Agree Realty Corporation

Good morning and welcome to the AGRI Realty First Quarter 2019 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Each questioner will be limited to two questions only. Please note this event is being recorded. I would now like to turn the conference over to Joey Agri, President and CEO. Please go ahead, Joey.

Thank you, Operator. Good morning, everyone, and thank you for joining us for Agri Realty's first quarter 2019 earnings call. Joining me this morning is Clay Thalen, our Chief Financial Officer. I'm pleased to report that we're off to a strong start to the year as we continue to capitalize on opportunities across all phases of our business. During the quarter, we further strengthened our portfolio through strategic investment activity and proactive asset management while continuing to fortify our balance sheet through capital markets activity. Subsequent to quarter end, we commemorated our 25th anniversary as a public company by ringing the closing bell at the New York Stock Exchange. Our compounded average annual total shareholder return since the IPO is 13.2%. an impressive accomplishment that sets the bar for our future performance. Before we move on to our traditional update, I'd like to take a couple of minutes to clarify and expand upon our investment philosophy and underwriting standards, given some of the recent discussions we've had with investors during this busy conference season. I think the simplest place to start is what we're avoiding. private actively-backed and other retailers with over-leveraged balance sheets that lack the capacity to adapt to a dynamic retail environment and invest in an omnichannel future. Second, retailers that are overly susceptible to e-commerce due to commoditization and consumer price leverage. Third, retailers that traffic in highly discretionary and luxury goods that are susceptible to recessionary pressures. Fourth, we avoid an overemphasis on store-level performance as a barometer for real estate and tenant quality. It is a data point, not a driver of our underwriting. In today's omnichannel retail world, store-level performance is becoming increasingly difficult to measure using traditional methods, such as store sales, EBITDA, and rent coverage. Retailers today are increasingly favoring locations that enable them to penetrate a market through a variety of distribution methods, including BOPIS, home delivery, in-store returns, as well as maintain a physical presence. The market penetration that a retailer can achieve through these methods is often misrepresented by historic four-wall performance metrics. The most successful 21st century retailers have effectively blurred the lines between these different distribution channels. And lastly, we avoid non-fungible single-purpose boxes that have limited residual value or very narrow retenanting options that inhibit the future value of the real estate. This includes larger boxes where the tenant has entered into a traditional turnkey lease. Our risk mitigation here is best demonstrated through our ground lease portfolio where we own the land and the tenant has paid to construct their own improvements. The tenant's investment in the improvements decreases the likelihood that they'll look to relocate, increases the probability of renewal, as well as drives residual upside through re-tenanting or outlaw creation at a very low basis. As usual, I will discuss our ground lease portfolio in more detail shortly. Now that I've addressed what we avoid, let's focus on our continued acquiring and development of the highest quality retail net lease assets in the country. Today, our proverbial sandbox is comprised primarily of 30 to 35 of the country's strongest retailers that have a comprehensive omnichannel strategy, a value-oriented business model, or a strong service-based component. We think about quality as a unique combination of industry-leading tenants, lease structure, and strong underlying real estate. With almost 50 years of development expertise, our emphasis is on fundamental retail real estate characteristics rather than simple spread investing or contract structure. With that, allow me to return to our standard update. During the first quarter, we invested approximately $145 million in 57 high quality retail net lease properties across our three external growth platforms. Of those 57 investments, 48 properties were sourced through our acquisition platform, representing aggregate acquisition volume of more than $141 million for the quarter. The properties were acquired at a weighted average cap rate of 7% and had a weighted average remaining lease term of 12.8 years. The acquired properties are located in 22 states and are leased to leading operators in 16 different retail sectors, including off-price, convenience stores, auto parts, tire and auto service, home improvement, health and fitness, grocery, and crafts and novelties. Notably, we were very pleased to add our first Trader Joe's, HomeSense, as well as CarMax to our portfolio during the quarter. Other properties acquired during the quarter include O'Reilly Auto Parts, AutoZone, Bridgestone, NTB's Tire and Service Centers, Hobby Lobby, TJ Maxx, Alta, Tractor Supply, 7-Eleven, and Gerber Collision. Our focus on industry-leading tenants is evidenced by the continued increase in our investment grade concentration. More than 71% of annualized base rent acquired during the quarter was derived from investment grade retailers. At quarter end, our total investment grade exposure was 52.4%, representing a year-over-year increase of approximately 680 basis points. Based on the high quality nature of our current acquisition