Agree Realty Corporation

Good morning and welcome to the Agri Realty Corporation's second quarter 2019 earnings 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. Please note, this event is being recorded. I would now like to turn the conference over to Joey Agri. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us for Agri Realty's second quarter 2019 earnings call. Joining me this morning is Clay Phelan, our chief financial officer. I'm very pleased to report that our strong start to the year gained momentum during the second quarter. Robust investment activity, largely comprised of leading investment grade retailers, picked up pace during the quarter and continues to accelerate into the third quarter. Our investment activities during the quarter were supported by strategic capital markets transactions that further reinforced our best-in-class balance sheet, as well as the number of dispositions aligned with our long-term asset management strategy. Investment activity during the quarter was again of superior quality. A record 73% of the annualized base rent acquired was derived from leading retailers with an investment-grade credit rating. Activity across our three external growth platforms totaled $183 million in 37 properties. Thirty-one of these properties were sourced through our acquisition platform, representing aggregate acquisition volume of more than $176 million for the quarter. The properties were acquired at a weighted average cap rate of 6.7 percent and had a weighted average remaining lease term of 10.6 years. The acquired properties are located in 20 states with only 13 retailers operating in 13 different sectors, including off-price, convenience stores, auto parts, dollar stores, warehouse clubs, consumer electronics, and farm and rural supply. We are very pleased to have completed several noteworthy acquisitions during the quarter that reinforce our real estate emphasis. As previously announced in May, we acquired Wawa's flagship store in Philadelphia's historic city center. The 11,500 square foot store is located on the ground floor of the public ledger building, just steps from the Liberty Bell, Independence Hall, and Congress Hall. Additionally, we acquired our first Costco during the quarter, located in a dominant retail corridor in Newport News, Virginia. Costco is on a ground lease where they have paid for the construction of their building and improvements with approximately 15 years of remaining term. Going forward, and absent any unique transactions such as the Wawa or Costco, you can anticipate that our acquisition yields will be more in line with our historical returns of approximately 7%. For the first six months of the year, we've invested a record $327 million into nearly 90 retail net lease properties spread across 31 states. Of the $327 million invested during the first half of 2019, approximately $317 million was via our acquisition platform. The 79 properties acquired in the first half of the year are leased to 33 leading retail tenants operating in 20 distinct sectors. A record 72% of the annualized base rent acquired during the first six months of this year is derived from investment grade operators. Given our record acquisition volume in the first half of the year and our robust and high quality pipeline, we are increasing our 2019 acquisition guidance to a range of $625 to $675 million. The low end of this range would represent record acquisition volume for our company, surpassing the $607 million acquired in 2018 which, of course, included the Sherwin-Williams sale-leaseback transaction. Notably, we have not closed nor are we contemplating executing any large-scale transactions in this guidance. Our activities continue to be of granular nature, leveraging our unique relationships and capabilities to execute on opportunities with superior risk-adjusted returns. We continue to source a number of ground lease opportunities with leading retailers. Today, our ground lease portfolio spans 56 assets, comprising 9.2% of our total annualized base rents. We've increased our ground lease concentration by approximately 200 basis points year over year, adding premier retailers such as Walmart, Costco, Home Depot, 7-Eleven, and Sheetz convenience stores. At quarter end, nearly 90% of our ground lease rents were derived from investment grade retailers, and conversely, only 1% is leased to some investment grade operators. The remaining 10 percent of the ground lease portfolio was leased to leading unrated retailers. At quarter end, our total investment grade exposure stood at 54.2 percent, representing a substantial year-over-year increase of approximately 770 basis points. It's important to note that the investment grade makeup of our activities is a result of our distinct focus on the industry-leading operators, rather than an explicit focus on investment grade rated retailers. Our pipeline continues to be of the highest quality in the history of our company, and we anticipate our investment-grade concentration to continue this upward trajectory. Our top tenant roster continues to positively evolve. During the quarter, we acquired