Agree Realty's (ADC) CEO Joey Agree on Q1 2016 Results - Earnings Call Transcript

| About: Agree Realty (ADC)

Agree Realty Corporation (NYSE:ADC)

Q1 2016 Earnings Conference Call

April 26, 2016 9:00 am ET

Executives

Joey Agree - President, CEO

Matt Partridge - CFO, EVP, Secretary

Analysts

Collin Mings - Raymond James

Robert Stevenson - Janney Montgomery Scott

George Hoglund - Jefferies

Craig Kucera - Wunderlich

Dan Donlan - Ladenburg Thalmann

Omotayo Okusanya - Jefferies

Operator

Good morning and welcome to the Agree Realty First Quarter 2016 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.

I'd now like to turn the conference over to Joe Agree, President and Chief Executive Officer. Please go ahead Joey.

Joey Agree

Thank you, Keith.

Good morning everyone and thank you for joining us for Agree Realty's first quarter 2016 earnings call. Joining me this morning is Matt Partridge, our Chief Financial Officer.

We are pleased to report that 2016 is off to a strong start. In the first quarter we invested over $38 million in 13 high-quality retail net lease properties. Of those 13 assets, we acquired 12 through our acquisition platform for a total investment of $33.3 million. The acquired properties are located in nine states and are leased to 30 national and super regional tenants operating in nine diverse retail sectors including the entertainment retail, specialty retail, quick service restaurant, discount and auto services sectors. The properties were purchased at a weighted average cap rate of 7.9% with the weighted average remaining lease term of approximately seven years.

Our first quarter acquisitions combined with our robust pipeline puts us well on our way to achieving our targeted 2016 acquisition volume of $175 million to $200 million. We are currently conducting diligence on a number of opportunities comprised of both individual assets as well as portfolios.

On to the development front, we continue to see more opportunities to leverage our unique capabilities for a number of national and super regional retailers. As previously announced, the company completed its hobby-lobby project in Springfield, Ohio, during the first quarter of 2016. The property, which is shadow anchored by Wal-mart is located in a dominant retail trade area and is subject to a new 15-year lease. The development was completed ahead of schedule at a total cost of approximately $5 million.

In addition to the company's recently completed hobby-lobby development, construction has commenced in our previously announced Burger King and Farr West, Utah. The development has a total cost of approximately $1.6 million and is the inaugural project of our previously disclosed partnership with Meridian Restaurant to develop up to 10 Burger King locations. The company-own a 100% fee interest in the property upon the project completion though we anticipate rent to commence in the third quarter of this year.

Subsequent to quarter end, we commenced construction on our second Burger King project in partnership with Meridian in Devils Lake, North Dakota, which like Farr West will be subject to a new 20-year lease. These projects are in addition to our Wawa in Orlando Florida, our Chick-fil-A in Frankfort, Kentucky, as well as our Starbucks in Lakeland, Florida, all of which are currently under construction.

We also continue to make significant progress in our partnered capital solutions platform. Our three differentiated external growth platforms give us the capability to work with retailers at various points in their growth cycles. An ability that has positioned us a comprehensive solution and an uncommon and differentiated growth model in the net lease sector.

As we continue to leverage our three external growth platforms, we look forward to updating you if these opportunities take shape.

We have maintained our discipline bottoms up underwriting approach emphasizing real estate fundamentals. We continue to couple that emphasis with the top down focus on ecommerce resisting retail sectors. Our industry leading portfolio was wholly-concentrated in retail net lease properties and represents a very well diversified mix of tenants, retail sectors and geography.

As of March 31, 2016, our growing retail net lease portfolio span 42 states and consisted of 291 properties with leading tenants that operate in over 25 distinct retail sectors. By nearly any measure our portfolio continues to be among the strongest in the net lease space. It is comprised almost exclusively of national and super regional retailers with over 50% of annualized rents coming from tenants with an investment grade credit rating.

