Earnings Call Transcript
AGREE REALTY CORP (ADC)
Earnings Call Transcript - ADC Q1 2022
Operator, Operator
Good morning, and welcome to the Agree Realty Corporation's First Quarter 2022 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Reuben Treatman, Director of Corporate Finance. Please go ahead, Reuben.
Reuben Treatman, Director of Corporate Finance
Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's first quarter 2022 earnings call. Before turning the call over to Joey and Peter to discuss the results for the quarter, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities law. 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 the containment measures on us and our tenants. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-K for 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.
Joey Agree, CEO
Thanks, Reuben, and thank you all for joining us this morning. I am pleased to report that we're after a very strong start in 2022. The first quarter marks record development in Partner Capital Solutions as well as our second highest quarter of acquisition volume in the Company's history. While we continue to execute across all three external growth platforms, we are very pleased that our fortress-like balance sheet and disciplined portfolio construction received an upgrade from Moody's to Baa1. During the first quarter, we invested approximately $430 million in 124 high quality retail net lease properties across our three external growth platforms. 106 of these properties were originated through our acquisition platform, representing acquisition volume of just over $407 million. While investment volume was impressive, we maintained our discipline focused on best-in-class opportunities with our leading retail partners as demonstrated by more than 74% of first quarter acquisitions being comprised of investment grade retailers. The 106 properties acquired during the first quarter represent 43 tenants operating in 20 distinct sectors including leading operators in farm and rural supply, dollar stores, home improvements, general merchandise, tire and auto service, and auto parts. We executed on several notable transactions during the quarter including the 55 property $180 million portfolio discussed on our last earnings call. The acquired portfolio has a weighted average lease term of nearly 10 years, derived approximately 90% of annualized base rent from a diversified set of investment grade retailers. Top tenants include Tractor Supply, CVS, Dollar General, Sherwin-Williams, Advanced Auto Parts, and O'Reilly Auto Parts. For the quarter, the total properties acquired had a weighted average cap rate of 6% and had a weighted average lease term of 9.2 years. Excluding the 55 property portfolio, the properties acquired during the quarter had a weighted average cap rate of 6.2%. During the first quarter, we also acquired six Sunbelt Rentals locations in North Carolina, New York, Washington, Florida, and Michigan. Several years ago, we identified Sunbelt and their parent Ashtead Group as a compelling and aligned partner with the only investment grade credit profile in their respective space. Our decision to invest in Sunbelt Rentals was recently reinforced by the upgrade at BBB by Fitch. We continue to look for opportunities to build our relationship with Sunbelt across all three of our external growth platforms. Given our significant acquisition activity in the first quarter and robust pipeline, we are increasing our full year 2022 acquisition guidance to a range of $1.4 billion to $1.6 billion, representing a 25% increase at the midpoint. While the midpoint of our increased acquisition guidance would represent record volume for our company, we have not and will not sacrifice quality or yield. We continue to believe that retailers are dynamically evolving, and we remain intent on investing in those retailers best positioned to succeed in an omnichannel and dynamic world. Moving on to our development and partner capital solutions platform. This quarter demonstrates the results of our efforts to provide comprehensive real estate solutions to our retail partners through our programmatic relationships, as well as the modifications and additions we have made to our team to increase productivity. Led by our Chief Operating Officer, Craig Erlich, our development and construction team is working around the clock on a host of exciting projects. During the quarter, we commenced a record 15 new development and PCS projects including 13 geographically diverse Gerber Collision locations, a Sunbelt Rentals in St. Louis, Missouri, as well as a Burlington in Turnersville, New Jersey. We completed our first development with 7-Eleven in Saginaw, Michigan during the quarter, while construction continued on two Gerber Collision projects in Pooler, Georgia and New Port Richey, Florida. In total, we had 18 projects either completed or under construction during the first quarter, representing $53 million of committed capital. On last quarter's call, I mentioned our expectation to commence between $50 million and $100 million through our development and PCS platforms this year, and we have now surpassed the low end of that range, and our pipeline continues to ramp. Our value proposition remains unique and distinct. Our three-pronged external growth strategy combined with our outstanding asset management platform continues to provide a full-service solution for the country's premier retailers. Moving on to dispositions, we sold one property opportunistically for total gross proceeds of approximately $8 million during the quarter. The property was a recently acquired ground lease convenience store. Notably, we acquired the property during the third quarter of 2021 and received an unsolicited offer