes receiving approximately $17 million upon termination. Considering the effect of the terminated swap agreements, the blended all-in rates for the 2028 Notes and 2033 Notes are 2.11% and 2.13% respectively.

We used the portion of the net proceeds from the offering to repay all $240 million of our unsecured term loans, the termination costs related to early pay down of our unsecured term loans total approximately $15 million.

Given the one-time nature of the termination costs, these amounts have been added back to our core FFO and AFFO measures. The offering in combination with the prepayment of all of our unsecured term loans extended our weighted average debt maturity to approximately nine years and reduced our effective weighted average interest rate to approximately 3.2%.

In June, we also completed a follow-on public offering of 4.6 million shares of common stock. Upon closing we received net proceeds of approximately $327 million. During the second quarter, we entered into forward sale agreements in connection with our ATM program to sell an aggregate of roughly 1.2 million shares of common stock for anticipated net proceeds of approximately $81 million. In May, we settled roughly 164,000 shares and received net proceeds of approximately $10 million.

At quarter-end we had approximately 3.9 million shares remaining to be settled under existing forward sale agreements which are anticipated to raise net proceeds of approximately $259 million upon settlement. Inclusive of the anticipated net proceeds from our outstanding forward offerings cash on hand and availability under our credit facility, we had nearly $950 million in available liquidity at quarter-end. The balance sheet continues to be a huge strength for us.

As of June 30, our pro-forma net debt to recurring EBITDA was approximately 3.6 times, including our outstanding forward equity offerings. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was approximately 4.5 times. Total debt to enterprise value of quarter-end was approximately 25% while fixed charge coverage remained at a record five times.

During the second quarter, we declared monthly cash dividends of $0.217 per share for April, May and June. The monthly dividend reflected an annualized dividend amount of $2.60 per share representing an 8.5% increase over the annualized dividend amount of $2.40 per share for the second quarter of last year.

Our payout ratios for the second quarter were a conservative 73% of Core FFO per share and 74% of AFFO per share respectively. Subsequent to quarter-end, we declared a monthly cash dividend of $0.217 per share for July. The monthly dividend reflects an annualized dividend amount of $2.60 per share or an 8.5% increase over the annualized dividend amount of $2.40 per share from the third quarter of 2020.

With that I'd like to turn the call back over to Joey.

[Joel Agree, President and CEO]

Thank you, Simon. At this time, operator, we will open it up for questions.

[Operator]

[Operator Instructions] The first question comes from Ki Bin Kim with Truist. Please go ahead.

[Ki Bin Kim, Truist]

So Joey when I look back at your transaction history, you've been buying in the past like in the mid-7 a few years ago and then 7% in the past, I think in 2019 and 2018 and then that yield has gone down to the low 6s lately. So I'm just curious when you look at that is it because cap rate compression across the sector or is it that you're targeting certain types of investments like ground leases, which nevertheless have lower yields. I'm just trying to understand what the cause of that was, and if a low 6% is what we should be expecting from you guys for the foreseeable future.

[Joel Agree, President and CEO]

Yes, no, I appreciate the question, Kim. But I think generally speaking, we've seen in several years of cap rate compression with cap rates at historic lows as of today, so we continue to target high-quality assets. I don't think you've seen any change there since we've launched the acquisition platform in 2010 and we've said historically that our ground lease assets generally fall within the range.

The cap rate range of the turnkey acquisitions that we make, so we continue to see very aggressive capital chasing a high-quality lease retail properties and I think what you'll see from us relative to other acquirers out there is that we're continuing to drive towards quality without sacrificing yield. And so it's a competitive environment we don't see that changing, but the team is doing a fantastic job creating value through all sorts of transactions.

[Ki Bin Kim, Truist]

Okay. And second question, can you just help me understand the ground lease portfolio strategy. I forget what the lease duration is for that segment of your portfolio and when the lease does come do how are you thinking about that? And is there, is it fair market value, reset, or is there contractual rent increases built today. I'm trying to understand, eventually when that comes to, what will actually happen?

[Joel Agree, President and CEO]

Yes, so the ground lease portfolio is weighted average lease term about 12.5 years as we mentioned in the prepared remarks. Rent per square foot is only $9.65 with annual embedded growth of approximately 1% and is 90% investment grade. So when you look at our ground lease portfolio. I'd tell you, from a credit, real estate, and return perspective, but I think it is a very unique sub-portfolio that obviously is growing trending towards 13% of our overall portfolio. We continue to find just compelling opportunities there now.