In addition to our current acquisition, development and partner capital solutions opportunities, we continue to believe that our portfolio has unique value that is attributable to our ground leased assets where the company is a fee simple owner and groundless or to leading retailers.

With over 8% of our total base rental income derived from these ground leases, we feel that the portfolio presents an extremely appealing risk-adjusted investment for our shareholders. Currently 88% of these ground leases are with tenants that have investment grade credit ratings, including JPMorgan Chase, McDonald's, all the PMC, Wal-mart, Lowe's and Wawa. These assets are a direct reflection of the value that we can add through our development platform.

Overall portfolio occupancy rate remain 99.5% at the end of Q1. Hence our portfolio continues to be effectively fully occupied and has a weighted average remaining lease term of 11.2 years. These metrics demonstrate a stable and long-term asset base. As we look to our lease maturity schedule, we are in a fantastic position to maintain strong occupancy levels throughout the remainder of 2016 and into 2017. We now have no remaining lease maturities in 2016.

Last but not least, I'd like to thank our many loyal shareholders for their continued support through a combination of share price appreciation and dividend growth, the company realized a total return of nearly 15% in the first quarter of 2016 representing one of the highest total shareholder returns in the retail net lease space.

With that, I will turn it over to Matt to discuss our first quarter 2016 financial results. Matt?

Matt Partridge

Thanks, Joey. Good morning, everyone.

Let me first run through the cautionary language. As a reminder please note that during this call, we will make certain statements that may be considered forward-looking under Federal Securities Law. Our actual results may differ significantly from the matters discussed in any forward-looking statements. In addition, we discuss non-GAAP financial measures including funds from operations or FFO and adjusted funds from operations or AFFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release.

As we announced in yesterday's press release, total rental revenue including percentage rents for the first quarter of 2016 was $18.7 million, an increase of 28.2% over the first quarter of 2015. G&A expenses were approximately 10.1% of total revenue for the quarter as compared to 10.6% in the first quarter of 2015, a 48 basis points decrease year-over-year. We continue to expect decreases in corporate operating leverage as we grow the company and realize operating efficiency to increase scale.

FFO for the quarter was $12.7 million, which was an increase of 27.2% over 2015. Similarly, AFFO was also $12.7 million, an increase of 26.5% year-over-year. On a per share basis, FFO increased 8.5% over the prior year's result to $0.61 per share and AFFO increased 7.9% to $0.61 per share.

During the quarter, we repaid an $8.6 million mortgage secured by three Wawa properties in March, which represented only debt maturities in 2016. Also in the quarter the company issued 53,886 shares of common stock through its ATM program realizing gross proceeds of approximately $2.1 million. We believe the ATM program is an efficient tool for us to reduce our overall cost of capital, improved timing and efficiency of raising capital and helps improve the liquidity of our stock.

We continue to maintain one of the more conservative balance sheets in the industry and as of March 31, 2016 total debt to enterprise value was approximately 30.3%, and net debt to recurring EBITDA was approximately 5.3x. Our fixed-charge coverage ratio, which includes principal amortization was a strong 3.5x. These metrics are consistent with our targeted leverage and coverage levels and signify considerable capacity for future growth.

Finally, on April 15 the company paid a dividend of $0.465 per share to stockholders of record on March 31, 2016, which represented a 3.3% increase over the $0.45 per share quarterly dividend declared in the first quarter of 2015. Since its IPO, the company has paid 88 consecutive cash dividends or payout ratios for the quarter was 77% and 76% for FFO and AFFO respectively, which are at the lower end of the company's target ranges and reflect a very well covered dividend.

So we are very pleased with how 2016 is progressing and believe we are well-positioned to perform at a high level through a combination of consistent execution, balance sheet strength and our emphasis on delivering attractive risk-adjusted total shareholder return.

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

Joey Agree

Thank you, Matt.

