Agree Realty Corporation

Good morning and welcome to the AGRI Realty third 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 touchtone 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 third quarter 2019 earnings call. Joining me this morning is Clay Phelan, our Chief Financial Officer. I'm very pleased to report another extremely strong quarter of execution across all aspects of our business. Robust acquisition activity during the quarter was of the highest quality in our company's history. A record 85.5% of acquired annualized ABR was derived from leading retailers with investment grade credit ratings. During the quarter, we invested over $252 million in 74 high quality retail net lease properties across our three external growth platforms. 68 of these properties were sourced through our acquisition platform, representing aggregate acquisition volume of more than $246 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 12.3 years. The acquired properties are located in 27 states and are leased to retailers operating in 16 different retail sectors, including off-price retail, convenience stores, auto parts, fire and auto service, dollar stores, home improvement, pharmacy, and farm and rural supply. Notable acquisitions during the quarter included a CVS in downtown Greenwich, Connecticut, located on Greenwich Avenue. CVS is committed to a long-term net lease with nearly 19 years of remaining base term. This acquisition adds yet another unique urban street retail asset to our portfolio. During the quarter, we also acquired our first Mariano's grocery store located just outside of Chicago. The lease is guaranteed by Kroger, which carries a triple B rating from S&P and has more than 15 years of remaining term. We also acquired 10 711 properties located in Virginia and Florida. We're very excited to have to work with 711 to construct a portfolio that has a weighted average lease term of more than 14 years. This was our first significant transaction with 7-Eleven. Through the first nine months of the year, we've invested a record $579 million into 157 retail net lease properties geographically diversified across 37 states. Of the nearly $580 million invested year-to-date, approximately $563 million was sourced through our acquisition platform. The 147 properties acquired are leased to 45 different retail tenants operating in 22 distinct sectors. Most notably, 78% of the annualized base rent acquired during the first nine months of the year comes from retailers that carry an investment grade credit rating. Our stringent focus on premier operators and avoidance of private equity sponsored or second tier retailers is continuously demonstrated through the quality of our investment activity. We continue to view the retail world as dynamic and believe the risk-adjusted returns we are achieving are exceptional. Given our record year-to-date acquisition activity improved visibility into the pipeline for the remainder of the year, we're increasing our full year 2019 acquisition guidance to a range of $650 million to $700 million. While increasing our full year acquisition guidance, I want to again reiterate that our activities remain granular in nature and we continue to leverage our unique relationships and skill sets to identify and execute on best-in-class opportunities. During the quarter, we continue to add properties to our ground lease portfolio. We acquired four ground lease properties, including a Wawa in Cocoa, Florida, and three geographically diverse AutoZone stores. Today, our ground lease portfolio spans 60 assets, comprising 8.6% of total annualized base rents. At quarter end, nearly 90% of ground lease rents continue to be derived from leading investment grade retailers, including Walmart, Home Depot, Costco, Aldi, Wawa, 7-Eleven, and AutoZone. Conversely, only 1% of the portfolio is leased to sub-investment grade tenants, and the remaining 9% is leased to leading unrated retailers. Our focus on creating the country's leading retail portfolio was also demonstrated by the continued transformation of our top tenant roster. During the quarter, we are very pleased to have added Home Depot to our top tenant list, marking the third new entrant to be added to this list this year alone. At quarter end, approximately 57% of our annualized base rents were derived from investment grade retailers. This represents a nearly 1,000 basis point year over year increase. It's important to again note that the investment-grade makeup of our recent activities is a result of our rigorous focus on best-in-class retailers rather than an explicit focus on rated companies. Turning to our development and partner capital solutions platforms, we had 10 development and PCS projects either completed or under construction during the first nine months of the year that represent total committed capital of more than $32 million. During the quarter, we completed four previously announced development and PCS projects. The project had total aggregate costs of $12.2 million and include the company's third and fourth developments with Sunbelt Rentals in Carrizo Springs, Texas and Georgetown, Kentucky, the company's first development with River Collision around Lake Illinois, and the company's redevelopment of the former Kmart space in Mount Pleasant, Michigan for Hobby Lobby. We also commenced our first development with Tractor Supply during the third quarter in Heart, Michigan. Anticipated completion is the second quarter of next year. Construction continued during the quarter on the redevelopment of the former Kmart in Frankfort, Kentucky for Aldi, Big Lots, and Harbor Freight tools. The project is anticipated to complete in the first half of next year. We continue to work to foster deeper relationships with retailers in our top tenant roster. These relationships enable our retail partners to leverage our capabilities while consistently demonstrating our ability to add value across the full life cycle of an asset. While we've strengthened our portfolio through record year-to-date investment activity, we've also diversified our portfolio through strategic asset management and disposition efforts. During the quarter, those activities continued as we sold three properties for gross proceeds of approximately $8 million at a weighted average cap rate of 6.8%. Dispositions during the quarter were comprised of a Walgreens in Grand Blanc, Michigan, a Mr. Car