Upon expiration or failure to renew an auction, we effectively get the building and the entire premises for free now. That is very rare, tenants typically don't want to give away improvements that are sitting on their balance sheet. And so, it's the upside, upon lease expiration or failure to exercise an option or rejection in the bankruptcy once that contractual leases is broken, is very compelling as well.

So, I think when you look at the front end, the economics, the underlying credit profile, the lease duration, the embedded growth in the portfolio and you combine that with the residual value in real estate, that's not on our balance sheet that the tenant paid for. For example, the Wegmans and the Capital Grill that we acquired with the Parsippany, New Jersey here it's a pretty compelling risk-adjusted return.

[Ki Bin Kim, Truist]

So when you say that the tenant has an option, is that option based on the contractual rent increase of whatever stated X percent or is it a fair market value reset type adoption?

[Joel Agree, President and CEO]

The vast majority is the former, so contractual increases throughout the base term then contractual increases pursuant to exercising any options.

[Ki Bin Kim, Truist]

Okay, thank you, Joey.

[Joel Agree, President and CEO]

Thanks Kim. Operator I think we can go to number two.

[Operator]

The next question comes from Nate Crossett with Berenberg. Please go ahead.

[Nate Crossett, Berenberg]

Maybe just following up on that ground lease question, what can you maybe provide us in terms of helping us value that optionality of the ground lease portfolio? Do you guys track kind of your cost basis versus the appraised value of everything that's on top of the ground lease?

[Joel Agree, President and CEO]

No, I think, look, first off, we're not going out and appraising every single asset, we're not getting asset-level financing. We're not looking at valuations really in that perspective. We're looking at price per pound that we're acquiring the building, if and when we were to get that back, we're looking at price per acre and then we're looking at replacement rents for that specific use.

So again the ground leases range just to give you a sense, the ground leases range from McDonald's rate chase ground lease on a one acre parcel of 354,000 square foot building to us to a Walmart Supercenter our Costco sitting on 20 acres. And so those are very different constructs.

Obviously, if we were to get one of the Walmart or in this case our first Cabela's building back, we would have effectively a 20-acre parcel with 600 feet of frontage where we could develop five to six outlets plus 100,000 square foot to 200,000 square foot building back it for free in the rear, which used to formally how obviously is the store and so they're very different analysis in comparison to a Wawa C-store, that is a C store, that's a C-store, always a C store.

And I think it really takes an individual bottoms up real estate analysis to be able to understand each and every asset, but at the end of the day, we are always getting the improvements in the building back for free if the tenant were to vacate for any reason.

[Nate Crossett, Berenberg]

Maybe, I was wondering if you could parse out I think the average yield in the quarter was 6.2%. What was the yield on the ground leased stock versus the non-ground leased stock.

[Joel Agree, President and CEO]

Yes. Just rate of that range. I don't have the exact number in front of me in April it is really right in that range, we're buying generally speaking between 5 at the low end and a 7. Sometimes higher frankly and what we're doing things with tenants such as blend and extends or really exercises of options or working in conjunction, but that's the general range here. We acquire a number of shorter-term ground leases or medium-term ground leases with asymmetric information and we're working in conjunction with a tenant on a longer-term prospect.

[Nate Crossett, Berenberg]

Maybe just one last one on pricing. I was just curious on what leasing spreads were like on the renewals and kind of what's the expectation or what is left this year. I know it's not a lot, but.

[Joel Agree, President and CEO]

Yes, I mean, really effectively every single option has been exercised this year, asking we're extremely pleased to have Burlington added to Mount Pleasant. That was a former JCPenney, where they're paying 250 a foot or something ridiculous, so obviously is a significant positive leasing spread, but in the overall scheme of things it is very de minimis obviously. And then with the former Art Van, then the former Loves Furniture we're thrilled to have Gardner White in there.

As I mentioned in the prepared remarks, Gardner White has been in business for over 100 years, I think since 1914 or 1916. It is led by a fourth generation leader and Rachel Tronstein today. This store is now their flagship. They have effectively relocating the store from down the street, they've been in the market, they've been in the state. And this is a stable family-owned company and we recaptured essentially 100% of rent for the second time from Art Van to Loves and then Loves to Gardner White, which we're thrilled to have take over that asset.