shortly thereafter. We sold the asset at just over a four cap approximately 200 basis points below the initial acquisition yield, resulting in a gain of over $2 million in just six months. While this was a one-off transaction, it demonstrates the embedded value in our ground lease portfolio and validates the compelling risk-adjusted returns that we have discussed on prior calls. During the quarter, we executed new leases, extensions, or options on approximately 358,000 square feet of gross leasable area. Notable new leases, extensions, or options included Walmart in Ohio, and Best Buy in Amarillo, Texas. As a result of our asset management team's efforts, at quarter end our 2022 lease maturities stood at just 0.4% of annualized base rents, representing a year-over-year decrease of approximately 80 basis points. At quarter end, our quickly growing retail portfolio surpassed 1,500 properties, a remarkable achievement in terms of our exponential growth in recent years, and consisted of 1,510 properties across 47 states, including 186 ground leases, representing 13.5% of total annualized base rents. Our investment grade exposure stood at nearly 68%, representing a two-year stacked increase of more than 800 basis points. With that, I'll turn the call over to Peter, and then we can open up for any questions.
Peter Coughenour, CFO
Thank you, Joey. Starting with earnings, core FFO for the first quarter was $0.97 per share, a 15.5% year-over-year increase. AFFO per share for the quarter was also $0.97, representing an increase of 16.4% year-over-year, which is the highest AFFO per share growth achieved in 10 years. As a reminder, treasury stock is included within our diluted share count prior to settlement, if and when ADC stock trades above the deal price of our outstanding forward equity offers. However, the aggregate dilutive impact related to these offerings was negligible in the first quarter. Our consistently strong earnings growth continues to support an increasing and well-covered dividend. During the first quarter, we declared monthly cash dividends of $0.227 per share for each of January, February, and March. On an annualized basis, the monthly dividend represents a 9.7% increase over the annualized dividend from the first quarter of last year. At 71%, our payout ratio for the first quarter was below the low end of our targeted range of 75% to 85% of AFFO per share. Subsequent to quarter end, we declared an increased monthly cash dividend of $0.234 per common share for April. The monthly dividend reflects an annualized dividend amount of $2.81 per share or a 7.8% increase over the annualized dividend amount of $2.60 per share from the second quarter of last year. General and administrative expenses totaled $7.6 million in the first quarter. G&A expense was 7.2% of total revenue, excluding the non-cash amortization of above and below market lease intangibles. While we continue to invest in people and systems, our anticipation is that G&A as a percentage of total revenue will continue to scale, decreasing between 20 basis points to 50 basis points as a percentage of total adjusted revenue compared to last year. Additionally, we continue to anticipate total income tax expense to be in the range of $2.5 million to $3.5 million. Moving on to our capital markets activities for the quarter, in March, as Joey mentioned, Moody's upgraded the Company's issuer rating to Baa1 from Baa2 with a stable outlook. The improved investment grade credit rating is a testament to the strength of our balance sheet and reflects the thoughtful and disciplined manner in which we've grown the Company since achieving our initial rating four years ago. The Baa1 credit rating will further improve our long-term access to capital and enhance our ability to execute in the public bond markets. As mentioned on last quarter's call, we have $300 million of forward starting swaps in place, effectively fixing the base rate for contemplated long-term unsecured debt issuance at 1.7%. Near the end of the quarter, we settled approximately 3.8 million shares of outstanding forward equity, realizing net proceeds of $251 million. At quarter end, we still had approximately 4.1 million shares remaining to be settled under the December 2021 forward offering, which is anticipated to raise net proceeds of $263 million upon settlement. Inclusive of the anticipated net proceeds from our outstanding forward equity, cash on hand and availability under our $1 billion credit facility, we had almost $970 million of liquidity at quarter end. As of March 31, our net debt to recurring EBITDA was approximately 4.3 times, pro forma for the settlement of $263 million of outstanding forward equity. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was approximately five times. Total debt to enterprise value at quarter end was approximately 26.5%, while fixed charge coverage, which includes principal amortization and the preferred dividend remains at a company record of 5.2 times. In summary, we continue to maintain a conservative and well-positioned balance sheet that affords us tremendous flexibility with pro forma net debt to EBITDA of 4.3 times and roughly $970 million of liquidity to fund our robust investment pipeline. Our significant liquidity, more than $560 million of hedged capital, and our robust pipeline continues to give us confidence in achieving high single-digit AFFO per share growth in 2022. Combined with our nearly 10% AFFO per share growth last year, this implies two years of stacked growth in the high teens. We do that per share growth to be very attractive when combined with our best-in-class portfolio, our fortress-like balance sheet and extremely well-covered dividend. With that, I'd like to turn the call back over to Joey.
