Earnings Call Transcript - ADC Q3 2021

Nicole Witteveen, Executive Vice President and Chief of Staff

Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's Third Quarter 2021 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, clarity 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 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, CEO

Thank you, Nicole. I'm very pleased to report that we had record investment volume of approximately $1.1 billion for the first 9 months of 2021 with continued momentum heading into the fourth quarter of this year. While replicating this investment volume is a testament to the efforts of our talented team, I am most pleased with the exceptional quality of the investments that we've made in a challenging environment. While our investment activities further strengthened our best-in-class retail portfolio, we have also fortified our robust balance sheet with $1.5 billion of capital markets transactions year-to-date positioning our company for dynamic growth in the quarters ahead. Notably, we completed our inaugural preferred equity offering during the third quarter, raising $175 million at a 4.25% coupon. This represents the lowest non-PSA REIT preferred equity coupon in history and provides a new source of perpetual capital for our rapidly growing company. During the third quarter, we invested approximately $343 million in 83 high-quality retail net lease properties across our 3 external growth platforms. 80 of these properties were sourced through our acquisition platform, representing acquisition volume of over $340 million. The 80 properties acquired during the third quarter are leased to 49 tenants operating in 20 distinct retail sectors, including best-in-class operators and off-price retail convenience stores, tire and auto service, home improvement, auto parts, grocery and general merchandise. The acquired properties have a weighted average cap rate of 6.2% and a weighted average lease term of 10.7 years. As mentioned, through the first 9 months of the year, we've invested a record $1.1 billion and 226 retail net lease properties spanning 40 states across the country in 26 retail sectors. While raising the lower end of our acquisition guidance for the year to $1.3 billion, our thoughtful and disciplined approach is evidenced by the nearly 1/3 of annualized base rents acquired year-to-date derived from ground lease assets, and roughly 70% of annualized base rents acquired derived from leading investment-grade retailers. During this past quarter, we executed on several unique transactions, including our third Amazon Fresh store in Illinois. We're excited about the opportunity to add the Amazon Fresh store to the portfolio located in a prominent Chicago suburb with median household incomes of $110,000 and a daytime population of roughly 225,000 within a 5-mile radius. Our acquisition team also continues to uncover compelling ground lease opportunities. During the quarter, we completed the acquisition of a 9-property portfolio of Thorntons convenience stores for approximately $21 million. The stores, which are paying an average annual rent of only $120,000 per year and had a weighted average lease term of close to 20 years, are all well located in the Nashville and Chicago MSAs. Shortly after we expressed our intent to purchase this portfolio, BP announced they're taking full ownership of Thorntons convenience store chain after 2.5 years as part of a joint venture established in 2019. This transaction makes BP, which is an A-rated company by S&P, one of the leading convenience store operators in the Midwest with more than 200 stores across 6 states. Other notable ground lease acquisitions during the quarter include Walmart and Sam's Club in Lansing, Michigan, 2 Lowe's stores located in Wallingford, Connecticut and Avington, Massachusetts and a CVS in Springfield, Massachusetts. We've acquired 73 ground leases year-to-date for total investment spend of nearly $350 million, representing nearly 31% of acquisition spend for the entire year. This includes 28 ground leases during the third quarter, representing investment volume of over $108 million. As of September 30, our ground lease exposure reached a record of nearly 14% of annualized base rents. The ground lease portfolio now derives roughly 87% from investment-grade tenants and has a weighted average lease term of 12.1 years with an average rate of less than $10 per square foot. This portfolio continues to represent an extremely attractive risk-adjusted investment for our shareholders. On recent earnings calls and discussions, there has been considerable dialogue regarding our ground lease