Agree Realty Corporation

Good morning and welcome to the AGRI Realty first quarter 2021 conference call. All participants will be in a 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. Please note, this event is being recorded. I would now like to turn the conference over to Simon Leopold, Chief Financial Officer. Please go ahead, Simon.

Good morning, everyone, and thank you for joining us for AGRI Realty's first quarter 2021 earnings call. Before we begin, I'd like to thank Joey and the board for the opportunity to join ADC and the outstanding team that they've assembled. I'm very excited to build upon the long track record of success here at AGRI, and I look forward to contributing to the company's next phase of growth while maximizing value for all stakeholders. Before turning the call over to Joey to discuss our results for the quarter, let me first run 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 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 and 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'll now turn the call over to Joey.

Thank you, Simon, and welcome aboard. Good morning, everybody. I'm pleased to report that ADC 3.0 is officially underway. Our focus on people, processes, and systems combined with the unique and unprecedented opportunity in the marketplace has accelerated the trajectory of our company in every respect. Our increase in guidance reflects the success we are seeing on the acquisition front. While externally these results speak to our present and future capabilities, what is less visible is the platform infrastructure that we have constructed that powers the ADC engine. The launch of ARC, our proprietary technology platform, is the culmination of a multi-year effort. was started as an idea and a static spreadsheet has now materialized into a powerful and dynamic tool for our growing company. At the core of our decision-making is real-time data. AHRQ enables and informs everything from relationship management through its CRM tool, our asset level underwriting, portfolio construction via vast modeling and planning capabilities, as well as its asset management through its work order management system. These tools have enabled our team to execute quickly and decisively in opportunities, aggregate and access data, establish key performance indicators, measure our performance, streamline and provide clarity to team members, and proactively manage our growing team. We are very excited to demonstrate Arc's capability in the very near future. In addition to the technology that we have deployed, the leadership and board additions match the opportunity we see in front of us. This is not a company that sits still, but we intend to continue to rise to the occasion and take advantage of our distinctive market positioning. Moving now to our results, during the first quarter we invested approximately $391 million in 90 high-quality retail net lease properties across our three external growth platforms. 86 of these properties were originated through our acquisition platform, representing acquisition volume of almost $387 million. While achieving another very strong quarter of acquisition volume during these uncertain times, we maintained our discipline focus on best in class opportunities with leading retail partners. This was clearly demonstrated by a record 32% of first quarter acquisition volume being comprised of ground leases, and more than 72% of first quarter volume being derived from investment grade retailers. The 86 properties acquired during the first quarter leased to 46 tenants operating in 20 distinct sectors, including best in class operators in the off price, consumer electronics, auto parts, general merchandise, convenience store, grocery, and tire and auto service sectors. The acquired properties had a weighted average cap rate of 6.3% and had a weighted average lease term of 12.9 years. We executed on several notable transactions during the quarter, including our first two Amazon fresh grocery stores located in Westmont and Bloomingdale, Illinois. We're very pleased about the opportunity to add Amazon as a top 50 tenant within our portfolio and look forward to additional opportunities to grow our relationship with them. Additionally, we acquired a unique portfolio of 10 CVS stores, all of which recently signed brand new 20-year net leases at below market rents of just over $14 per square foot on a weighted average basis. Even with this portfolio acquisition, our pharmacy exposure is still down nearly 110 basis points year over year, driven by portfolio growth and the opportunistic disposition of Walgreens assets. With this transaction, CVS has surpassed Walgreens as our largest pharmacy tenant, quite an accomplishment for a former Walgreens developer that at one time had nearly 40% exposure to Walgreens. By year end, I anticipate our exposure to Walgreens to drop to at or below 1.5% of our total portfolio. The pharmacies that we've added in recent years, including this portfolio and the long-term CVS in downtown Greenwich, Connecticut, reflect unique opportunities to acquire high-performing CVS stores with duration and residual values that are difficult to find in the pharmacy space. As I've discussed in recent calls, we continue to favor CVS as the sector leader, given their innovation and adaptation to consumer preferences and overall market dynamics in the pharmacy space. The acquisition of Aetna in 2018, the rollout of the Minute Clinics, and now their Health Hub concepts continue to demonstrate thoughtful leadership. During the quarter, we also added our first REI store located on a major retail thoroughfare in East Hanover, New Jersey. With median household incomes of $150,000 and a daytime population of 165,000 within a five-mile radius, this store is positioned for long-term success. Our focus on building the highest quality retail portfolio is further evidenced by the record number of wrong leases that we acquired during this past quarter. We added 31 ground leases to our portfolio for an aggregate purchase price of $127 million, again representing almost 32% of annualized base rents acquired