Joey Agree, CEO
Thank you, Peter. At this time, operator, let's open it up for questions.
Operator, Operator
We will now begin the question-and-answer session. Our first question comes from Josh Dennerlein with Bank of America. Please go ahead.
Josh Dennerlein, Analyst
So, you had a pretty sizable portfolio acquisition during the quarter. Just curious how that deal came about and maybe what the bidder pool like in the current environment?
Joey Agree, CEO
Yes, good morning, Josh. I think we talked about it on the last call that transaction for the portfolio itself, we started to look at it in 2019. At the time, the swap breakage fees for the seller, which is a private individual in the Mid-Atlantic, were too heavy for him to burden. And so, we were re-approached, I believe in December of last year, and then within three days, had a transaction that was getting papered. And so, there was no bidder pool, it was fully off market, a single individual owner who had aggregated the portfolio over several years.
Josh Dennerlein, Analyst
And then, so you had a record number of starts across your development and PCS programs. Are there any terminals on how big your development pipeline can get?
Joey Agree, CEO
No, I think look, we've always said that we're going to deploy our development capabilities selectively in terms of dedicating our time, energy, and capital. Of course, we want those projects to hurdle, our internal rates to make sense. So, we don't see any governor. We've made significant additions to the team, both on the development and construction side, as I mentioned in the prepared remarks. And so, we're going to continue to ramp that pipeline opportunistically. We have several projects we anticipate announcing in Q2. But we think there's ample opportunity right there given the disconnect between rates and returns for private developers for us to step in. We've been having a number of conversations with retailers on both programmatic and individual projects.
Operator, Operator
Our next question comes from Robert Stevenson with Janney. Please go ahead.
Robert Stevenson, Analyst
Joey, just a follow-up on the last question. On the Gerber stuff, was there anything in particular that sort of drove timing, I mean, of doing that? I mean, that was 13 of the 15 development PCS volumes at this point in time, or is this just part of their expansion plans et cetera?
Joey Agree, CEO
Generally, part of their expansion plans. We continue to look for opportunities with Gerber across all three external platforms. Gerber continues to grow both from a greenfield perspective and an M&A perspective, acquiring generally independent operators. These projects are, I would tell you, about half what we call retrofits, renovations, or expansions and then half greenfield projects. So, Gerber continues to take market share in this country, and we see them as a pretty critical partner in an industry that is very favorable.
Robert Stevenson, Analyst
And then you guys sold the LA Fitness you acquired in the portfolio deal pretty quickly. How are you thinking about the other LA Fitness locations in the portfolio and the other gyms in the portfolio in general? Are those near-term disposition candidates? Was there something about this one that caused this one to be sold so quickly versus the others? How are you thinking about gyms and fitness going forward?
Joey Agree, CEO
Yes, just for clarity purposes, that was not part of the $180 million portfolio that was part of a Walmart and Home Depot portfolio that we acquired. We agreed to take the LA Fitness which was based in Houston, but immediately looked to divest that even pre-close at our cost basis. We're just simply not willing to take on incremental specifically LA Fitness exposure, but generally health and fitness exposure unless it's a really low-cost operator or a piece of real estate that we're really in love with. So as you can see, we reported the LA Fitness at 331 to 1.5%. But they're truly down to 1.3% just immediately after or subsequent to quarter close. We still look at the gym sector or the health and fitness sector with caution. We have some impaired balance sheets. Obviously, we still have COVID out there, but I think just the fragmentation of the space, the private equity in the space, and just the sheer number of options available for consumers today really make that space difficult to underwrite for us.