three Walmart supercenters. Consequently, Walmart is now the second largest tenant in our portfolio, behind Sherwin-Williams. Turning to our development and partner capital solutions platforms, we had nine development and PCS projects either completed are under construction during the first half of the year that represent total committed capital of approximately $30 million. Our pipeline continues to progress nicely with several additional projects anticipated to commence yet this year. Retailers continue to leverage our expertise to execute across the full lifecycle of their assets. During the quarter, we completed our second development with Sunbelt Rentals in Mississippi, The project had total cost of almost $2 million and is subject to a new 10-year net lease. Subsequent quarter end, rent commenced for the company's third project with Sunbelt Rentals in Carrizo Springs, Texas. Construction continued during the second quarter at our four Sunbelt Rentals and our first ground-up project for the retailer in Georgetown, Kentucky. The project is anticipated to be complete by the third quarter of this year. Construction continued during the quarter on three additional development and PCS projects with total anticipated costs of more than $15 million. The project consists of the company's first development with Gerber Collision around 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 record year-to-date investment activity has improved the quality of our portfolio, We've also solidified and diversified our portfolio through proactive asset management disposition efforts. These efforts continued during the second quarter as we sold four assets for gross proceeds of approximately $17 million. Included in these activities was the sale of three franchise operated Sonic restaurants, reducing our exposure to franchise tenants to just 3.9% of annualized base rents. This represented a reduction of 160 basis points year over year. We continue to see opportunities to dispose of franchise restaurants at favorable cap rates and recycle the capital into higher quality assets. Additionally, we continue to be highly selective in our approach to the health and fitness space. Rapid unit growth, a proliferation of specialty and discount operators, single purpose boxes, as well as private equity sponsorship continue to make this a sector that is challenged to surpass our stringent underwriting criteria. To that end, during the quarter, we also disposed of a 24-hour fitness in Fort Worth, Texas. Dispositions for the first six months of the year have totaled six assets for gross proceeds of just more than $27 million, with the weighted average cap rate of approximately 7.2%. Subsequent to quarter end, we disposed of another Walgreens in Grand Lake, Michigan, the third Walgreens that we have disposed of year to date. This sale reduced our Walgreens exposure to approximately 4% of annualized base rents, representing a year-over-year decrease of 290 basis points. Given our year-to-date disposition activities, as well as additional visibility into our pipeline, we are increasing the bottom end of our disposition guidance from $25 million to $50 million for the full year. Our asset management team also continues to focus on upcoming lease maturities. As a result of these efforts, at quarter end, we had only three remaining lease maturities in 2019, representing just .4% of annualized base rents. During the second quarter, we executed new leases, extensions, or options on approximately 56,000 square feet of gross leaseable space. Notably, Dave & Buster's exercised their five-year option during the quarter on their 40,000 square foot location in Austin, Texas. We are also very pleased to have executed a new 15-year lease with Panera Bread to backfill our only former vacant Applebee's at the corner of Bayou Boulevard and 9th Avenue in Pensacola, Florida. We are recapturing 108% of rent at this location with zero landlord investment or tenant proven allowance. This transaction is emblematic of the high-quality real estate that underlies our portfolio. As of June 30th, our rapidly growing retail portfolio consisted of 722 properties across 46 states. Our tenants are comprised primarily of industry leading retailers operating in more than 28 retail sectors, again with 54.2% 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 10.1 years. Before I turn the call over to Clay to discuss our second quarter and first half financial results, on behalf of all of our directors, I would like to welcome Simon Leopold to our board. As many of you are familiar, Simon currently serves as the Chief Financial Officer and Treasurer of Taubman. Prior to Taubman, Simon had an extensive career in real estate investment banking. We are very pleased to have Simon's finance, capital markets, and industry expertise join our board of directors. With Simon's addition, we have added three new directors within the past 12 months, adding REIT, operational, and human capital expertise at the highest level. Thank you for your patience, and with that, I'll turn it over to Clay to discuss our financial results for the quarter.