during the quarter. Our overall ground lease exposure now stands at a company record of 11.4% of our total annualized base rents. Notable ground lease acquisitions during the quarter include a CarMax in Pleasant Hill, California, six Wawa convenience stores, our first discount tire, and the previously announced portfolio acquisition of 15 ground lease assets from Kite Realty Group. Inclusive of our first quarter acquisition activity, our ground lease portfolio now derives 89% of rents from investment-grade tenants and is comprised of the company's premier retailers. Our deep relationships across the industry, as well as our team's strong track record of execution, continues to deliver additional opportunities to add such properties to this expanding sub-portfolio. Given our robust acquisition activity in the first quarter and enhanced visibility into our pipeline, we are increasing our full year 2021 acquisition guidance to a range of $1.1 to $1.3 billion, representing a 33% increase at the midpoint as compared to our previous annual guidance. This increase reflects the fact that we're seeing very strong opportunities to grow our portfolio while remaining disciplined and committed to our stringent investment criteria. We continue to view retail real estate as dynamic and bifurcated into long-term winners and losers, and we fully intend to stay on the winning side. At quarter end, our portfolio's investment grade exposure stood at more than 67%, representing a significant year-over-year increase of more than 750 basis points. On a two-year stacked basis, our investment grade exposure has improved by almost 1,500 basis points. Moving on to our development and partner capital solutions platforms, we continue to see compelling opportunities. We had four development and PCS projects either completed or under construction during the first quarter that represent total capital committed of more than $14 million. One of these projects was completed during the quarter, our second development with Burlington in Texarkana, Texas. I'm pleased to announce we also commenced our first development with 7-11 during the quarter, located in Saginaw, Michigan. 7-11 will be subject to a new 15-year lease upon completion, and we anticipate delivery will take place in the first quarter of 2022. Construction continued during the first quarter on two development and PCS projects with anticipated total costs of more than $8 million. The projects consist of a grocery outlet in Port Angeles, Washington, and a Gerber collision in Beaufort, Georgia. Subsequent to quarter end, we commenced our first development with Floor & Core in Naples, Florida, where they will be subject to a new 15-year lease. We anticipate total costs for this project to be approximately $20 million, with rent commencing by January of 2022. We remain focused on leveraging our three-prong external growth platform to expand our relationships with best-in-class retailers, and look forward to updating you on progress in the quarters ahead. Moving on to dispositions, we sold three properties for total gross proceeds of nearly $9 million during the first quarter, These dispositions were completed at a weighted average cap rate of 6.8% and included a short-term Walgreens in Big Rapids, Michigan, as well as another franchise restaurant. Subsequent to quarter end, we sold our Dave & Buster's in Austin, Texas for approximately $10.5 million, representing a cap rate of 7.4%. Notably, Dave & Buster's had less than four years remaining on the base term of their lease at the time of sale. This disposition is reflective of our real estate underwriting And the ability to sell this asset at an IRR of more than 8% is a testament to the quality of real estate in our portfolio. This sale reduced our Dave & Buster's exposure to just two remaining locations. During the quarter, we executed new leases, extensions, or options on approximately 66,000 square feet of gross leaseable area. As a result of our asset management team's efforts, at quarter end, our lease maturities for 2021 stood at just 0.4% of annualized base rents. representing a quarter over quarter decrease of approximately 50 basis points and a year over year decrease of approximately 170 basis points. Our 2022 lease maturities are in a very positive position as well with only 21 leases or 1.2% of ABR expiring during the course of the year. No single lease maturity exceeds $600,000 annualized base rents and represents only 0.2% of ABR. As of March 31st, our rapidly growing retail portfolio consisted of 1,213 properties across 46 states, including 120 ground leases. The thoughtful and disciplined construction of our leading retail portfolio continues to be reflected in our rent collections data. Including April, we've now collected at least 99% of rent payments for eight consecutive months. During the quarter, we collected more than 99% of rent payments from our portfolio while entering into deferral agreements representing less than 1% of first quarter rents. As a reminder, our collections data includes both base rent and recurring operating cost reimbursements. In addition, we include base rents and operating cost reimbursements charged to tenants in bankruptcy and have not made any COVID-related adjustments to the denominator when making these calculations. We remain committed to providing complete and transparent data to our investors on our collections. I'm also pleased to report that our inaugural ESG report was published in the first quarter and can be found in the Investors section of our website. I look forward to continuing to engage with our stakeholders on the ESG front and excited about our future successes here. Lastly, I'd like to take a moment to welcome Ambassador John Riccolta, Jr. back to our Board of Directors. John previously served on our Board from 2011 until his confirmation as United States Ambassador to the United Arab Emirates in September of 2019. His leadership helped shape our company, and his contributions will be invaluable as we enter the next phase of our growth. With that, I'll hand the call over to Simon, and we can open it up for any questions.