Robert Stevenson, Analyst
Okay. And then last one for me. Peter, if you were doing a note issuance today, where have you gotten indications from your banks group that you could price 5 or 10-year debt versus where you would have been at the end of 2021?
Peter Coughenour, CFO
Yes, Rob, first, as noted in the prepared remarks, we have $300 million of forward starting swaps in place today that have effectively fixed the base rate at 1.7%, what is contemplated as a 10-year unsecured debt issuance. In terms of the spread on top of that base rate, it depends on when we access the market. Obviously, the capital markets have been somewhat volatile to start the year, but the good news is we are in an excellent position from a liquidity perspective and can be opportunistic in terms of when we access the market and issue additional unsecured debt.
Operator, Operator
Our next question comes from Nicholas Joseph with Citi. Please go ahead.
Nicholas Joseph, Analyst
Thanks. With regards to the development pipeline, what are you seeing in terms of construction costs and how does that ultimately compare relative to the yield?
Joey Agree, CEO
Good morning, Nick. Welcome back to net lease. Construction costs continue to rise across the country. And so, we are very cognizant of where those costs are. These are generally fixed return projects. I think most tenants are aware that construction costs, and also lead times such as HVAC units, roofing material are both things factoring into construction costs, but also efficiencies to deliver. I think that's why we see a number of retailers looking to us with the liquidity, obviously being publicly traded and having access to the revolving credit facility, to be able to provide certainty, truly of delivery at the end of the day. But construction costs continue to be a challenge for everybody here, we are very cognizant of those. And like I said, most of the transactions that we enter into are open book, fixed return, and so that risk is not going to be on us.
Nicholas Joseph, Analyst
Okay. And then, as you think about kind of pricing forward deals, do you expect to be able to continue to get similar returns to what you've been experiencing? Or ultimately, is there kind of a price point where maybe that yield has to come down a bit?
Joey Agree, CEO
On the development side specifically, we are very hesitant to go too far out the curve. We are really looking at shovel-ready projects, nothing that's taking too long from an entitlement perspective or permitting perspective. As we can see with the 15 starts we have this quarter, we will have a few starts next quarter as well. In cases where we are going out longer with a longer entitlement period or permitting period, it's going to be a fixed return, open cost structure, or we know what those costs are. But even in that instance, given the volatility we see out there, we are pretty hesitant to enter those without a significant premium.
Operator, Operator
Our next question comes from Spenser Allaway with Green Street Advisors. Please go ahead.
Spenser Allaway, Analyst
Thank you. Can you just comment on the broader cap rate environment specifically as it relates to what you are seeing in terms of portfolio deals versus some one-off transactions?
Joey Agree, CEO
Yes. Good morning, Spencer. I think I always compare the net lease space to single family residential. It's the longest lag time in terms of cap rate movement because of the fragmentation of ownership, but also the sheer number of intermediaries in the forms of brokers and agents that are out there trying to get or promising to get aggressive pricing for sellers. I'll tell you, we're starting to see some cracks and specific instances of cap rates moving upwards. But I think it's really going to take that 90 to 150 days, which are typically upon expiration of those listing agreements, which again brokers have promised sellers very aggressive pricing, to set the tone for the overall market. But we're starting to see some cracks. In terms of portfolios versus one-off, it's really dependent upon the quality of the portfolio and the type of portfolio. And we're not looking at anything that generally ABS buyers or heavily-levered buyers would have played in that pool historically. Those IRRs have gone down significantly because of the availability of debt and obviously the coupon on debts available today. But I tell you, on both sides of the equation, we're hopefully seeing more movement. It takes time. They haven't seen material movement across the board yet, but there are, of course, opportunities where we've been able to push cap rates.
Spenser Allaway, Analyst
Can you provide any insights regarding the increases in cap rates that you're witnessing? Is it a complex situation? Also, could you share some details about the current ground lease market and pricing trends?
