Agree Realty Corporation

Good morning and welcome to the Agri Realty second quarter 2021 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. Please note this event is being recorded. I would now like to turn the conference over to Peter Toganoa, Vice President, Corporate Finance. Please go ahead, Peter.

Thank you. Good morning, everyone, and thank you for joining us for AGRI Realty's second quarter 2021 earnings call. Discussing our results on today's call will be Joey Agri, President and Chief Executive Officer, and Simon Leopold, Chief Financial Officer. Before turning the call over to Joey, 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 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 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 will now turn the call over to Joey.

Thank you, Peter. I'm very pleased to report that we continued our strong start to the year, achieving record investment volume of more than $750 million during the first six months of 2021. Robust and high-quality investment activity further increased our investment-grade concentration and raised our ground lease exposure to a record of nearly 13%. Our investment activities during the quarter were supported by more than $1 billion of strategic capital markets transactions that fortified our best-in-class balance sheet and positioned our company for continued growth in the quarters ahead. During the second quarter, we invested approximately $366 million in 59 high-quality retail net lease properties across our three external growth platforms. Fifty-four of these properties were originated through our acquisition platform, representing acquisition volume of more than $345 million. The 54 properties acquired during the second quarter are leased to 32 tenants operating in 18 distinct retail sectors, including best in class operators in the off price, home improvement, auto parts, general merchandise, dollar store, convenience store, craft and novelty, grocery, and tire and auto service sectors. The acquired properties had a weighted average cap rate of 6.2% and a weighted average lease term of 11.8 years. Through the first six months of this year, we've invested a record $756 million into 146 retail net lease properties spanning 35 states and 24 retail sectors. Approximately $732 million of our investment activity originated from our acquisition platform. Roughly 75% of the annualized base rents acquired in the first half of the year comes from leading investment-grade retailers. while almost one-third of annualized base rent is derived from ground-leased assets. These metrics demonstrate our continued focus on best-in-class opportunities with leading omni-channel retailers while still achieving record results. Given our record acquisition activity to date and visibility into our pipeline, we are increasing our full-year 2021 acquisition guidance to $1.2 to $1.4 billion. During this past quarter, we executed on several unique and notable transactions, including a new small format target on the University of Georgia's campus in Athens. We're extremely pleased to expand our relationship with Target, as well as add another unique street retail asset to our growing portfolio. We continue to invest in market-dominant grocers during the quarter. Most significant was a five-store sale leaseback transaction with Kroger for approximately $68 million. The stores are located in Texas, Michigan, Ohio, and Mississippi, and each location is subject to a new 15-year net lease. With this transaction, Kroger moved into our top 10 tenants at 3.2% of annualized base rents. Kroger is, of course, a leader in the grocery space. Their fortified balance sheet, strategic omni-channel initiatives, and significant investment in e-commerce fulfillment are emblematic of our investment strategies. Additionally, we closed on the purchase of a ShopRite, which is owned and operated by Wake Fern in New Rochelle, New York. ShopRite is a tremendous operator, and the real estate located at a strategic interchange off of I-95 is yet another example of the diligent bottoms-up analysis that we conduct on every asset we acquire. Finally, as you may recall, we acquired our first Wegmans ground lease in Chapel Hill, North Carolina during the fourth quarter of 2020. We built upon that momentum this quarter with the acquisition of our second property, ground lease to Wegmans. The store, located in Persippany, New Jersey, is over 100,000 square feet and was constructed at Wegmans' expense. The ground lease has over 21 years of term remaining and is a welcome addition to our growing ground lease portfolio. Through the first six months of the year, we've acquired 45 ground leases for a total investment of over $240 million. The second quarter contribution to this total is 14 ground leases representing investment volume of more than $113 million. Additional notable ground lease acquisitions during the quarter included our first Capital Grill in Whippany, New Jersey, a Walmart Supercenter in Lowe's in Hookset, New Hampshire, our first Cabela's in Albuquerque, New Mexico, as well as three additional Wawa assets, increasing our Wawa portfolio to 25 properties, including their flagship store in downtown Philadelphia. As mentioned, at quarter end, our overall ground lease exposure stood at a company record of 12.7% of annual life-based rents and includes some very unique assets leased to the best retailers in the country. Inclusive of our second quarter acquisition activity, the ground lease portfolio now derives nearly 90% of rents from investment-grade