Agree Realty Corporation

Good morning and welcome to the AGRI Realty fourth quarter and full year 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 Eckery, President and CEO. Please go ahead, Joey.

Thank you, Operator. Good morning, everyone, and thank you for joining us for AgriRealty's fourth quarter and full year 2019 earnings call. Joining me this morning is Clay Phelan, our Chief Financial Officer. Before we begin, I'd like to digress for a moment and start this morning's call with a 30,000-foot perspective. I'll get to our most recent quarter and record full-year accomplishment shortly, but first I think it's important to speak to recent activities we have seen in the net lease space. Recent retailer bankruptcies and negative headlines have served to affirm our investment thesis, which is built upon a risk-averse perspective of the retail universe. Over the course of the last several quarters, I have tried to emphasize and refocus investors away from not only per share earnings growth, but also towards real estate fundamentals, market positioning, and retailer balance sheets in an omni-channel retail world. The world today is changing dynamically, and retail is going through constant disruption. Today's retail operators need to be adept, flexible, and nimble. A strong consumer and low interest rates can prolong the inevitable, but the reality facing today's poorly capitalized retailers has become abundantly clear. The ability to invest in e-commerce distribution, price, and market share are critical. Leveraged balance sheets, private equity sponsorship, or the lack of liquidity are nearly insurmountable challenges given these strong headwinds. Our investment strategy has been focused on the brightest and strongest retailers in this omni-channel world. Of the retailers that have been in the headlines recently, we have one prominent location among them. Our Art Van flagship store in Canton Township is the preeminent retail location in the state of Michigan. The store is located on Ford Road, one of the most highly trafficked corridors in the state. The site shares a signalized intersection with Michigan's only IKEA store and is a regional draw for customers across the state as well as northern Ohio. It is this type of discipline and bottoms-up underwriting which is the hallmark of our investment strategy. I would remind listeners today that we undertook the development of this store prior to Art Van and his family selling the company to TH Lee, which has since embarked on their aggressive growth strategy. We subsequently passed on a number of additional opportunities to participate in Art Van's rapid growth. The real estate we own in Canton is in our backyard. We know it extremely well, and we are very confident in its long-term value and success. I encourage everyone to visit our YouTube channel and see our drone video of the site themselves. Moving on to 2019, which marked our 25th anniversary as a publicly traded company and another year of record growth for our company. During the year, we accomplished several notable milestones. Among them, we significantly improved portfolio quality increasing our investment grade exposure by nearly 700 basis points. This is on top of a 740 basis point increase in 2018. As of year end, our portfolio consisted of an industry-leading 58% of annualized base rents leased to these leading retailers. In 2019, our portfolio exceeded 800 properties while undertaking further diversification. We added over 190 properties during the year across 40 states and 22 distinct retail sectors. We reduced our exposure to Sherwin-Williams, our top tenant, by 110 basis points to 4.9% of annualized base rents, while adding a number of leading retailers to our top tenant roster, including Home Depot, National Tire and Battery, and Sunbelt Rentals. We further solidified our industry-leading balance sheet with several strategic capital markets transactions, ending the year with net debt to recurring EBITDA of 4.5 times pre-forward settlement and 3.7 times inclusive of the settlement of our outstanding forward. And lastly, we are proud to have surpassed $4 billion in enterprise value. I'd like to take a moment to thank our fantastic and growing team members, who amazed me every day with their commitment day in and day out to our dynamically growing company. In addition to these milestones, we also completed our state-of-the-art campus to support our growing team, which now has 46 team members. Throughout the course of the last year, we have continued to add talented team members in all areas of our company, including acquisitions, asset management, finance, accounting, human resource, and due diligence. Our state-of-the-art campus includes the Agri Wellness Center, locker rooms, and auditorium, integrated technology, and unique collaborative meeting spaces. We have created a best-in-class work environment to motivate and accommodate our best-in-class team. During this past year, we invested a record $720 million in 196 high-quality retail net lease properties. 186 of these properties were originated through our acquisition platform. representing total acquisition volume of more than $701 million. While we achieved yet another year of record acquisition volume, our rigorous underwriting standards and continued focus on best-in-class retailers is again evidenced by our record 76.7 percent of annualized base rent acquired being derived from leading investment-grade operators. We closed out 2019 with a strong fourth quarter, investing in 41 properties across our three external growth platforms, while executing several strategic capital markets transactions that fortified our balance sheet and positioned us for growth in the year ahead. During the fourth quarter, we invested more than $141 million, of which $138 million was sourced through our acquisition platform. Consistent with our focus on quality throughout the year, nearly 72% of annualized base rents acquired during the fourth quarter are derived from retailers that carry an investment-grade credit rating. The 39 properties acquired during the fourth quarter are leased to 23 tenants operating in 17 retail sectors, including off-price, convenience store, auto parts, tire and auto service, dollar stores, and home improvement. The properties were acquired at a weighted average cap rate of 6.9% and had a weighted average lease term of almost 11 years. We continue to construct a net lease portfolio with sector-leading retailers that are well positioned for success, in the omnichannel retail world of today. As previously mentioned, we welcome Home Depot, National Tire and Battery, and