Joey Agree, CEO
Yes, nothing thematic. It's really one-off sellers generally what we're dealing with, average price points of $5 million absent the portfolio transactions we've mentioned. Ground leases this quarter were light for us, partly because of the large portfolio transactions, the $180 million and then the other $80 million. We've always said we would take advantage of ground lease opportunities that we see. I think we acquired five during the quarter, and we obviously disposed of the convenience store ground lease, extremely aggressive cap rate for the $2 million that was off market, just an opportunistic inbound bid by a high net worth individual. There are a number of ground leases in our pipeline today. I don't see any material change to the ground lease versus the turnkey structure, although there is obviously more focus on ground leases today given the focus on us as well as safe and some of the work that you guys and others have done.
Operator, Operator
Our next question comes from Wes Golladay with Baird. Please go ahead.
Wes Golladay, Analyst
You have a lot of Gerber Collisions added to the portfolio or the developer PCS program this quarter. Do you anticipate adding more retailers at a similar scale? And the program also appears to be building momentum throughout this year? Can you comment about how big you think this program can get over the next few years? Could we get $300 million, $400 million, $500 million? What is your ultimate vision here?
Joey Agree, CEO
With Gerber specifically? Yes, we're very pleased with how it scaled and ramped. As I mentioned, we've always held that capability. It's the core of this company that started as agreed development in 1971 up until the launch of the acquisition platform in 2010. I'll tell you we've had more and more inbounds from retailers to provide that certainty of execution. We have retailers that are growing in this country. They're facing pricing pressures, labor shortages that their historical developers cannot handle in a rising interest rate environment and potentially rising cap rate environment, their historical developers can't perform and they can't deliver the stores that they're typically being promised to Wall Street. So, we're having a number of conversations. I'll be frank. Some of them aren't fit for us. They may be credit fits for us. We may like the operator, but the price point is too small. It'd be akin to us launching a single-family home construction business across the country. We're not interested in doing that. But I'll tell you those conversations have significantly ramped up given the environment we're in today. Specifically to Gerber, I think it's almost akin to what we did with Sunbelt, and we discussed in the prepared remarks in terms of identifying early on a retailer that we thought was in a tremendous position to access a fragmented space and had the balance sheet capabilities to do so. So, with Gerber specifically owned by the boy group of Canada publicly traded on the Toronto Stock Exchange has over 700 stores, very low leverage at just over three times leverage at the conservative company at its core. As you're probably aware, there are the big three collision operators in this country, Gerber, Caliber, Service King. Service King, if you read media reports, is entering into a potentially out-of-court restructuring given some of their financial constraints, and if not, could be heading into bankruptcy. What's interesting about the collision business is that it's really a tremendous business today. It used to be that you bumped something with your bumper, you had a little scratch or a little thing and maybe you got it fixed and maybe you didn't. Now you got three sensors, two cameras, LiDAR, all of this high-tech equipment in there. And so frankly, the days of the local collision shop having the skilled labor and the capability for all of those high-tech repairs are pretty much gone. The vehicles, the accident rate could we see going down generally across the board just because of some of those safety features as well. But the cost to repair these, what used to be minimal repairs is absorbent. And so, the national vendors, which have relationships and pricing power, with the auto insurers are really thriving. Gerber works hand in hand with those insurance companies to direct customers to their collision centers and as a preferred vendor for them. We see this very similarly to the equipment rental business, we see Caliber really taking the lead on collision. And so, we're excited to continue to work with them across all three platforms.
Wes Golladay, Analyst
And then one for Peter. Can you talk about the swaps? Are those 10-year swaps, and for your $200 million of the potential issuance will double and risky, including the swaps? And then, just a follow-up to that, does that Moody's upgrade at all help you from your current debt issuance?
Peter Coughenour, CFO
So, first, the $300 million of forward starting swaps contemplate a 10-year unsecured debt issuance. So, they're hedging effectively a tenure issue, so we could apply them to an issuance with a different tenor. They have effectively fixed the base rate at 1.7%, as I mentioned, and they can be used at any time throughout 2022. So, there's no near-term rush to use those swaps. Certainly, we think that the upgrade from Moody's to Baa1 will help improve pricing and also access to capital in the public markets. In terms of ultimately where that price is, I think that's dependent on when we access the market. We're in an excellent position today, as I mentioned in terms of liquidity and can be opportunistic in terms of when we go to public markets.