tenants and has a weighted average lease term of 12.5 years. The majority of the portfolio includes rent escalators that result in average annual growth of close to 1%, while the average per square foot rent is only $9.65. This growing portfolio continues to be a source of tremendous risk-adjusted returns when reviewing the lease term, credit, underlying real estate attributes, and of course the free building and improvements if a tenant were ever to vacate. We look forward to continuing to leverage our industry relationships and strong track record of execution to identify potential additions to this expanding and diversified sub-portfolio. As of June 30th, our portfolio's total investment grade exposure was nearly 68%, representing a significant year-over-year increase of approximately 670 basis points. On a two-year stacked basis, our investment grade exposure has improved by more than 1,300 basis points. The continued growth of our ground lease portfolio and the investment grade exposure demonstrates our disciplined focus on building the highest quality retail portfolio in the country. Moving on to our development and partner capital solutions platforms, we continue to uncover compelling opportunities with our retail partners. We had six development and PCS projects either completed or under construction during the first half of the year that represent total capital committed of more than $36 million. Three projects were completed during the second quarter, including a grocery outlet in Port Angeles, Washington, a Gerber collision in Beaufort, Georgia, and a floor and decor in Naples, Florida. I'm pleased to announce we also commenced construction during the quarter on our second development with Gerber Collision in Pugar, Georgia. Gerber will be subject to a new 15-year net lease upon completion, and we anticipate rent will commence in the first quarter of 2022. We continue to work with Gerber Collision on additional opportunities that we anticipate announcing later this year and into next year. Construction continued during the quarter on our first development with 7-Eleven in Saginaw, Michigan. We anticipate delivery will take place in the first quarter of next year, at which time 7-11 will be subject to a new 15-year net lease. We remain focused on leveraging our full capabilities to grow our relationships with these leading omni-channel retailers, and I look forward to providing an update in our continued progress in the coming quarters. While we continue to strengthen our best-in-class retail portfolio through record investment activity, we're also quite active on the disposition front during the quarter. We continued reducing Walgreens exposure as well as franchise restaurants as we sold seven properties for gross proceeds of approximately $28 million with a weighted average cap rate of 6.7%. In total, we disposed of 10 properties through the first six months of the year for gross proceeds of more than $36 million with a weighted average cap rate of approximately 6.7%. Given our disposition activities during the first half of the year, We are raising the bottom end of our disposition guidance to $50 million for the year, while the high end remains at approximately $75 million. Our asset management team has also been proactively and diligently addressing upcoming lease maturities. Their efforts have reduced their remaining 2021 maturity to just three leases, representing 20 basis points of annualized base rents. During the second quarter, we executed new leases, extensions, or options on approximately 209,000 square feet of gross leaseable area. Most notably, we are extremely pleased to have executed a new 15-year net lease with Gardner-White to backfill our only former Loves Furniture store in Canton, Michigan. As you may recall, this was the art van flagship we developed prior to the company's acquisition by T.H. Lee. We delivered the space to Gardner-White in June, and rent commenced in July, allowing us to recover close to 100% of prior rents with just over one month of downtime. I would note that this is the second time we have released this asset at effectively full recovery since the Art Van bankruptcy. Gardner-White is Michigan-based, family-owned and operated, and has been one of the preeminent furniture retailers in the state for more than a century. The company is led by Rachel Tronstein, one of the brightest minds in the retail furniture industry and a former high school classmate of mine. We are extremely pleased to have Rachel and her team as partners in this flagship asset. I'm also pleased to announce the addition of Burlington to Central Michigan Commons in Mount Pleasant, Michigan, one of the only two remaining legacy shopping centers that we chose to retain during the transformation of our portfolio. To date, we have redeveloped the former Kmart space for Hobby Lobby and Alta and added Texas Roadhouse on an outlot via a ground lease. These transactions are emblematic of our ability to unlock embedded value within the portfolio and support our decision to hold on to this very well-located legacy shopping center across from Central Michigan University's main campus. During the first six months of the year, we executed new leases, extensions, or options in approximately 275,000 square feet of gross leaseable area. And as of June 30th, our expanding retail portfolio consisted of 1,262 properties across 46 states, including 134 ground leases, and remains nearly 100% occupied at 99.5%. With that, I'll hand the call over to Simon, and then we can open it up for any questions.