To wrap up first quarter, represented another strong quarterly performance for our company. Our strategy has remained consistent and we continue to grow and diversify our best-in-class retail net lease portfolio, while maintaining our capabilities through our industry-leading balance sheet. We are quite enthusiastic about our opportunities for the remainder of 2016 and beyond.

At this time, we would like to open it up for questions.

Question-and-Answer Session

Operator

Yes. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Collin Mings with Raymond James.

Collin Mings

Hey. Good morning, guys.

Joey Agree

Good morning, Collin.

Matt Partridge

Good morning.

Collin Mings

First question, just maybe, can you touch on what drove the below average lease term on the acquisitions that you guys completed during the quarter? They seem to be a bit below your company average and some of the recent deals you have done.

Joey Agree

Sure. I think first it is a very small sample size. So to read anything into lease terming those in that $33 million in acquisitions would do a disservice. I tell you with that small sample size, it gives us the opportunity kind of articulate on some specific transactions that we executed on in the first quarter. Specifically, we did a small portfolio working in conjunction with errant, rents where they took over those stores from a franchisee. We acquired the real estate. These are our Wal-mart, Wawa, fantastic underlying real estate there, but they took over from a distressed franchisee where the ability to acquire that real estate with new buildings.

Second, we acquired our first Dave & Buster's in Austin, Texas. Again, really a fantastic piece of real estate, a high performing store. The store is already in percentage rent, really, main and main for Dave & Buster's in a unique location with underlying real estate attributes. So, I think, all in all, reading into the shorter lease term is 6.9 years is indicative of what you will see from us for the remainder of the year.

Collin Mings

Okay. That's helpful color. Thanks, Joey. Switching just to the balance sheet, I mean you guys at the end of the quarter had about $60 million I think on the line. Maybe update us on how you're thinking about handling that either through continued match funding with the ATM or potentially a longer-term debt deal?

Matt Partridge

Hey, Collin. It's Matt. Historically the company has used the ATM as bridge financing to fund the acquisition pipeline and then over the longer term they have sourced long-term debt capital to pay that line down or equity. You should expect that we will take a similar approach and we are evaluating the debt capital markets right now for long-term financing to pay down the line of credit.

Collin Mings

Okay. And then, maybe just on that front, Matt, just update us on kind of what pricing maybe for ten-year private placement?

Matt Partridge

Yes. I think for a ten-year private placement here in low to mid-four's all in. There has been a little bit of volatility in the ten-year treasury of laying its run up. But, pricing hasn't moved too much. Spreads tend to come in as the tenure bounces around.

Collin Mings

Okay. And then, just one last one for me and I will turn it over. Doesn't look like you guys sold anything during the quarter. I know Joey longer term you talked a little bit more about being a capital recycler. Just maybe outside just as it relates to the net lease portfolio not just the shopping centers. Maybe just touch on your expectations as far as disposition activity throughout the remainder of the year.

Joey Agree

We continue to maintain an active stance in terms of disposing of net lease assets. Really what we deemed non-core net leased assets with the focus on reducing our pharmacy concentration. We did not have any dispositions closed during the first quarter. But, we are looking toward Q2 through for a potentially realizing some of those transactions and recycling those proceeds.

Collin Mings

Okay. And along those lines, still the bias is towards again that the pharmacy exposure reducing that a little bit maybe bringing down the Michigan concentration. Is that fair?

Joey Agree

Yes. That's fair. I think you can see our Walgreens exposure specifically came down 70 basis points just as a function of the growth in the underlying portfolio and the growth in the denominator. We stated before pretty clearly that we are going to take an active stance in reducing that concentration and not allow the company to grow out of that position. So it is a difficult market really driven by 10.31 purchase or 10 point timing of dispositions. But, we're confident that we will be able to transact on the disposition front on some of those assets through the remainder of the year.

Collin Mings

All right. Thanks, guys. I will turn it over.

Joey Agree

Thank you.

Matt Partridge

Thanks Collin.

Operator

Thank you. And the next question comes from Robert Stevenson with Janney Montgomery Scott.