Operator, Operator
Our next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Ronald Kamdem, Analyst
Great. Can I ask about tenant health a bit? I noticed that occupancy is up, and there have been very few bankruptcies reported. Could you give us an update on how the tenants are feeling and what you are hearing regarding inflationary pressures or discussions of a recession that have been mentioned widely?
Joey Agree, CEO
Good morning, Ron. I think, look, we are in a very unique position. We have zero, I believe bankruptcies in the portfolio today, and this is a portfolio that is built with recession resistance in what we call, used to call e-commerce resistance, but now omni-channel critical. The largest tenants in our portfolio are non-discretionary led by the Walmarts and Dollar Generals of the world, non-discretionary retailers that are providing core goods and services to customers. They also have the greatest ability to absorb and compete on price and give inflationary pressures and have the greatest distribution logistics networks among those retailers in the world. And so, today for a smaller mid-size retailer, who is dealing with labor pressures and inflationary pressures and you name it right. Logistical pressures, it is extremely challenging. If you are Walmart, or if you're The Home Depot or TJ Maxx, you have global procurement networks that can quickly pivot, and have the ability to absorb price. We have always talked about, we want to invest in retailers that have a few distinct characteristics. Number one, they have the capital and the balance sheet to invest in omnichannel. We know how expensive micro and macro fulfillment can be. Two, they have the ability to try and test out new forms of distribution and delivery to meet customers' needs. And then three, they can compete on price because once you lose customers due to price today, in a price transparent world where any customer can see a price of anything on an iPhone in about four seconds, they generally don't come back. And so, we are heavily focused on those retailers, and even in the short term, if they have to impact margins, they can retain customers and frankly grow their customer bases.
Ronald Kamdem, Analyst
Great. And just wanted to sort of go back to the acquisition questions, I think it's been asked a couple different ways. But, look, I think you talked about sort of cap rates, maybe having a little bit of a lag before re-pricing, which is all fair. But, just specifically, on either the private equity buyer or any other type of buyer, have you started to see any sort of deals being re-traded, just signs of that sort of buyer pool taking a step back at all, or is it sort of too soon to see?
Joey Agree, CEO
Ron, we don't have significant exposure to the heavily-leveraged private equity buyer group. They typically do not engage in the types of transactions and opportunities we are focused on. On the disposition side, we have seen very little activity. I've heard some talk about re-trades, and it's evident that internal rates of return have dropped from the upper teens to the lower teens for many heavily-levered buyers. Our main competitors are usually 1031 purchasers and private individuals. Therefore, if the heavily-levered buyers decide to re-trade or pull out of a deal, we are generally their first point of contact.
Operator, Operator
Our next question comes from Linda Tosai with Jefferies. Please go ahead.
Linda Tosai, Analyst
The high single-digit earnings growth, you hit that last year and you're on track to achieve it this year. What do you see as the key puts and takes in potentially sustaining this growth going forward?
Joey Agree, CEO
One of our strengths is the ability to source attractive transactions across all three of our platforms. The cost of capital impacts both equity and debt, primarily equity capital, alongside cap rates and maintaining spreads. I’m impressed by the team’s ability to consistently identify these opportunities nationwide across all platforms without compromising our investment criteria. This quarter, 74% of our investments were rated investment grade, and that figure now stands at 68%. We are not increasing our risk profile, nor have we changed our approach, which I believe is crucial. The investments we’ve made in our team and in technology, particularly with ARC, continue to genuinely exceed my expectations. If you had asked me several years ago, I would have thought it was unrealistic to be deploying $1.5 billion a year at over 70% investment grade, while also putting an additional $50 million to $100 million into the ground. Yet, we are operating in a vast area, covering 65% of U.S. retail GLA, which is highly fragmented, and our team consistently excels in uncovering these opportunities.
Linda Tosai, Analyst
Thanks. And then I know you said that the 4% was a bit aggressive for the unsolicited ground lease deal. What sort of cap rate would be reasonable to assign to the rest of your ground lease portfolio that's close to 14% of your ADR?
