Agree Realty Corporation

Good morning and welcome to the AGRI Realty second quarter 2020 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 a telephone keypad. And to withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Clay Thalen, Chief Financial Officer. Please go ahead, Clay.

Thank you, operator. Good morning, everyone, and thank you for joining us for AGRI Realty's second quarter 2020 earnings call. Joey will, of course, be joining me this morning to discuss our second quarter and first half results. 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 for a number of reasons, including uncertainty related to the scope, severity, and duration of the COVID-19 pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures on us and on our tenants. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-K and subsequent reports, for a discussion of various risks, uncertainties underlying our 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, website, and SEC filings. I will now turn the call over to Joey. Thank you, Clay, and thank you all for joining us this morning.

I hope that all of our listeners and their families are staying healthy and safe during these challenging times. Before providing our standard update, I'd like to start by outlining the additional steps that we've taken to further strengthen our position amidst this ongoing crisis. As mentioned on last quarter's call, we created a cross-functional COVID response team that consists of asset management, legal, accounting, and tenant relations. They've done an outstanding job helping us navigate through this pandemic. Since the beginning of the year, we've raised more than $825 million in gross equity proceeds, positioning our company to execute on the high-quality opportunities that are emerging throughout this crisis. At quarter end, pro forma for our outstanding forward equity, our fortified balance sheet stood at 1.6 times net debt to recurring EBITDA. Our balance sheet and nearly $1 billion in liquidity provides us with an unparalleled optionality as we continue to execute on the numerous opportunities that we uncovering. Given our record investment activity of more than half a billion dollars during the first half of the year, our fortress balance sheet and liquidity, we have continued to amass an incredibly high quality and robust pipeline. I am pleased to announce we have increased our acquisition guidance to a range of $900 million to $1.1 billion. As evidenced by the best-in-class nature of our year-to-date activity, rest assured we will maintain our disciplined underwriting standards that are focused on the premier retailers in the country. The quality of our carefully constructed portfolio is reflected in our second quarter and July rent collections data, which continue to lead the retail sector. We received April, May, and June rent payments from 92%, 89%, and 89% of our portfolio, respectively. In the aggregate, we received second quarter rent payments from approximately 90% of our portfolio and entered into limited deferral agreements representing approximately 3% of total rents. For the month of July, our collection data has continued on this positive trajectory. To date, we have received July rental payments from 94% of our portfolio, while also entering into limited deferral agreements with tenants representing an additional 3% of July rents. What we have confirmed is that quality and discipline count. Tenant credit, real estate fundamentals, and sound balance sheet management have been a mainstay of our strategy before COVID and will continue to drive our activities during and after this pandemic. Our company is positioned to emerge stronger than ever with best-in-class collections, a fortress balance sheet, and organizational momentum that will allow us to execute on the myriad of high-quality opportunities that we see accelerating in this environment. With that, allow me to run through our standard update. I'm very pleased to report that despite the ongoing disruption caused by COVID-19, the second quarter represented a record quarter for agri-realty. During the quarter, we invested a record $276 million in 78 high quality retail net lease properties across our three external growth platforms. 75 of these properties were originated through our acquisition platform, representing record acquisition volume of approximately $272 million. While achieving a record volume during these unprecedented times, We remain extremely disciplined in our approach as demonstrated by approximately 80% of acquisition volume being derived from investment grade retailers. The 75 properties acquired during the second quarter released to 16 tenants operating in 11 distinct sectors, including best in class operators in the off price, general merchandise, auto parts, tire and auto service, grocery, dollar stores, and convenience store sectors. The properties were acquired at a weighted average cap rate of 6.5% and had a weighted average lease term of 10.9 years. Most notably during the quarter, we acquired seven additional Walmart stores comprising more than one quarter of total acquisition capital deployed. I'm very pleased to report that Walmart remains our largest tenant at 7.6% of annualized base rents, representing a year-over-year increase of roughly 320 basis points. We continue to enjoy a very productive and strong relationship with the world's largest retailer. Through the first six months of the year, we've invested a record $507 million into 132 retail net lease properties spanning 33 states across the country. Of that $507 million invested, approximately half a billion was via our acquisition platform. The 126 properties acquired in the