development pipeline, we anticipate our investment grade concentration to continue this upward trajectory. Given our strong acquisition volume in the first quarter and our robust and high quality pipeline, we are increasing our 2019 acquisition guidance to a range of $450 to $500 million for the year. While increasing our full-year acquisition guidance, I want to again reiterate that we remain intently focused on constructing the highest quality retail portfolio in the country. Our acquisition team has done an outstanding job originating best-in-class opportunities with industry-leading retailers. While significantly increasing our investment grade concentration, We've also grown our ground lease portfolio by 140 basis points year over year to almost 9% of annualized base rents at quarter end. 7-Eleven is the newest addition to the many leading retailers that comprise our ground lease portfolio, including Home Depot, Lowe's, Walmart, Wawa, Aldi, AutoZone, McDonald's, and Starbucks. At quarter end, approximately 88% of our ground lease portfolio's rents were derived from retailers that carry an investment-grade credit rating, and only 1 percent was leased to sub-investment grade retailers. The remaining 11 percent of the portfolio was leased to leading retailers that are unrated, such as Chick-fil-A and Texas Roadhouse. We continue to seek to expand this portfolio and currently have under control a number of assets that are ground leased to the country's best operators. In addition to our ground lease portfolio, we also have several exceptional urban assets. One such asset is our Harris Teeter on West 6th Street in Charlotte, North Carolina. Notably, Harris Teeter recently announced that the 18,000 square foot store will be the first in the chain to implement self-checkout to increase the number of lanes available to customers and reduce checkout times. We continue to look for similar opportunities to add unique urban assets to our portfolio. The strength of our portfolio is also evidenced by our changing tenant roster. During the quarter, we added TBC Corporation to our top tenant list via six property sale leaf back with National Tire and Battery Service Centers. Simultaneously, AMC was eliminated from our top tenant list during the quarter. Turning to our development and partner capital solutions platforms, we had nine development and PCS projects either completed or under construction during the quarter that represent total committed capital of approximately $30 million. Three of those projects were delivered during this past quarter, representing total capital deployed of almost $8 million. The projects delivered during the quarter include the company's third and fourth developments with Mr. Car Wash in Orlando and Tavares, Florida, and our first completed project with Sunbelt Rentals in Maumee, Ohio. Subsequent to quarter end, the company delivered its second project with Sunbelt Rentals in Batavia, Ohio. In addition to our completed projects in Maumee and Batavia, Construction continued during the quarter at our third Sunbelt rentals and our first ground-up project in Georgetown, Kentucky with them. Finally, we're pleased to announce that we commence construction on our fourth Sunbelt rentals project during the first quarter in Carrizo Springs, Texas. The project is anticipated to complete by the fourth quarter of this year, and we look forward to continuing to expand our relationship with Sunbelt to the future. In addition to the Sunbelt Reynolds project in Georgetown, Kentucky, construction continued during the quarter on three other development and PCS projects with total anticipated costs of nearly $16 million. The project consists of the company's first development with Gerber Collision in Round Lake, Illinois, the company's redevelopment of the former Kmart in Mount Pleasant, Michigan for Hobby Lobby, and the company's redevelopment of the former Kmart in Frankfort, Kentucky for Aldi, Big Lots, and Harbor Freight Tools. While our year-to-date investment activity has improved the quality of our portfolio, we've also solidified and diversified our portfolio through proactive asset management and disposition efforts. These efforts continued during the first quarter as we sold two Walgreens assets for gross proceeds of approximately $10 million. As a result of our disposition efforts, our Walgreens concentration has been reduced to 4.6% at quarter end. This represents a decrease of approximately 300 basis points year over year. Similarly, our pharmacy exposure decreased 400 basis points year over year to 7.6%. We currently have an additional Walgreens asset under contract to sell, which is subject to customary due diligence, and we anticipate closing in the next few weeks. Our asset management team also continues to focusing on addressing upcoming lease maturities As a result of these efforts, at quarter end, we had only five remaining lease maturities in 2019, representing less than 1% of annualized base rents. During the quarter, we executed new leases, extensions, or options in approximately 111,000 square feet of gross leasable space. As of March 31st, our rapidly growing retail portfolio consisted of 694 properties across 46 states. Our tenants are comprised primarily of the industry-leading retailers operating in more than 28 distinct retail sectors, again with 52.4% of annualized base rents coming from investment-grade tenants. The portfolio remains effectively fully occupied at 99.7% and has a weighted average remaining lease term of 10.2 years. Thank you for your patience. And with that, I'll turn it over to Clay to discuss our financial results for the quarter. Clay?