portfolio and its valuation. I would encourage everyone to take a look at the new slide we added on Page 10 of our investor presentation, which compares our ground lease portfolio to the 10-year Bloomberg BBB index, which has been trading between 2% and 3% over the past 12 months. This is a very compelling comparison when thinking about the value of our ground lease portfolio, which has a weighted average credit rating of BBB+ and over 2 years of additional term in comparison to the Bloomberg BBB index and internal growth of nearly 1%. As of September 30, our portfolio's total investment-grade exposure was approximately 67%, representing close to a 500 basis point year-over-year increase. On a 2-year stacked basis, our investment-grade exposure has improved by roughly 1,000 basis points. Moving on to our Development and Partner Capital Solutions program. We continue to uncover compelling opportunities with our retail partners. We had 7 development in PCS projects either completed or under construction during the first 9 months of the year that represent total committed capital of approximately $40 million. I'm pleased to announce we commenced construction during the quarter on our third development with Gerber Collision in New Port Richey, Florida. Gerber will be subject to a new 15-year lease upon completion, and we anticipate rent will commence in the second quarter of 2022. Construction continued during the third quarter on 2 development in PCS projects with anticipated cost of just over $5 million. The project consists of our first 7-Eleven development in Saginaw, Michigan, and a Gerber Collision in Pooler, Georgia. We remain focused on leveraging our 3 external growth platforms and our differentiated asset management capabilities to expand our relationships with best-in-class retailers providing comprehensive solutions that facilitate the real estate strategies and growth plans. While we continue to strengthen our best-in-class retail portfolio through record investment activity, we remain active on the disposition front during the third quarter. We continue to reduce exposure to franchise restaurants and non-core tenants through the disposition of 3 properties for total gross proceeds of approximately $11.8 million with a weighted average cap rate of 6.3%. As of September 30, we've disposed of 13 properties for gross proceeds of just over $48 million and are maintaining our disposition guidance of $50 million to $75 million for the year. Bolstered by the recent addition of David Darling as our Vice President of Real Estate, the asset management team continues to diligently address upcoming lease maturities. Their efforts have reduced our 2021 maturities to just 4 leases, representing 10 basis points of annualized base rents. During the third quarter, we executed new leases, extensions or options in approximately 72,000 square feet of gross leasable area. For the first 9 months of the year, we executed new leases, extensions or options on approximately 347,000 square feet of gross leasable space. Our 2022 lease maturities are de minimis with only 19 leases maturing representing less than 1% of annualized base rents expiring over the course of the next year. As of September 30, our expanding retail portfolio consisted of 1,338 properties across 47 states, including 162 ground leases, and remains effectively fully occupied at 99.6%. Notably, and as pointed out in our press release, Walgreens and LA Fitness are no longer top tenants for our company. Both now represent less than 1.5% of annualized base rents. For those that have been following our company over the years, this reduction in Walgreens exposure is a true milestone given our historical exposure which once approached 40% of our portfolio. We have made a concerted effort to reduce our pharmacy exposure given the high per square foot rental rates of many vintage pharmacy leases and the diversion approaches by CVS and Walgreens to a quickly changing landscape. Before I turn the call over to Peter to discuss our financial results, I'd like to welcome Mike Judlowe to our Board of Directors. Many of you are familiar with Mike as he most recently served as Chairman of the U.S. Real Estate, Gaming and Lodging Investment banking practice at Jefferies. Over the course of his career, Mike has raised in excess of $50 billion in capital through numerous transactions. Having had the opportunity to work with Mike for many years, I am extremely excited to leverage his unique perspectives and experiences as our company continues to dynamically grow and evolve. With that, I'll hand the call over to Peter to discuss our financial results for the quarter.