Robert Stevenson

Good morning, guys. Joey, just as a follow-up on the last question, I mean, if we think about what you are likely to sell this year plus what you're likely to buy this year, can you sort of talk about where you expect to sort of end the year in terms of investment grade in the portfolio. It's a little over 50% right now. Does that drop below 50% or you cognizant of adding back for whatever you take out sort of keep it at that level? How should we be thinking about the way that -- even the Board reviewing the percentage of investment grade tenants in the portfolio longer-term?

Joey Agree

That's a great question, Rob. We have been pretty clear that our driver is not when we make investment decisions, whether not a retailer carries an investment grade credit rating. We're really looking for national and super regional retailers, many of which carry investment grade credit ratings, many of which are unrated. As we talked about historically and on the call today, we just wrapped up a hobby-lobby, another hobby-lobby. We have a Chick-fil-A in the ground currently in Frankfort, Kentucky. Those are unrated retailers. But, I think if you ran them through, we are pretty confident actually, if you ran them through a Moody's risk CAO, dive into their balance sheet. They would be investment grade.

So we are not imputing any credit ratings to any retailers either. We are using the traditional ratings definition. So, our focus is really maintaining the national and super regional retailer perspective. It's focusing on main retail corridor. I think investment-grade exposure as we transacted, you mentioned, as we transact on the acquisition disposition, development and partner capital solutions front we will vacillate. I think our goal is to maintain a significant piece of our portfolio as investment grade, but we definitely don't have a hard line of 50% or anything of the sort.

Robert Stevenson

Okay. And then, what are you guys seeing in terms of incremental demand on the development side? I mean is that part of the business as there is a little bit of turmoil in the private markets likely to expand for you guys meaningfully or basically at this point sort of keeping it at more or less the same size going forward?

Joey Agree

No. I see, turmoil in the private markets or any turmoil you are referring to currently in the markets. That doesn't have an impact in the present. That could play out in the future. Laith Hermiz and his team here -- our Chief Operating Officer is doing a fantastic job working with retailers on development opportunities. We're seeing growth in our pipeline. These projects take an average of 24 months to bring to fruition. We're seeing both external growth opportunities, but also internal growth embedded growth opportunities in context of our own portfolio currently.

We have additional outlaid opportunities. We have additional redevelopment opportunities that we are currently looking at and working on and we look forward to really bringing everybody up to speed on those hopefully in the next quarter.

Robert Stevenson

Okay. And then, just lastly for me, around this time last year, the Board bumped the dividend. What's been the recent discussions around the dividend going forward here?

Joey Agree

Yes. We are going to have a discussion shortly with the Board regarding the dividend. Our current payout ratio is both on an AFO and AFFO basis of 76% are at the lower end of our stated range. Our range has typically been 75% to 85%. And as Matt mentioned in the prepared remarks, that implies the ability for future growth. We've always wanted to maintain consistency and predictability with a dividend, maintain a conservative payout ratio. But, a payout ratio, that our shareholders continue -- really a fair yield that our shareholders continue to enjoy. So, the Board will be discussing the dividend -- the Q2 dividend in the near term. We look forward to continue to have the ability to raise the dividend in quarters and years to come.

Robert Stevenson

Okay. Thanks guys.

Operator

Thank you. And the next question comes from George Hoglund with Jefferies.

George Hoglund

Hey, good morning guys. Just wondering if you could comment a bit about the acquisition pipeline and kind of what you are seeing and how volume might ramp up over the course of the year.

Joey Agree

Yes. Thanks for the question George. So the $33 million in the first quarter we had talked historically about bringing approximately $25 million transaction forward into Q4. So we feel like our Q1 run rate of $33 million plus that $25 million transaction we brought forward would have brought us to about $55 million-$58 million for the first quarter. So I wouldn't read into the Q1 run rate of -- the Q1 $33 million and use that as a run rate. We're pretty confident we are going to be able to hit the $175 million to $200 million guidance that we put out earlier.