Sunbelt Rentals to our top tenants during 2019. Concurrently, we eliminated AMC and PetSmart for our top tenant list since the fourth quarter of 2018. We will continue to cultivate our portfolio as we proactively embrace a dynamic omnichannel retail world. During this past year, we uncovered several opportunities to add to our ground lease portfolio. We added 12 properties to this unique portfolio, which now stood at 8.5% of annualized base rents as of 12-31. Notable ground lease assets acquired during the year include our first Costco in Newport News, Virginia, an Aldi in Columbus, Georgia, a Chick-fil-A in Brockton, Massachusetts, and a Wawa in Cocoa, Florida. Our ground lease portfolio derives 89% of rents from investment-grade tenants and is comprised of leading retailers including Walmart, Home Depot, Lowe's, Wawa, Sheetz, Aldi, AutoZone, Chick-fil-A, McDonald's, and Starbucks. Conversely, only 1% is leased to subinvestment-grade tenants, and the remaining 10% is leased to leading unrated retailers. We continue to identify and execute on high-quality opportunities to add assets to our ground lease portfolio. Moving on to our development and partner capital solutions platforms, We had 10 development and PCS projects either completed or under construction during the year that represented total committed capital of more than $32 million. Eight of these projects were completed during the past year, representing total investment volume of approximately $22 million. During the fourth quarter, we completed landlords' work for Aldi and Harbor Freight tools at the company's redevelopment of the former Kmart in Frankfort, Kentucky. Work continued for Big Lots as of December 31st, and we anticipate completion and full rent commencement in the first quarter of this year. Construction continued during the fourth quarter on our first development with Tractor Supply in Hart, Michigan, which is expected to be completed in the first quarter of this year as well. Subsequent to quarter end, we commenced construction on two new projects, including our first development for TJ Maxx in Harlingen, Texas, immediately adjacent to a high-performing target. Rent is anticipated to commence in the third quarter of this year. We also commenced our fifth development project with Sunbelt Rentals in Converse, Texas, with rent anticipated to commence during the second quarter of 2020. We continue to focus on providing full-service real estate solutions to leading omnichannel retailers, many of which are on our top tenant roster. The relationships we built with these retailers continue to create investment opportunities across all three external growth platforms as we seek to leverage the complete spectrum of our real estate investment capabilities. While we strengthened our portfolio through record investment activity, we've also diversified our portfolio through strategic asset management and disposition efforts. The fourth quarter was particularly active on the disposition front as we sold seven assets for gross proceeds of approximately $32 million. Notable dispositions during the fourth quarter included an Academy Sports in Belton, Missouri, a Camping World in Tyler, Texas, and an LA Fitness in Maplewood, Minnesota. I anticipate additional disposition activities during the first quarter of this year as we continue to take advantage of market conditions and aggressively move to divestive assets that no longer fit within our investment philosophy. For the full year, we sold 16 properties for total gross proceeds of approximately $67 million. Of note, we sold four Walgreens assets during the year, bringing our exposure to 3.4% at year end. representing a 200 basis point reduction over the course of the year. The high per square foot rents, as well as continued disruption in the pharmacy space, continues to drive our disposition activities. We anticipate our Walgreens exposure to continue this downward trajectory during the course of 2020. Our asset management team has also been diligently focused on addressing any upcoming lease maturities. As a result of their efforts, our 2020 lease maturities represented just 0.5% of annualized base rents at year end. Our portfolio remains in the best shape in our nearly 26-year operating history. During the fourth quarter, we executed new leases, extensions, or options on approximately 55,000 square feet of gross leaseable space. For the full year 2019, we executed new leases, extensions, or options on approximately 370,000 square feet And as of January 1st of this year, we have exercised our recapture right on the last Kmart in our portfolio located in Grayling, Michigan. Kmart has vacated the space, and I am very pleased to announce we have executed a lease with Tractor Supply to backfill the entire box. Additionally, we have carved out a pad in the parking lot for a future outlot development. This transaction is a testament to our asset allocation decisions and granular approach to real estate analyses. As you may recall, we chose to retain three Kmart stores from our initial public offering that were not sold in the last several years, Frankfort, Kentucky, Mount Pleasant, Michigan, as well as Grayling. We have now redeveloped or re-tenanted all three stores with best-in-class retailers. Our decision to retain these assets has been confirmed by the quick turnaround by our asset management team. As of December 31st, our rapidly growing retail portfolio consisted of 821 properties, across 46 states. Our tenants are comprised primarily of industry-leading retailers operating in more than 28 retail sectors, again, with more than 58% of annualized base rent coming from investment-grade tenants. The portfolio remains effectively fully occupied at 99.6% and has a weighted average lease term of 10 years. Our pipeline heading into 2020 is robust and I am very pleased with our progress to date. As indicated by our strong initial acquisition guidance of $600 to $700 million, we are confident in our expanding team's capabilities to aggregate high-quality transactions while also continuing to review unique opportunities that cross our path. I'd like to take a moment to thank all of our loyal stakeholders for their support during another record year for AgriRealty. With that said, I again want to be clear that we remain intensely focused on constructing and constantly seeking to improve the highest quality retail portfolio in the country. I look forward to building upon our momentum in the upcoming year ahead. Thank you all for your patience. Happy to answer any questions after Clay discusses our financial results for the fourth quarter and full year.