Wash in Flowood, Mississippi, and a franchise operated Taco Bell. Through the first nine months of the year, we sold nine assets for total gross proceeds of $35.4 million. These dispositions were completed at a weighted average cap rate of 7.2%. As I discussed on last quarter's call, we continue to be very discerning in our approach to the health and fitness space. Subsequent to quarter end, we sold an LA Fitness in Maplewood, Minnesota. This disposition reduces our current LA Fitness exposure to approximately 2.6% of annualized base rents, representing a year-over-year decrease of approximately 100 basis points. This week, we will also be closing on the sale of another Walgreens in Ypsilanti, Michigan. Pro forma for this sale, our Walgreens exposure will be reduced to 3.5% of annualized base rents, a 270 basis point reduction year over year. Our asset management team also continues to proactively address our upcoming lease maturities. As a result of their efforts, at quarter end, our 2019 lease maturities represented just 0.2% of annualized base rents. During the third quarter, we executed new leases, extensions, or options in approximately 148,000 square feet of gross leaseable space. Notably, we acquired a 31,000-square-foot Best Buy in Sanford, Florida, and extended the lease commensurate with the acquisition. As of September 30th, our rapidly growing retail portfolio consisted of 789 properties across 46 states. Our tenants are comprised primarily of industry-leading retailers operating in more than 28 distinct retail sectors, again with nearly 57% of annualized base rents coming from investment-grade tenants. The portfolio remains effectively fully occupied at 99.7% and has a weighted average lease term remaining of 10.2 years. Lastly, our second headquarters building continues to make substantial progress. We're looking forward to having additional capacity for our growing team, as well as providing enhanced amenities and functionalities to our team. We anticipate moving to occur by Thanksgiving and look forward to many of you visiting our campus in the future. I thank you for your patience. Happy to answer any questions after Clay discusses our financial results for the third quarter. I'll turn it over to 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 discussed 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. Core funds from operations for the third quarter was $33.4 million, representing an increase of 42.2% over the third quarter of 2018. On a per-share basis, core FFO increased to 78 cents per share, an 8.8% year-over-year increase. Adjusted funds from operations for the third quarter was $32.7 million, a 40% increase over the comparable period of 2018. On a per-share basis, AFFO of 77 cents represented an increase of 7.1% year-over-year. General and administrative expenses in the third quarter totaled $3.8 million. G&A expense was 8% of total revenue or 7.4%, 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. 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 last year and April of this year. 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 offerings. There was no Treasury stock dilution in the third quarter related to the September 2018 forward equity offering. given we settled the transaction in conjunction with our April forward offering. However, our year-to-date results included Treasury stock dilution from both transactions. The aggregate dilutive impact related to these offerings was roughly a penny to both Core FFO and AFFO per share for the three-month period, and three cents for the nine-month period. To the extent that prior to settlement our stock continues to trade above the deal price of the April 2019 forward, we will continue to record Treasury stock dilution. To date, we have not settled any of the 3.2 million shares from our April forward and view this as a meaningful equity backstop to fund future growth. Now moving on to our capital markets activities. In July, we entered into a new $400 million at-the-market equity program. During the third quarter, we issued over 400,000 shares of common stock through our new ATM program at an average price of $74.30, raising gross proceeds of $33 million. We've raised more than $270 million via our ATM program in the past four quarters, which demonstrates our view that the ATM is an efficient tool to raise equity given the granular nature of our business. Subsequent to quarter end, we funded $125 million of senior unsecured notes per the agreement that we entered in June of this year. The proceeds were used to pay down the outstanding balance on our revolving credit facility. The notes bear interest at a fixed rate of 4.47% and have a 12- As a reminder, in March, we entered into forward starting interest rate swap agreements to fix the interest for $100 million of long-term debt until maturity. The company terminated the swap agreements at the time of pricing the senior unsecured notes in June. Taking into account the effect of the terminated swap agreements, the blended all-in rate for the $125 million private placement is 4.42%. Our balance sheet continues to be in fantastic shape. As of September 30th, our net debt to recurring EBITDA was approximately 5.1 times, which is at the low end of our stated range of five times to six times. Pro forma for the settlement of the nearly $200 million in proceeds for our April 2019 forward equity offering, our net debt to recurring EBITDA is approximately four times. Total debt to enterprise value at the end of the third quarter was approximately 23%, and our fixed charge coverage ratio, which includes principal amortization, increased to a company record of 4.3 times. The company paid a dividend of $0.57 per share on October 11 to stockholders of record on September 27, 2019, representing a 5.6% year-over-year increase. This was our company's 102nd consecutive cash dividend since our IPO 25 years ago. For the first nine months of the year, the company declared dividends of $1.69.5 per share a 5.9% increase over the dividends of $1.60 per share declared for the comparable period in 2018. Our quarterly payout ratios for the third quarter were 73% of core FFO per share and 74% of AFFO per share. For the first nine months of 2019, our payout ratios were 75% of core FFO per share and 76% of AFFO per share, respectively. These payout ratios are near 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.