Joey Agree, CEO
It's a great question. I'll tell you that that was not a dominant operator. It was not Wawa. It was not the quick trip or sheets. It was a smaller regional operator, I believe with a couple of hundred stores that unsolicited inbound four months from closing, but 200 basis points inside. I don't think I've ever flipped an asset that quickly in my career. But a $2 million gain was something that we just couldn't turn away. I think that is demonstrative of the overall value of the ground lease portfolio here. I mean, this was a convenience store. It was a smaller regional operator. It wasn't Walmart or Lowe's or Wegmans. I think it's demonstrative of the overall value of the ground lease portfolio. So, I'll leave that to others to decide but it was an interesting unsolicited offer someone who was familiar with the credit with the real estate.
Operator, Operator
Our next question comes from Ki Bin Kim with Truist. Please go ahead.
Ki Bin Kim, Analyst
Just wanted to tie together a few things that you mentioned about the prospects of potentially higher rates, you also increased your full year acquisition guidance. And I know this isn't like a video game that you can start and stop and turn on and off the acquisition switch right, I mean, business and there's a momentum to it, and I get that. But as a CEO, how do you balance the prospects have higher rates and maybe better deals ahead versus pushing that throttle up a little bit and buying more today versus how do you balance that?
Joey Agree, CEO
It's a terrific question. If we didn't have our overall hedging policy in place, I think it would change the answer. Having forward-starting swaps at 1.7%, as Peter mentioned. Having $260 million plus in forward equity already priced, let's call it nearly $300 million post settlement of some of the forward at before March 31, gives us that medium-term visibility into a pipeline, and also into effectively outside of just spreads on the debit side locked in our cost of capital. If you really think about it, what we're acquiring today was already financed months ago, I mean, that's the bottom line. We know what those spreads are today, and that's a critical component of it. I said on the last call, in regards to leverage, it's much easier to lever up than to de-lever. Maintaining that balance sheet capacity heading into the intermediate view of your cost of capital in an external growth business makes that question, it removes a great preponderance of the answer to that question. That said, you always have to look out at opportunities, and you have to try to project forward in that video game simulation you said of what's going to happen with cap rates. So, we balance what we think is going to happen on a go-forward basis with the opportunity at hand. But again, knowing that you have your cost of capital locked into the medium term makes that a much easier decision because of course there is no video game and there probably is. There's no right answer just a bunch of prognosticators including us.
Ki Bin Kim, Analyst
And going back to that client Gerber Collision questions and thinking about the next generation of automobiles coming out. I'm not an automobile expert. If you think about kind of EV, it's kind of EV revolution in autos. I mean it's foreseeable to think about a bear case scenario where maybe the Auto Parts O'Reilly, there's less use for going forward. And I'm sure this question is like five years too early, but any kind of early thoughts on that?
Joey Agree, CEO
There's definitely fewer moving parts in electric vehicles compared to traditional combustion engines. This is beneficial for collision shops like Gerber because minor damages can't be overlooked anymore. For example, a minor collision with a light pole used to result in just a small dent on the bumper, but now it can involve a camera or sensor. If those issues aren't addressed, the overall vehicle protection system fails. Repairs today are almost akin to IT work; it's not simply fixing bumps anymore. The technicians need specialized skills to handle high-tech equipment that works together to ensure driver safety. As a result, repairs have become much more complex, which benefits larger collision operators who have the necessary scale, relationships with retailers, and the ability to maintain a skilled workforce. It's certainly a more challenging environment to hire qualified personnel for collision centers today, and the industry has transformed significantly in just a few years.
Ki Bin Kim, Analyst
But you don't see any kind of the longer-term risk to the auto parts retailers?