I will tell you we've got quite a significant pipeline right now. As I mention both individual one-off assets through multiple different sourcing channels that we typically find assets through as well as some small portfolio opportunities. All of these are of course subject to customary diligence. We're seeing a lot of opportunities to cross all three of our external growth platforms, not just acquisitions and it's great to see the traction in the marketplace, and then being able to leverage those platforms not only on a discrete basis, but the leverage of those platforms and produce really superior risk adjusted opportunities to what we see in the market.

George Hoglund

Okay. Thanks. And then, also on acquisition yields, 7.9% GAAP, what was the cash yield?

Joey Agree

So, the cash yields were in the upper sevens as well. That was due frankly to the shorter term nature of the cash yields were only about 10, 15 basis points out there.

George Hoglund

Okay. And then just last one. On the development, sort of what are the yield on developments relative to the acquisitions?

Joey Agree

Well, generally, we've always stated that our development yields, minimally we look at it 250 basis point spread. That's on a flow down of variable basis, 250 basis points spread of cap work rates. And if we're going to undertake a typical two-year development project we are going to be looking for that amount of cushion before we embark on a slight selection entitlement and construction.

Our development yields, I will tell you today are in the upper ninth and 10th. I mean so we're really achieving yields here on fresh really 20 and 15 year terms on these transactions that are with some fantastic retailers and great opportunities. And that's a function of the value creation process that we undertake with development.

George Hoglund

Again, thanks guys.

Joey Agree

Thank you.

Operator

Thank you. And the next question comes from Craig Kucera with Wunderlich.

Craig Kucera

Hey, guys. Appreciate your time this morning. Did you touch on the total expected development spend both for this year and for the entire pipeline?

Joey Agree

Yes. We have been giving guidance just because of the variable nature of development and the timing. We don't control the timing. Many of these projects are going through entitlement permitting and site selection process. To-date we have announced approximately $7.3 million in development. We anticipate additional announcements coming later this year hopefully as soon as Q2. And then, we will see how the pipeline materializes throughout the course of the year. It's tough to pin down actual commencement days. And we historically have announced the project until we effectively have a shovel in the ground.

Craig Kucera

Got it. When we look at your non-cash comp this quarter there was a bit of a lift from last year where there anyone one-time adjustments or is that a pretty good run rate or non-cash comp for this year?

Matt Partridge

Craig, this is Matt. The non-cash comps rise in Q1 because for the first time, the Board took their fee and stock and that stock was granted in January. So we expensed that stock comp in January. So that won't be indicative of the run rate. But, that's what it is due to.

Craig Kucera

Got it. Is that decision that the Board makes, do they make that every quarter or doesn't sound like that's for the entire year then?

Matt Partridge

That's for the entire year. And that was a decision they chose to make. They have the option to take any cash, but they all chose to take it in stock.

Joey Agree

In that note, that's on an individual level. So, I think it is a testament to frankly the belief in the execution and the strategy. Every Board member chose to take their Board fees this year in stock rather than cash. And I think that's a great statement for the company as well as the Board members.

Craig Kucera

Got it. Can you talk about the acquisitions you did this quarter? We appreciated the color on sort of the types of tenants, did you have any sense of sort of the store level rent coverage that you guys achieved this quarter or is it too difficult because some of these are large tenants they just won't get back?

Joey Agree

Typical tenants, national tenants don't provide store level sales. I'll tell you that we do everything we can in our diligence and our investigative powers to understand the store level performance. And we often do understand the store level performance. For example, the Dave & Buster's transaction, I mentioned in Austin, that store is effectively now in percentage rents. So we understand the store level performance as well as the coverage there which is well north of 2.5x.

Most of it is anecdotal, it will come through tenant interviews, our relationships with retailers and their real estate department as well as everything from our diligence on the ground at the store manager levels. So store level coverage we're not writing these leases, especially in the first quarter. We are not writing the leases we are taking subject to them. And most national retailers aren't providing that store level data.