Peter Coughenour, CFO

Thank you, Joey. Starting with earnings. Core funds from operations for the third quarter was $0.92 per share, representing a 13% year-over-year increase. Adjusted funds from operations per share for the quarter increased 11.5% year-over-year to $0.89. 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 offerings. The aggregate dilutive impact related to these offerings was roughly $0.05 in the third quarter. As mentioned on the last 2 calls, we expect to achieve high single-digit earnings growth for full year AFFO per share. Building upon our 6% AFFO per share growth in 2020, this implies 2-year stacked growth in the mid-teens. We view this level of per share growth as very compelling when combined with the strength of our portfolio and our fortress-like balance sheet. This consistent and reliable earnings growth continues to support our growing and well-covered dividend. During the third quarter, we declared monthly cash dividends of $0.217 per common share for July, August, and September. On an annualized basis, the monthly dividends represent an 8.5% increase over the annualized dividend from the third quarter of last year. While meaningfully increasing the common dividend over the past year, we maintain conservative payout ratios for the third quarter of 71% of core FFO per share and 73% of AFFO per share, respectively. Subsequent to quarter-end, we again increased the monthly cash dividend by 4.6% to $0.227 per common share for October. The monthly dividend reflects an annualized dividend amount of $2.72 per share or a 9.8% increase over the annualized dividend amount of $2.48 per share from the fourth quarter of 2020. On a 2-year stack basis, this reflects annualized dividend growth of more than 15%. General and administrative expenses for the third quarter, which were impacted by recent changes to the company's executive officers, totaled $5.7 million. G&A expense was 6.5% of total revenue or 6% excluding the noncash amortization of above and below market lease intangibles. While we continue to invest in people and systems to support our dynamic and growing business, we still anticipate that G&A as a percentage of total revenue will be roughly 7% for full year 2021. This excludes 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 $1.3 billion to $1.4 billion. Total income tax expense for the third quarter was approximately $390,000, which was slightly lower than our expectation due to a one-time refund. We continue to anticipate total income tax expense for 2021 to be close to $2.5 million. Moving on to our capital markets activities for the quarter. As Joey mentioned, in September, we completed our inaugural preferred equity offering, raising $175 million of gross proceeds at a record low coupon of 4.25%. This attractive offering demonstrates our ability to opportunistically access yet another source of capital to support the continued growth of our company. During the third quarter, we entered into forward sale agreements in connection with our ATM program to sell an aggregate of approximately 367,000 shares of common stock for anticipated net proceeds of roughly $27 million. During the quarter, we also settled close to 886,000 shares under forward ATM sale agreements and received net proceeds of approximately $56 million. At quarter-end, we had approximately 3.4 million shares remaining to be settled under existing forward sale agreements, which are anticipated to raise net proceeds of more than $226 million upon settlement. Inclusive of the settlement of our outstanding forward equity, our fortified balance sheet stood at approximately 3.7x net debt to recurring EBITDA. Excluding the impact of our unsettled forward equity, our net debt to recurring EBITDA was approximately 4.4x. If you include our recent preferred equity offering and net debt, this adds roughly 0.5 turns of leverage to our net debt to recurring EBITDA metrics. At September 30, total debt to enterprise value was just under 25%, while our fixed charge coverage increased to a record 5.1x. With full availability under our revolving credit facility and nearly $830 million in total liquidity, we have tremendous flexibility to execute on our growth plans.

Joel Agree, CEO

Thank you, Peter. At this time, operator, we'll open it up for questions.

Operator, Operator

Our first question comes from Brad Heffern with RBC Capital Markets.

Bradley Heffern, Analyst

I was wondering on the acquisition front, if you could talk through the relative attractiveness of the investment-grade versus sub-investment grade this quarter? I noticed it was a little bit below the normal proportion for the portfolio overall, and it was down quite a bit sequentially.

Joel Agree, CEO

Brad, first off, we're focused in our sandbox of industry-leading retailers that 25 to 30 retailers across the country that have generally speaking, investment-grade credit ratings and/or a ground lease asset, where we see residual upside. So notably, this quarter, we acquired a shorter-term out-lab portfolio of unrated tenants. We don't impute any scores or rating to those included there a Chipotle, KFC franchise, and Outback Steakhouse. Just for example, the Outback is paying $9.50 a foot on the 2-acre site, at $63,000 a year. We see tremendous upside if we were able to get that asset back. We acquired a Publix. Obviously, it doesn't have a credit rating, but you can impute an investment-grade credit rating to Publix, if you'd like, in South Carolina. Lastly, we acquired BJ's in Wallingford, Connecticut, immediately adjacent to the Lowe's we own in Wallingford as well, right on the toll road, a great piece of real estate, high-performing store, low rent, and clear visibility into the residual of the real estate there. So you'll see those numbers investment grade and/or term ground lease also fluctuate from quarter to quarter, but I think over the course of the year, it's pretty consistent.

Bradley Heffern, Analyst

Okay. Got it. And then on the ground lease, you all continue to acquire sort of the third level every quarter. Is that what we should sort of think of as the long-term goal for ground leases as a percentage of the portfolio? Any color you could put around how big you wanted to eventually be?

Joel Agree, CEO

We see, as I mentioned in our prepared remarks, tremendous opportunity. We think the valuation of that portfolio when you compare it to something like the BBB index is extremely compelling. In terms of a go-forward basis, we're opportunists at our core. The Outback that I just mentioned is a perfect example there. We'd love to get that asset back and re-lease it for 3 times the current rent. So we'll see those transactions continue to materialize. There are a number of them in Q4, and visibility into 2022 is still pretty light here at the beginning of November, but we're focused on finding best-in-class opportunities on a risk-adjusted basis.

Operator, Operator

Our next question comes from Katy McConnell with Citi.

Mary McConnell, Analyst

Can you discuss what the acquisition pipeline looks like today? And have you seen any notable changes in the opportunities that are pricing trends that might contribute to some conservatism that you're assuming for the upcoming year?