[Operator]

The next question comes from Katy McConnell with Citi. Please go ahead.

[Katy McConnell, Citi]

So on the ground lease acquisitions, whether any other portfolios acquired this quarter and then just looking at the future pipeline did you expect to keep that at similar pace of deals relative to the total deal volume?

[Joel Agree, President and CEO]

Yes, good morning, Katy. We did acquire some small portfolios of just diversified assets during the quarter. Nothing overly material. In terms on a go-forward basis, look our Q3 pipeline has a significant ground lease exposure. We're excited about those opportunities. Many of them very similar to what we've executed in the past couple of quarters here In terms of on a go-forward here, we're going to continue to evaluate all opportunities whether they're ground lease or turnkey in the next few on the best opportunities that we're able to originate and so it's hard to predict the future.

Never thought we'd see the ground lease portfolio approaching 13%, but again the team continues to do a tremendous job originating opportunities.

[Katy McConnell, Citi]

Thank you, great. Another, you've adjusted on 2021 lease expiration, what percentage of that space is ultimately renewed and how does that compare to historical trends.

[Joel Agree, President and CEO]

Effectively 100% was ultimately renewed. Obviously, we had the Loves bankruptcy. So that was a unique situation and JC Penney bankruptcy where they rejected. I believe the actual rejection took place in 2020. The JCPenney rejection in Mount Pleasant where we've signed on Burlington and so I caution everyone our leasing activity is probably not emblematic of any broader trends. In retail we have very de minimis remaining leases expiring. Obviously, this year at only 0.2% of ABR and 1.1% of ABR in 2022. And so again, I would caution everybody not to see any larger trends on that.

[Operator]

Your next question comes from Robert Stevenson with Janney. Please go ahead.

[Robert Stevenson, Janney]

Joey. I know it's a relatively small piece of the portfolio, but how are your movie theaters doing these days where are rents rebounding to and then also, have you seen any theater assets trade in the market and where those asset values versus pre-pandemic if you wanted to sell down some of your portfolio?

[Joel Agree, President and CEO]

Good morning, Rob. Full transparency, I haven't been to the movies or looked at a movie theater since the pandemic started, but we've got five movie theaters in the portfolio today, they're all paying rent, the Red Mafia is helping a number of these operators, obviously in the portfolio. We have no interest in movie theaters, adding additional movie theater exposure. We weren't adding movie theater exposure for several years before the pandemic. My kids do want to see Space Jam too.

So we'll have to put that on the docket here, but besides that, we just don't think the fundamentals of the business, plus the residuals on the real estate makes sense in context of this portfolio.

[Robert Stevenson, Janney]

But, I guess if you wanted to sell that today is there a significant haircut or has it rebounded enough that you could sell those plus or minus a bit of where you'd want to or is this on hold for 2022 or 2023 and hope for a bigger rebound to get out of those?

[Joel Agree, President and CEO]

It's a good question. I'd say there is a lot of liquidity in the feeder market today, we're very comfortable with the five theaters that we have in the portfolio, it's again large operators, the AMC Regal Cinemark. I wouldn't anticipate that pricing with that pre-pandemic levels by any means, but I think you saw pricing weakness pre-pandemic as well in the sector in general.

And so if we see an opportunity to divest of one of the theater, just like we divested of the Dave & Buster's in Austin we will do so. But we're very comfortable, holding them. It's, again it's a fairly de minimis. It's a very de minimis piece of our portfolio and we're comfortable with the five assets.

[Robert Stevenson, Janney]

And then how are you feeling about the furniture segment going forward as a whole these days, and you still want to be there longer-term on a risk adjusted basis. And then I guess with 15 years now on this Gardner White lease is now the time to sell that asset as well.

[Joel Agree, President and CEO]

But - we have very de minimis exposure to furniture, I believe we have one Ashley Furniture and now with Gardner White in the portfolio. So we've never been overly acquisitive in the furniture space, it's obviously highly cyclical related to the housing market, the broader macroeconomic trends, the bigger problem with the furniture space generally in real estate is the lack of parking for most of the stores.