Craig Kucera

Fair enough. One last one. You've historically been buying more one-off assets. You mentioned you're looking at a couple of small portfolios. But, when you talk about the larger portfolios, what kind of a portfolio premium are you seeing? Can you eyeball sort of basis points, what do you think some of the larger portfolios are trading more relative to -- it's kind of where you sweet spot is?

Joey Agree

Frankly, I don't think we are seeing a significant portfolio premium today as we saw in years passed. I think portfolios today there are opportunities where portfolios are trading potentially even at discounts. So the days of the portfolio premiums really driven by some of the large cap peers as well as the non-traded vehicles snapping up assets left and right are such essentially gone. The opportunities we typically look at or either small sale lease faux with retailers that we have the ability to then develop for and work with on an organic basis to leverage our balance sheet and execute on a sale leaseback. But, then also on a go forward basis to work on organic development and work with the real estate departments on their net new storing strategies or diversified portfolios, diversified by tenant sector geography as well as lease term. So those are -- what we call mixed bag portfolio. But, I think the days of the portfolio premium really driven by the non-traded entities out there I think we have passed those days.

Craig Kucera

Okay. Then I do have one more question in that regard. Does that mean you see an opportunity to grow even faster than you have? If you find a large portfolio that really [indiscernible] pricing, your cost of capital is dropping because the stock has done so well. You press harder this year or you still pretty comfortable at sticking $200 million -- $175 million to $200 million of acquisitions?

Joey Agree

No. We are confident that our existing platform can aggregate $175 million to $200 million in unique net lease we delve opportunities that are a traditional -- that are atypical to the market. We mentioned on the last call we got a similar question. Our cost of equity has improved. Our cost of capital has improved. But that's not going to change our bottoms up underwriting approach. At the margin, does it give us the ability on the margin to transact? Sure. But, I think as we look forward in 2016, our core focus and our disciplined underwriting approach is still going to drive all of the investment decisions that we make.

Craig Kucera

Okay. Great. Thanks, guys.

Joey Agree

Thank you.

Operator

Thank you. And the next question comes from Dan Donlan of Ladenburg Thalmann.

Joey Agree

Good morning, Dan.

Dan Donlan

Good morning. Just kind of probably two questions for me here. Just going back to the development pipeline, what has been your gauge of either retailers or franchisees willingness to expand versus years passed? Have you seen it start to accelerate? Is it kind of a pretty much unchanged over the last couple years? What is there confidence in the future to build?

Joey Agree

I think from 30,000 feet we've seen the confidence improve. I mean we are coming out honestly out of the great recession, consumer spending has improved marginally. I think consumer confidence obviously has improved. It really varies by sector and tenant. We obviously don't see the big-box retailers out there doing greenfield projects.

That said, we see sectors, such as the fast food sectors, such as the auto parts sector and a number of others that are out there aggressively looking for new opportunities. These aren't pre-recession number of openings. Our focus is working with the retailers that fit within our investment profile, that fit within that ecommerce resistant lends and we feel like we can partner with on a go forward opportunity and deploy meaningful capital and be a material piece of their growth. Does that make sense, Dan?

Dan Donlan

Yes, absolutely. I guess, have you seen any retailers that have kind of just roughly gone into a strip center or mall, shopping center or whatever you want to call it? Have you seen any more of a willingness to explore single tenant boxes? Could that be a source of growth five years from now or a few years from now?

Joey Agree

It's hard to look forward. I tell you. If you look at net lease retail, you effectively, most retailers except some of the smaller mall-based retailers and the traditional mall anchors while all look at freestanding formats. I mean whether that's a junior box, you see, freestanding Bed, Bath and Beyond; you see freestanding TJX and HomeGoods combo stores today. Most retailers who will go in a shopping center, unless they are a small tenant that feeds off of a traditional grocery anchor will also look at freestanding formats. It frankly becomes a function of occupancy cost, right? To develop a freestanding store rather than go in line can be more offensive for them.