Joel Agree, CEO

Katy, I wouldn't read too much into the upper end of our guidance being raised. There's certainly no deceleration in our pipeline. We have a few hundred million dollars, close to 100 properties in our pipeline today. It's really just a question of timing when those close. So does it close by year-end? Does it push into next year? A lot of that is under our control subject to a seller and/or our retailer. And so I can say with confidence here the pipeline is in place to continue to execute on the granular nature of our traditional transactions or a much larger transaction if that comes about or comes to fruition. So you can combine the team here in conjunction with our ARC system; it's a powerful combination. We'll continue to execute. I wouldn't read into any guidance not being raised at year-end here or the $1.4 billion not being raised; it's quite possible we will hit it or exceed it subject to timing.

Michael Bilerman, Analyst

Joe, it's Michael Bilerman. Just going back to the ground lease portfolio, and you and I discussed this earlier when you started to really accelerate the ground lease assets. If you're not going to get a commensurate decline in your cost of capital, and I can understand the residual value that could be embedded in some of these, which are quite long duration, so it's not always immediate in terms of getting to that opportunity. And I'm sure you're going to come to examples that you have. But in aggregate, you're not going to be able to get the residual value as quickly. And I'm not sure the market gives you value especially if your cost of capital is not declining to the same degree to create the same level of accretive growth. So I guess, are you thinking at all about different structures for the ground lease portfolio, or how do you help us understand why buying a ground lease, even if they are more secure longer-term, how does that really drive your cash flow growth to which would we get a higher multiple?

Joel Agree, CEO

No, I appreciate the question. We've obviously made a focus here in emphasizing the value proposition of the ground lease portfolio. First, we're not reaching for yield in terms of chasing cap rates or in the ground lease portfolio; generally, the ground lease assets on an individual basis at acquisition are in line with our acquisition cap rate. What we've done is pivot with our capabilities, with our relationships with retailers and owners, developers, and sellers, it's really a flight to quality. And so we see tremendous upside. Now these aren't 99-year ground leases, meaning leasehold interest or something of the like in the safehold where 99-year ground leases and you're never getting the residual back. The Outback is a good example of that. I think there's 2 ways to go in an environment where you see continued cap rate compression. It's continued to drive toward quality and find asymmetric and unique opportunities, or you can go up the risk curve in terms of credit or term or single-purpose buildings, which you won't see us do. So I think the premise of that question, we're not going to reach for yield in terms of ground lease. They're going to be effectively in the same range as our standard net leases.

Michael Bilerman, Analyst

Let's discuss the CFO situation. You had a transition with Simon Leopold in mid-August, and you stepped into the CFO role about 6 or 7 months before that. He had been a Board member prior to his departure. Over the past decade, you've had several CFOs, which raises questions about this role. What explains the lack of stability in the CFO position, especially in a company experiencing rapid growth and strong performance without the typical issues associated with high executive turnover? What are your thoughts on why this role hasn't remained more consistent, and how do you plan to approach the future of this role? Please share your insights on what has transpired.

Joel Agree, CEO

I appreciate the question. First, I want to make it clear that Simon and I did not part on bad terms. There was no personal conflict or strategic disagreement regarding the company's performance moving forward. It was simply a matter of differing operating styles. We found it disappointing but recognized the need to separate quickly, and I believe both sides are better for it. We wish Simon the best and consider him a friend. As for the CFO position, we are actively conducting this search and doing our due diligence. Peter is doing an excellent job with the preferred offering and now earnings, so he can stop plugging his ears. It's been a unique situation with our CFOs; two left for their own reasons—one personal and one for a professional opportunity that didn't work out. It's crucial that we choose the right person for this role, as it is essential for our operations. We are focused on executing a disciplined operating strategy, with everyone in our 60-person company contributing. Over the past few months, we've carefully assessed this position, engaging with various candidates as well as current REIT CEOs and professionals from other industries to determine the best path forward for a permanent CFO. David Wolff, our Chief Accounting Officer, is here with us, and we have a great accounting team that is managing our day-to-day operations. Now, we need to define the appropriate responsibilities and role for the CFO at Agree Realty, particularly given our growth.