Thank you, Joey. Good morning, everyone. I'll begin by quickly running 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. 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. As a reminder, beginning in the first quarter, we modified our calculation of NAREED FFO to exclude the add-back of the amortization of above and below market lease intangibles and introduced Core FFO, which includes the add-back of this non-cash item. Core FFO will be consistent with our historic reporting of FFOs. Core funds from operations for the first quarter was $28.6 million, representing an increase of 29.8% over the first quarter of 2018. On a per-share basis, core FFO increased to 74 cents per share, a 4.7% year-over-year increase. Adjusted funds from operations for the first quarter was $27.7 million, a 27.3% increase over the comparable period of 2018. On a per share basis, AFFO was 72 cents, an increase of 2.7% year over year. In addition to the inclusion of core FFO this quarter and in accordance with the updated lease accounting standards effective January 1st of this year, we've updated our presentation of revenues on the income statement and consolidated our historical reporting of revenue line items into a single line item, rental income. Additionally, We began including the amortization of above and below market lease intangibles as contra revenue in the new rental income line item. It is important to note that both of these changes are purely geographic and do not have an impact on our key earnings metrics. The inclusion of amortization related to above and below market lease intangibles is simply a reclassification as this was historically reported in depreciation and amortization expense. To help with modeling, we have added a new schedule to our press release tables, providing further detail as well as comparability with our historical reporting. General and administrative expenses in the first quarter totaled $4 million. G&A expense was 9.5% of total revenue, or 8.8%, excluding the non-cash amortization of above and below market lease intangibles. We continue to anticipate G&A as a percentage of total revenue to be an approximate 50 basis point improvement from 2018, or in the upper 7% range, excluding the impact of above and below market lease intangible amortization in total revenues. The inclusion of above and below market lease intangible amortization as contra revenue increases G&A as a percentage of total revenue roughly 50 basis points for the full year. The company recognized an income tax benefit of approximately $170,000 for the first quarter. The benefit is the result of a one-time tax credit related to the termination of one of the company's taxable REIT subsidiaries, totaling $475,000. This credit was included in our calculation of core FFO and excluded for the purposes of calculating AFFO. For the full year 2019, inclusive of this one-time credit, We anticipate total income tax expense to be in the range of $350,000 to $400,000. On a quarterly basis, core FFO per share and AFFO per share were impacted by dilution required under GAAP related to the forward equity offering we completed in September of 2018. Treasury stock is to be included within our diluted share count in the event that, prior to settlement, our stock trades above the deal price from the offering. The dilutive impact related to the offering was almost two cents to both core FFO and AFFO per share for the three-month period ended March 31st. To the extent that prior to settlement, our stock continues to trade above the deal price of the September forward offering, we will continue to record Treasury stock dilution. To date, we have not settled any of the 3.5 million shares and view this as a meaningful equity backstop to fund our investment pipeline. Now moving on to our capital markets activities. During the first quarter, we issued nearly 900,000 shares of common stock through our at-the-market equity program at an average price of $66.83, raising gross proceeds of $59.3 million. We continued to view the ATM as an efficient tool to raise equity given the granular nature of our investment activity. Our balance sheet continues to be in phenomenal position to execute. As of March 31st, our net debt to recurring EBITDA was approximately five times at the low end of our stated range of five to six times. Pro forma for the settlement of the approximately $190 million in proceeds from our September forward equity offering, our net debt to recurring EBITDA is approximately 3.7 times. Total debt to enterprise value was approximately 22.5%, and our fixed charge coverage ratio, which includes principal annualization, remains at a very healthy four times. We ended the quarter with approximately $500 million of liquidity including cash on hand, capacity under our revolving credit facility, free cash flow, and available proceeds from our forward equity offering. The company paid a dividend of 55.5 cents per share on April 12th to stockholders of record on March 29th, 2019, representing a 6.7% year-over-year increase. I'm pleased to report that this was the company's 100th consecutive cash dividend since its IPO just over 25 years ago. Our quarterly payout ratios for the first quarter were conservative 75% of core FFO per share and 77% of AFFO per share. These payout ratios are at the low end of the company's targeted ranges and continue to reflect a very well-covered dividend. With that, I'd like to turn the call back over to Joey. Thank you, Clay.