So, I think the freestanding nature of assets, when you look at the visibility, the access, the parking, the ingress, the egress, the retail synergy that you can drive with a traditional freestanding net lease format is really a dominant format in the retail landscape today. I mean coupled with another think, I think you see a lot of retailers, in their omnichannel -- in this omnichannel world that we are in today looking to add drive through. I mean Wal-mart has been really pick up Windows. Wal-mart has been very aggressive in adding pick up Windows. If you want to pickup window you either need an end cap, or you need to be freestanding to allow for the circulation as well as a vehicular traffic to access the exterior wall. So I think as retailers look forward in 2016 and beyond and they are looking in the omnichannel world, how their ecommerce presence online ordering, physical pick up, more and more retailers are going to realize the benefits of net lease retail. And I think we are going to see more of it frankly.

Dan Donlan

Okay. Thanks, Joey. Appreciate it.

Joey Agree

Thanks, Dan.

Operator

Thank you. [Operator Instructions] And the next question is a follow up from George Hoglund with Jefferies.

Omotayo Okusanya

Hi. This is actually Tayo from Jefferies. Two quick ones from me, Joey. The first one is, when you take a look at what the portfolio looks like today, any particular changes you are looking to make over the next 12 months, whether it's more exposure to new market, to some particular retail category, to some particular kind of retail tenants, just I think on look to further strengthen the overall quality of the portfolio?

Joey Agree

Good morning, Tayo. I think we touched on it. I think reducing overall pharmacy is the only thing that we can point to, pharmacy exposure and specifically Walgreens in the portfolio today. I mean we are looking at what we believe and we are confident is the best net lease portfolio in the country. It's a 100% retail. It's over 50% investment grades got north of 11 years weighted average lease term. We have zero lease expirations remaining in 2016.

Now, I will tell you, we have had the opportunity since we launched the acquisition platform in 2010 and the partner capital solutions platform in 2012 really to construct this portfolio anew. So when you look at the retail landscape today and the distressed retailers that are having challenges and/or filing for bankruptcy, we have no exposure to them because frankly since we launched the platform, we just stayed away from them. We didn't believe in the strategies, their merchandising strategies, we didn't believe in their execution.

So when you look across that landscape today, we don't have any sports authorities in our portfolio. We don't have many office supply stores in our portfolio. We have been very specific with our investments in targeted sectors, and then, targeted leading retailers in those sectors. And I think the results are today what you see. And that portfolio, again, is we believe is industry-leading. We are focused on the one piece that I mentioned is reducing our pharmacy concentration, which we think it's a great opportunity to divest and redeploy that capital on an accretive basis throughout the year.

Omotayo Okusanya

Okay. That's helpful. And then, the second question is, could you just talk a little bit about the overall rent coverage for the portfolio? And if you have any tenants in particular where rent coverages particularly maybe one-two, one-three or below?

Joey Agree

Yes. So overall, rent coverage of the portfolio where we have tenants that were poor which are traditional sale lease back typically with a franchise restaurant is well over 2%. That's really our threshold. We have one restaurant in the portfolio that we acquired as part of a small portfolio transaction at the end of 2014, it was a sonic restaurant that we immediately put on the market and disposed sub-6 gap. I think it was about a 5.5 gap that didn't meet that coverage threshold. So, if we're going to enter into a lease transaction, typically a sale leaseback where we have rent covers, we are targeting rent coverage really north of 2x.

Omotayo Okusanya

Great. Okay. Thank you.

Joey Agree

Thanks.

Operator

Thank you. As there are no many questions at the present time, I would like to turn the call back over to management for any closing comments.

Joey Agree

Great. Thank you. With that, we would like to thank everybody for joining us this morning. And we look forward to speaking to you again when we report our second quarter results. Thank you, everybody.

Operator

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

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