first half of the year leased to 24 leading tenants, operating in 17 distinct sectors. In unparalleled, 84% of the annualized base rent acquired in the first half of the year comes from investment-grade operators, while almost one-third of acquisition capital deployed in the first half of the year was invested into 13 Walmart stores. As previously mentioned, given our record acquisition volume to date and our robust pipeline, we are increasing our 2020 acquisition guidance to a range of $900 million to $1.1 billion from our previous range of $700 to $800 million. The low end of this range would represent a record acquisition volume for our company, easily surpassing the $700 million acquired last year. We continue to source a number of ground lease opportunities with leading retailers, adding 13 assets during the past year to this portfolio. Today, our ground lease portfolio spans 69 properties, comprising 8% of total annualized base rents. Our current pipeline includes several significant ground lease opportunities that we anticipate closing during the upcoming quarter. At quarter end, nearly 90% of our ground lease rents were derived from investment grade retailers, including Costco, Walmart, Aldi, Home Depot, Lowe's, National Tire and Battery, and Wawa. Only 1% is leased to sub-investment grade operators, and the remaining 10% of the ground lease portfolio is leased to unrated retailers. At quarter end, our portfolio's investment grade exposure stood at 61%, representing a substantial year-over-year increase of nearly 700 basis points. On a two-year stacked basis, our investment grade exposure has been improved by more than 1,400 basis points. As we continue to focus on best-in-class operators that are poised to thrive in an omnichannel environment, I anticipate our investment grade concentration to continue its upward trajectory. Moving on to our development and partner capital solutions platforms, we had six development and PCS projects either completed or under construction during the first half of the year that represent total committed capital of more than $19 million. One of those projects was completed during this past quarter, our first development with Family Dollar in Grayling, Michigan, in a vacant Rite Aid that we acquired. Construction continued during the quarter on our first project with 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 commenced construction on one new project during the quarter, our second development with Harbor Freight Tools in West Laco, Texas. The project is subject to a 15-year net lease upon completion, with rent anticipated to commence in the fourth quarter of this year. These recent projects are the result of our team's efforts to screen vacancies utilizing our software to identify potential backfill candidates within our sandbox of meeting omni-channel retailers. We continue to work with retailers to evaluate market vacancies and redevelop buildings at a very attractive cost basis for both ADC as well as our retail partners. Our pipeline consists of a number of projects that I anticipate announcing in conjunction with next quarter's earnings. While we fortified our portfolio through recent investment activity, we are again quite active on the disposition front during the quarter. as we sold eight assets for proceeds of approximately $19 million at a 6.3 cap rate. Notable disposition activity during the quarter, including the sale of seven franchise restaurants, further reducing our total franchise restaurant exposure to a mere 1.5%. This represents a decrease of approximately 230 basis points in the past 18 months. Dispositions for the first six months of the year have totaled 14 assets for proceeds of just more than $44 million, with a weighted average cap rate of approximately 7.2%. Given our disposition activities during the first half of this year, we are raising the bottom end of our disposition guidance to $50 million for the full year 2020. Our asset management team has also been diligently focused on addressing upcoming lease maturities. As a result of their efforts, our 2020 lease maturity stands at only three remaining lease expirations and represent just 0.1% of annualized base rents. We have similarly made significant progress on our 2021 upcoming maturities with additional announcements that I anticipate during our next quarterly call. During the second quarter, we executed new leases, extensions, or options on approximately 92,000 square feet of space. We are very pleased to have executed a new 20-year net lease with Love's Furniture to backfill the former Art Van flagship store in Cannes, Michigan. We anticipate recovering 100% of the prior Art Van rent upon Love's rent commencement during the latter half of the third quarter. During the first six months of the year, we executed new leases, extensions, or options on approximately 272,000 square feet of gross leaseable space. As of June 30th, our growing retail portfolio consisted of 936 properties across 46 states. We anticipate surpassing the 1,000 property milestone in this upcoming year. Our tenants are comprised primarily of industry-leading operators operating in more than 31 retail sectors, again with 61% of annualized base rents coming from investment-grade tenants. The portfolio remains fully occupied at 99.8%, and has a weighted average remaining lease term of 9.7 years. Before handing the call over to Clay, I would like to thank all of our loyal stakeholders for their continued support during these difficult and trying times. Thank you for your patience. Happy to answer any questions after Clay provides an update on our balance sheet and reviews our financial results for the second quarter.