Michael Bilerman, Analyst

Is there any reflection that you have on yourself or the Board? I know every situation has its reasons, but this has occurred a bit frequently. I'm curious if there's a connection to your management style or how you collaborate with others, as well as the Board's involvement. It’s unusual, right? You knew Simon well; he was a board member, even if only briefly. These incidents are not common, and it seems you've had to provide explanations more often than necessary. I'm trying to understand if there’s a broader issue affecting the stability of the CFO position.

Joel Agree, CEO

The brief answer to your question is no. There is nothing larger at play here. This situation is not about personal dynamics involving me; it’s about being part of a larger leadership team in a growing and dynamic company. The skills required for the CFO role today are vastly different from those needed two, three, four, or five years ago. Five and a half years ago, we moved into our current building with around 14 or 15 employees, and now we have 60 team members. Regarding the first part of your question, absolutely, there is a need for self-reflection. It would be unwise not to assess what we need to change and how we can improve. We must consider how the role of CFO has evolved alongside the company’s growth. We are approaching a valuation of $7 billion, and likely soon to reach $10 billion, supported by a dynamic team. This reflection involves both looking back and looking ahead. I want to stress that our team is committed to generating consistent results and dedicated to both operational and strategic efforts. We take our work seriously and have an ownership mentality, treating it like a private company, which is one of our most important core values.

Operator, Operator

Our next question comes from Linda Tsai with Jefferies.

Linda Tsai, Analyst

Looking at Slide 16 of your IR deck, Sandbox offers runway for growth, and you show the different retailer categories, where are you seeing the best opportunities from a risk-adjusted basis as you continue to build the pipeline for 2022?

Joel Agree, CEO

Linda, I think it's across the full spectrum for us. So we saw the surge in grocery due to the Kroger transaction and the Wegmans transaction in Q2. Now, this quarter, we see diversion again; we’ve emphasized the Amazon Fresh third in the portfolio, but it's really across the sectors that we're targeting, but most importantly, across the Sandbox of retailers. The ground lease opportunities span the full spectrum, all the way from casual dining opportunity like the Outback I highlighted to a Walmart, Costco, Lowe's, or Home Depot. It’s pretty fragmented this quarter, the convenience store emphasis with the Thorntons transaction as well as a ground lease to Royal Farms that we also acquired. We're very unique. The most interesting part about this business is that the pipeline changes every day. I emphasize there's no rhyme or reason for that change; it's what the origination team continues to dig up. I would tell you, it's extremely divergent.

Linda Tsai, Analyst

Got it. And then just given the lift that retailers have seen across the board in 2021, has your underwriting changed at all to accommodate for this more positive environment? I know you mostly have material exposure to necessity-based investment-grade retailers, but even these guys have done a little bit better than usual.

Joel Agree, CEO

No, I'd tell you it hasn't changed our underwriting. If anything, it's emphasized that we have a firm belief that the strong or the big are getting bigger, the access to capital, their balance sheet, their ability to invest in price, even in a supply-constrained environment and compete, as well as their ability to invest in an omnichannel future. We’ve seen sales surges, pent-up demand across the categories. We've seen some idiosyncrasies in different sectors. Everyone's got a bike or a shotgun or whatever they’re buying from Academy Sports today. We've seen some unique changes there, but we think those are cyclical, and they'll normalize here, hopefully sooner rather than later, in terms of consumer behavior. The environment continues to be what we expect. The big have access to capital. They can invest in those 2 most important pieces of their business today: competing on price and their omnichannel future, which obviously is paramount.

Linda Tsai, Analyst

Just one last one. On the past couple of earnings calls, you've verbalized your earnings growth expectations for the year. For 2022, should we expect the same type of communication?

Joel Agree, CEO

It's a good question. Look, we're looking at all options, including providing formal earnings guidance all the way to a similar strategy we've executed this year. I'll tell you, our expectation is a continued upper single digits earnings growth profile in terms of AFFO. We have the ability to do that with an extremely strong balance sheet, investing in the best retailers in the country with superior real estate. That’s what you're going to see us execute and do.

Operator, Operator

Our next question comes from Teo Okasana with Credit Suisse.

Unidentified Analyst, Analyst

Joey, you guys are still pretty bullish on your acquisition outlook. A bunch of your peers put out '22 guidance this morning as well with a very strong acquisition outlook. I guess what I'm curious about is, number one, what's kind of really driving everyone still being so bullish and being able to match or even exceed record acquisition volumes this year, especially given the backdrop of everyone getting concerned about higher interest rates, higher inflation, and things of that sort.