And so you take the average grocery stores parked one per 1,000 and so a 40,000 square foot furniture store frankly cannot park for a grocery operator or a soft good operator. So that's the biggest challenge, so it effectively becomes almost the single purpose buildings in like we're to a movie theater or gas station. And so we've never been overly attracted to the furniture space. Obviously, we develop the Art Van flagship in conjunction with our van predating obviously his death in TH Lee. We're thrilled to have a Gardner White here.

We will look at all opportunities, I think if everybody who hadn't seen this asset goes through the YouTube video. I think it still has our van on it. This is a premier retail location in the State of Michigan sharing a traffic signal with IKEA heads up and one of the three largest retail thoroughfares in Southeast Michigan. So Gardner White is going to do fantastic year. They've been in that sub-market for a long time right down the street and this store is going to do fantastic and we'll look for any opportunities if it makes sense for us to divest or move on from it.

[Operator]

The next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.

[John Massocca, Ladenburg Thalmann]

With regards to your balance sheet strategy, what should we expect with regards to the forward issuance under the ATM? Is there an absolute or relative amount you're targeting had outstanding on a forward basis at any one time.

[Joel Agree, President and CEO]

I'll touch on and then hand over to Simon. And I think, we're will continue to be opportunistic with capital sources seeking to maintain a balance sheet is going to enable our growth like we have historically in the four to five times range, inclusive of forwarding settlement of any equity and then we'll continue to look to reduce our cost of capital at attractive pricing. Simon. Go ahead.

[Simon Leopold, CFO]

Yes, I mean just sort of echoing what Joey is saying, obviously the balance sheet's in great shape, we got very little leverage and great access to efficiently price capital and we raised over $1 billion to this year and the combination of institutional debt, forward equity, straight common equity and we're generating very strong FFO growth while improving an already high quality portfolio.

So I think at the end of the day it's working and we don't plan to change it. If we can find other ways that makes sense to give ourselves some more tools in our toolbox to keep funding this company and its growth the right way, then we'll certainly look at them, but we think what we're doing is working and we're going to keep doing it.

[John Massocca, Ladenburg Thalmann]

Is there like a level you have in mind that you think about that issuance in terms of, gives you kind of a set cost of capital, no matter what the equity markets do in terms of volatility, but obviously, it's kind of a reserve the hold in some way. So is that, is there a number you have in mind, could we see that decline over time. Given the amount you kind of raised on the ATM on a forward basis in this quarter, or sorry, Q2 versus as well as having to kind of follow-on offerings in the quarter as well or is it kind of just going to be an opportunistic thing on your end.

[Joel Agree, President and CEO]

Well, John, I wouldn't think of it as an absolute or relative level generally. Forward equity is part of an overall hedging policy we have that we utilize to maintain medium-term visibility into our cost of capital.

So very similar and this is why we derive the forward equity strategy several years ago and we've seen a number of net lease REITs follow suit through regular way ATM is that we looked out in the marketplace we knew we are growing at a 30% CAGR. We obviously there's macroeconomic volatility that is out of our control and so companies have historically used forward starting swaps on the debt side, we said was 75% of our balance sheet is equity. Why don't we take an overall hedging policy to have a more stable perspective of the larger piece of our capital stack the equity side?

And so it's part of an overall hedging policy. The last two transactions I believe we've done have been regular way transactions. They haven't been forward then we utilize the forward structure on the ATM in conjunction with it, and again the goal here is, we know we're going to grow, but we have visibility in the 60-70 days of our pipeline, hence the increased acquisition guidance here.

We're still just working on Q4. And it gives us that visibility beyond Q4 into our cost of capital, whether it's COVID 2020 or the margins come down or who knows what happens or inflation runs rampant, we're going to have the ability to execute on our strategy assets.

[John Massocca, Ladenburg Thalmann]

That makes sense. And then I know you already touched a little bit on kind of disposition outlook but with regards to the restaurant space, it sounds like that was a focus on dispositions in the quarter, is that something we can see on the casual dining side, go down to zero eventually or is there kind of a lower bound for where that may end up in terms of exposure.

[Joel Agree, President and CEO]

Yes, we will continue to opportunistically divest of generally speaking franchise fast-food restaurant into a very aggressive environment. In Q2, we closed the sale of two Wendy's, a Burger King. I think you'll see us continue selling those assets. We don't have very many left, frankly, we sold the vast majority of them. And so the franchise fast food restaurant space is effectively winding down for us.