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. Core FFO was $0.81 per share for the fourth quarter and $3.08 per share for the full year 2019, representing 12.3% and 7.9% year-over-year increases respectively. Additionally, AFFO was $0.80 per share for the fourth quarter and $3.02 per share for the full year, representing 11.5% and 6.6% year-over-year increases. General and administrative expenses for 2019 totaled $15.6 million. G&A expense was 8.3 percent of total revenue, or 7.7 percent, excluding the non-cash amortization of above and below market lease intangibles, representing a 50 basis point year-over-year reduction. For 2020, we expect that G&A expenses as a percentage of revenues will contract an approximately additional 50 basis points. Income tax expense for the full year 2019 totaled $538,000, inclusive of the one-time tax credit of $475,000 realized in the first quarter. For 2020, we anticipate total income tax expense to be in the range of $1 to $1.2 million. On a quarterly and full-year basis, core FFO per share and AFFO per share were impacted by dilution required under GAAP related to our forward equity offerings. 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. The aggregate dilutive impact related to these offerings was roughly a penny to both core FFO and AFFO per share for the fourth quarter and four cents for the 12-month period. As Joey mentioned, we had another active year of capital markets activities, raising or settling more than $740 million of capital to fund our continued growth and position our company for 2020 and beyond. In addition to capital raised, we also generated nearly $100 million through our disposition activity and free cash flow after dividend during the year. In December, we entered into an amendment to our revolving credit facility and term loans to increase our credit facility to $600 million. The credit facility is comprised of a $500 million unsecured revolving credit facility and $65 and $35 million unsecured term loans. The credit facility includes an accordion option that allows us to request additional lender commitments up to a total of $1.1 billion. The revolving facility will mature in January 2024 with options to extend the maturity date to January 2025. In December, we settled the entirety of the 3.2 million share forward equity offering that was originally commenced in April 2019. receiving net proceeds of approximately $196 million. During the fourth quarter, we also entered into forward sale agreements in connection with our ATM program to sell an additional 2 million shares of common stock at an average gross price of $73.34 per share. Upon settlement, the ATM forwards are anticipated to raise net proceeds of approximately $145 million after deducting fees, expenses, and other adjustments. To date, we have not received any proceeds from the ATM forward offerings. At December 31st, we had $89 million outstanding on our unsecured revolving credit facility, reflecting additional capacity of $411 million. Our balance sheet remains in excellent position to continue to fuel our anticipated growth. As Joey mentioned, as of December 31st, our net debt to recurring EBITDA was approximately 4.5 times. Pro forma for the settlement of our forward equity our net debt to recurring EBITDA is approximately 3.7 times. Total debt to enterprise value is approximately 22%, while fixed charge coverage ratio, which includes principal amortization, stood at a company record 4.3 times. The company paid a dividend of 58.5 cents per share on January 3rd to stockholders of record on December 20th, 2019, representing a 5.4% year-over-year increase. This was the company's 103rd consecutive cash dividend since our IPO in 1994. For the full year 2019, the company declared dividends of $2.28 per share, a 5.8% year-over-year increase. Our payout ratios for the fourth quarter were conservative 72% and 73% of core FFO and AFFO per share. For the full year 2019, on a per-share basis, our payout ratios were 74% of core FFO and 76% of AFFO, respectively. These payout ratios continue to reflect a growing and very well-covered dividend. With that, I'd like to turn the call back over to Joey.