Joel Agree, CEO

Yes. I wouldn't want to answer for our peers. Ours is opportunistic. It's 100 transactions approximately, right, at any given time, moving through our pipeline, with average price points of $4 million to $5 million, ranging from $1 million to $80 million. I wouldn't want to speak for our peers. I'll tell you, across REITs, when you see favorable costs of capital, you see, generally speaking, companies deploy them in terms of external growth. The next question is, what is the quality of the underlying real estate credit residual that these people are acquiring? I know what our strategy is specifically here; it starts with that omnichannel critical, e-commerce-resistant necessity-based approach on a granular basis, open to larger opportunities if they fit within the context of this portfolio and are obviously accretive. I can't speak for what other REITs or other peers are acquiring. Given the favorable cost of capital, you see them continuing to achieve spreads that they think make sense in the context of their overall portfolios.

Unidentified Analyst, Analyst

Okay. That's helpful. And then just a quick second question. You guys have relatively low leverage at this point. Why the decision to go down the preferred route rather than just issuing straight-up debt that would have a lower interest rate?

Joel Agree, CEO

I'll turn that question over to Peter. I'd tell you, when we heard 4.25% as Peter mentioned in the prepared remarks, a non-PSA record at 4.25%, it was extremely attractive. Now obviously, that preferred equity is a hybrid security. We think perpetual paper at 4.25% with a callability feature after 5 years is attractive, and again, a non-PSA record. I'll turn that over to Peter. He really executed on that deal.

Peter Coughenour, CFO

Yes. Thanks, Joey. I would just mention when we've historically looked at market to Joey's point, the pricing hasn't always made sense in the context of other capital sources. This past summer, we saw several REITs print very low coupons relative to what they've been able to achieve historically and thought it made sense for us to explore that market further. The market dynamics, when we're taking a look, were favorable. There's a lot of demand for high-quality investment-grade paper. Given that anticipated pricing and strong demand, as well as the fact, we really didn't have a need for a $300 million index-eligible bond, we thought that it made sense to issue our inaugural preferred offering and really open up another source of capital for the company as we continue to grow. In terms of the execution of that offering, the demand was stronger than we anticipated. We were able to upsize the deal from $100 million to $175 million in time pricing down to 4.25%, as Joey mentioned, with a really strong order book and strong institutional demand. So it was great execution for the company.

Operator, Operator

Our next question comes from Wes Golladay with Baird.

Wesley Golladay, Analyst

I just want to stick with the preferred. I mean when I look at the portfolio, it's very high quality and the company's balance sheet is very strong with low leverage, and it is a risk-on environment. So I want to see what your appetite is to get a little bit more leverage on the common via the preferred?

Joel Agree, CEO

Well, I think the preferred auto, if you look at net debt plus preferred to EBITDA, inherently leverages us up an additional half a turn. Our stated range of 4 to 5x is exclusive of that preferred in that half turn that adds to our current leverage profile. It does provide us to 'lever up.' Obviously, when we look at both directions here, both as an equity substitute as well as the ability to add incremental leverage without a maturity.

Wesley Golladay, Analyst

So would, I guess, half a turn be where you would be comfortable as you grow the company?

Joel Agree, CEO

Our stated range of 4 to 5x does not include the preferred equity, but we are comfortable at 5.5x when considering the preferred. We recognize that investors and rating agencies evaluate it both ways. We were able to raise $175 million at 4.25%, which is effectively aligned with our weighted average cost of capital, and we plan to invest it with 200 basis point spreads indefinitely. We believe this was very appealing for us.

Wesley Golladay, Analyst

Got it. And then I guess when you talk to existing tenants, I guess, what is your appetite for new projects to go into the development and PCS project pipeline for next year?

Joel Agree, CEO

So it varies across the board, by tenant and generally by sector. We see a lot of activity, obviously, in the off-price space. We see a lot of activity in the auto and tire service space. So it truly varies. At the same time, we see home improvement retailers, most notably Home Depot and Lowe's not looking for net new stores but investing in their omnichannel distribution initiatives. It varies across retailers. There are definitely retailers on a freestanding basis that are expanding throughout this country. Our third Amazon Fresh store; obviously, they're expanding, and people read the news. It really varies by retailer and by sector today. You have people that are contracting and people that are growing aggressively.

Operator, Operator

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

Joel Agree, CEO

Well, thank you for joining us, everybody, today. We look forward to catching up virtually at the upcoming May REIT in about 10 days. We'll talk to you soon. Thank you.

Operator, Operator

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