In terms of casual dining we have very few assets that are casual dining and then the vast majority asset I think one or two of the entire portfolio our ground leases, and so we're very comfortable with those positions, as I talked about on the call in the pre-recorded part the capital grew ground lease is a very unique asset right - that's fine dining and mature with the category or sector designated for that it's the only one in the portfolio, but it's sitting there in Parsippany, New Jersey, capitals built the entire building and obviously it's a beautiful build-out and so it's a ground lease similar to the rest of the casual dining assets in our portfolio.

[John Massocca, Ladenburg Thalmann]

And I guess is there any kind of low-hanging fruit then maybe we think beyond 2021 in terms of dispositions, as you kind of solidify into you may be more ground leases in the restaurant space that you're not going to end up selling and obviously, we'll see theater pricing as you talked about the ability on the call, but anything else that kind of stands out as a potential sorts of dispositions category-wise?

[Joel Agree, President and CEO]

I tell you our disposition activity over the last several years has reduced our pharmacy exposure, obviously reduced our Walgreens exposure, the restaurant exposure, the Dave & Buster's now where we only have two including effective with the flagship in New Orleans. I think the portfolio as a whole has never been in a better place, we'll continue to opportunistically divest of assets.

That being said, I think if we roll back the clock to 2010, when we had 70 properties, I would bet you, we have less than 20 remaining of those legacy assets of the entire portfolio today. So we have, it's a new portfolio that's been constructed with an omnichannel future in mind since the advent of our acquisition platform in 2010 and it frankly doesn't have a lot of legacy challenges and so we're in a good place.

[Operator]

[Operator Instructions] The next question comes from Linda Tsai with Jefferies. Please go ahead.

[Linda Tsai, Jefferies]

With Grocery now your largest tenant take that almost 11%, how does the credit quality of these tenants compared to the overall portfolio average. And would you expect it to grow as a percentage of your whole?

[Joel Agree, President and CEO]

Good morning, Linda. Our grocery exposure is now led obviously by Kroger. Walmart doesn't fall into the grocery stores for us. There are in general merchandise, is now led by Kroger and it's effectively a 100% or nearly 100% investment grade. So the shop rate acquisition is wait for credit. The Amazon Fresh as we acquired are Amazon.

The Kroger portfolio obviously has Kroger credit. We have one or two Publix in the portfolio in HEB, now the two Wegmans inclusive of the New Jersey asset on a ground lease. And so, our focus in grocery we think there's going to be significant shakeup in the grocery industry over the next several years, is on best of breed operators who have the balance sheet to invest in price and invest in an omnichannel future through both macro and/or micro fulfillment or whatever permutation of that may take.

And so it's a highly competitive industry with 2% historic margins. It's going to be continued to be very competitive with Amazon Fresh continuing to roll out stores in full price transparency and so we think the best of breed whether the super-regional or national is going to shake out and be on top year and that's the only place we'll invest capital in the grocery space.

[Linda Tsai, Jefferies]

Thanks. And then there's a lot of headlines on rising COVID cases in the delta variant. What kind of conversations you have internally or might have had with your tenants on the potential impact you know if the case counts continue?

[Joel Agree, President and CEO]

Well, we were in a very unique position outside of the off-price retailers TJX being amongst them. The retailers in our portfolio thrived during the pandemic, generally speaking, so Walmart, Tractor Supply, Dollar General even Best Buy, the auto parts guys, the home improvement guys. They were thriving during the pandemic, frankly do agree that I wouldn't have anticipated. And I think I mentioned on the last call and never knew there were so many people to perform home improvement projects or fix their cars on their own out there, but it was the sales were absolutely tremendous at the four-wall level.

I think the biggest challenge for every retailer or the conversations we have is labor challenges today, is staffing. That's obviously apparent everybody who goes out to eat or goes shopping today is the staffing challenges out there continue to persist. Most retailers in our portfolio have figured out a way to navigate it, but that's the biggest challenge, but nothing specific to the delta variant or any other variant in terms of impact on the business.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.

[Joel Agree, President and CEO]

Well, thank you very much. Hopefully, we see everybody in person soon and stay safe. Thank you, everybody.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.