Joey Agree, CEO
Well, auto parts retailers, they are very different from collision. The collision operators generally are working on the exterior of the cars right down to the struck. They are not generally working on the combustion engine, that's a different operation there, that's the mechanics. The auto parts retailers continue to benefit from two different forms of customers, the do-it-yourself customer, which has been O'Reilly's core business now working to continue to expand the backdoor customers or the commercial customers, and then O'Reilly which their core businesses historically been more commercial oriented working to expand the do-it-yourself of customers or front door business as they call it. Now, we really don't see much in the way there. If you look at their same store sales, if you look at the trajectories and their commentaries and their earnings call, those operators continue to gain market share through recessions, through pandemics. The average age of cars on the road continues to go up. You can't even find a car anymore, half of the time. And so, it's a benefit. Now, look, there is no doubt the auto industry we are sitting here in the motor city is going to continue to change with EVs especially, but those premier operators with the balance sheets and the store network and the distribution networks are going to continue to thrive here.
Operator, Operator
Our next question comes from Nate Crossett with Berenberg. Please go ahead.
Nate Crossett, Analyst
Good morning guys. Maybe some funding questions just on the swaps. When do those expire and when they do expire, if rates are, where they are today or higher, is the swap kind of, would you continue to, I guess, do swaps regardless of where rates are? And then also, I just had a question on the preferred equity, you did that deal I think last year. Is that funding options still on the table? Or is that off the table given where rates have gone?
Peter Coughenour, CFO
Nate, this is Peter. With respect to the swaps, we can use the forward-started swaps at any point in 2022. Technically, there is an option available to us to roll the asset related to those swaps to a swap and really extend that if we really wanted to do that. But we have plenty of optionality and flexibility in terms of when we use those swaps this year. Regarding the preferred equity, that's still an option for us. We are always evaluating all forms of capital markets and what makes the most sense in the context of market conditions, pricing, and how we want to fund our business. It's today probably not something that we would look at given where pricing is but certainly an option longer-term as we evaluate everything available to us.
Nate Crossett, Analyst
I have a question about the portfolio you acquired. Is there any need to make adjustments to that portfolio, or do you essentially want to keep every property?
Joey Agree, CEO
No, as you probably saw in the jump in tenant concentration, Tractor Supply was the largest operator in there, the largest concentration in there. Sunbelt a couple of CVS is a few Dollar Generals. There's a FedEx in there that we will look to dispose of. We are not in the industrial or distribution business here. We think that will be a creative obviously to the overall portfolio with a small FedEx, I believe in North Carolina, adjacent to the airport. And so, we'll dispose of that asset. Other than that, we're pretty comfortable with the entire portfolio. Again, it was 90% investment grade, 100% retail outside of that one FedEx asset with a 10 years weighted average lease term. We're very cognizant of the CVS is that we acquired in terms of that pharmacy exposure, we're very comfortable with the store performance there, their long duration CVS is they're not on any closure lists. This was a really unique opportunity. Frankly, the only portfolio absent a ground lease portfolio from seven years ago that truly fit qualitatively within our existing portfolio composition. That's why it was such a great fit, let alone the unique circumstances here. And so, we'd love to be able to find more of them. The problem is most of them, don't have one asset, you've got to dispose of them. 20% of it doesn't fit qualitatively within the portfolio. That was, I would tell you, that you hit it on the head that was the real driver here is that there was one asset that's a disposition on the creative basis that we intend to execute.
Nate Crossett, Analyst
Is there any reason why it wasn't shopped around? I mean, now it's a testament to your relationships, but it would seem like portfolio this quality, the seller would want to kind of shop around to see what pricing they could get?
Joey Agree, CEO
I'll give you a little background on the seller. The seller was historically the largest post office, private post office contractor in the country. In his mid-70s, he works out of a converted house into an office with four women that have been with him for over 20 years. He owns thousands of acres of land in the Beltway that he sold to Polti and Toll Brothers. He disposed of a number of assets years ago and started acquiring net leased properties. His lawyer/friends/broker, we started the conversation with him in 2019. But Jim, our seller on this wanted to get something done, doesn't like to mess around and would have done a deal on a handshake. So, it was a very unique situation, a great guy with a great eye for real estate, whether it's agricultural land or net lease real estate. But he is a unique guy, and he wanted to get something done with someone he could trust and someone he could get something done quickly.
Operator, Operator
We will now conclude our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.
Joey Agree, CEO
Well, thank you everybody for joining us this morning. It will be great to see you in June at Nareit and good luck to the rest of earnings season. Appreciate it.
Operator, Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.