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 laws. Our actual results may differ significantly from the matters discussed in any forward-looking statements. In addition, we discussed non-GAAP financial measures, including core funds from operations, or core FFO, adjusted funds from operations, or AFFO, and net debt trickering EBITDA. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release. Core funds from operations for the second quarter was $31 million. representing an increase of 38.6% over the second quarter of 2018. On a per share basis, core FFO increased to 75 cents per share, a 5.5% year-over-year increase. Adjusted funds from operations for the second quarter was $30.6 million, a 37.5% increase over the comparable period of 2018. On a per share basis, AFFO was 74 cents, an increase of 4.7% year-over-year. General and administrative expenses in the second quarter totaled $3.9 million. G&A expense was 8.6% of total revenue or 8.1% 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 for 2019. excluding the impact of above and below market lease intangible amortization in total revenues. Income tax expense for the second quarter was approximately $195,000. For the full year, inclusive of the one-time tax credit of $475,000 realized in the first quarter, we anticipate total income tax expense to be in the range of $350,000 to $400,000. On a quarterly and year-to-date basis, core FFO per share and AFFO per share were impacted by dilution required under GAAP related to the forward equity offerings we completed in September of 2018 and April 2019. Treasury stock is being included within our diluted share count in the event that, prior to settlement, our stock trades above the deal price from the offerings. Since our average stock price for the second quarter was above the deal price for the September and April forward offerings, we included dilution related to both transactions. The aggregate dilutive impact related to these offerings was a penny to both Core FFO and AFFO per share for the three-month period and roughly two cents for the six-month period. There will be no additional Treasury stock dilution for future quarters related to the September 2018 forward equity offering given we settled the transaction in conjunction with the April forward offering. Now moving on to our capital markets activities. We had another active quarter, further strengthening our balance sheet and positioning the company for continued growth. We continue to maintain significant capital, both debt and equity, to execute on our robust pipeline. On May 1st, we settled the entirety of our September 2018 forward equity offering and received net proceeds of $186 million. In conjunction with the settlement of our September forward offering, we completed another follow-on public offering of 3.2 million shares of common stock in connection with a forward sale agreement. Upon settlement, the offering is anticipated to raise net proceeds of approximately $200 million after deducting fees and expenses. To date, the company has not received any proceeds from the sales shares of its common stock in connection with the April offering. We retain the ability to settle the transaction in whole or in tranches at any time between now and May 1st of 2020. The settlement of the September 2018 forward equity offering and the launch of the subsequent April 2019 forward equity offering provide the company the capacity to invest an incremental amount of approximately $700 million and remain within our stated leverage range of five to six times net debt to recurring EBITDA. During the quarter, we were also active in sourcing long-term debt financing. In June, we entered into an agreement for a private placement of $125 million of senior unsecured notes. Once the agreement is funded, the notes will bear interest at a fixed rate of 4.47% and have a 12-year term. We can elect to fund the private placement and receive the $125 million of gross proceeds anytime between now and October 30th of this year. I would note that we continue to execute our longer term fixed rate debt that matches the underlying duration of our asset base. In March, we entered into forward starting interest rate swap agreements to fix the interest of $100 million of long term debt until maturity. The company terminated the swap agreements at the time of pricing the $125 million senior unsecured notes. Taking into account the effect of the terminated swap agreements, the blended all-in rate for the $125 million private placement is 4.42%. As of June 30th, our net debt to recurring EBITDA was approximately 4.4 times, well below our stated range of 5 to 6 times. Pro forma for the settlement of the approximately $200 million in proceeds from our April 2019 forward equity offering, our net debt to recurring EBITDA is approximately 3.2 times. Total debt to enterprise value was approximately 21.6%. And our fixed charge coverage ratio, which includes principal amortization, remains at a very healthy 4.1 times. The company paid a dividend of 57 cents per share on July 12th to stockholders of record on June 28th, 2019, representing a 5.6% year-over-year increase. This was the company's 101st consecutive cash dividend since its IPO just 25 years ago. For the first six months of the year, the company declared dividends of $1.12.5 per share, a 6.1% increase over the dividends of $1.06 per share declared for the comparable period in 2018. Our quarterly payout ratios for the second quarter were 76% of core FFO per share and 77% of AFFO per share. For the first six months of 2019, our payout ratios were 76% of core FFO per share and 77% of AFFO per share, respectively. 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.