Agree Realty Corporation

Good day and welcome to the AGRI Realty second quarter 2023 conference call. All participants today will be in a listen-only mode. Should you need assistance, please signal the 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 at any time, please press star then two. Please limit yourself to two questions during this call. Note, today's event is being recorded. I would now like to turn the conference over to Brian Hawthorne, Director of Corporate Finance. Brian, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for AGRI Realty's second quarter 2023 earnings call. Before turning the call over to Joey and Peter 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. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-K, for a discussion of various risks and uncertainties underlying our 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 website and SEC filings. I'll now turn the call over to Joey.

Thanks, Brian, and thank you all for joining us this morning. This quarter we celebrated several notable milestones for our company. We surpassed the 2000 property mark in 49 states, adding Alaska to our geographic reach. Our tremendous team has now doubled the size of our portfolio in less than three years. Additionally, we have completed and moved into our new state-of-the-art headquarters to support our continued growth. The building includes cutting-end technology, a wellness center, locker rooms, an auditorium, a coffee bar, outdoor spaces, and other collaborative meeting areas. We've incorporated a number of environmentally friendly features and anticipate that the building will achieve LEED certification in the near future. Lastly, we have continued to invest in information technology and made further enhancements to our proprietary Arc database with the rollout of an updated module for development and construction. These investments are paying significant dividends they have increased automation and significantly reduced manual entry. This has created thousands of hours of time savings that have enabled us to strategically reallocate resources to further bolster our sourcing, underwriting, and relationship management capabilities. In addition, these savings and our continued top-line growth are anticipated to bring G&A as a percentage of revenue down at least 50 basis points to 6% or lower this year. Looking ahead, we have ambitious plans for our IT environment, and we look forward to sharing more with you in the coming months. Moving on to our results, I'm very pleased to report that we continued our strong start to the year, deploying significant capital across our three external growth platforms, maintaining near full occupancy, and further solidifying our balance sheet. During the quarter, we invested approximately $324 million in 120 high-quality retail net leach properties, across our three external growth platforms. This includes the acquisition of 92 assets for approximately $305 million. The properties acquired during the second quarter are leased to leading retailers operating in sectors, including off-price retail, farm and roll supply, dollar stores, auto parts, and tire and auto service. Our closed transactions to date and current pipeline include a myriad of different transaction structures, sale leasebacks with leading operators, blend and extend opportunities, new and repeat sellers, as well as distressed developers. We continue to be the first and last call in a highly fragmented and fatigued market. Cap rates continue to move in our favor as demonstrated by our second quarter results. The acquired properties had a weighted average cap rate of 6.8%, a 10 basis point expansion relative to the first quarter, and 60 basis points higher than full year 2022. The weighted average lease term was close to 10 years, and approximately 73% of annualized base rents are derived from investment-grade retailers. We acquired three ground leases during the quarter, representing approximately $26 million, or 8% of total acquisition volume for the quarter. Given our acquisition volume year-to-date and increased visibility into our growing pipeline, we are raising our acquisition guidance from at least $1.2 billion to at least $1.3 billion for the year. I anticipate the third quarter to be our largest volume quarter to date this year as our pipeline has grown significantly. As always, we remain disciplined to our underwriting criteria and avoid moving up the risk curve or deviating from our strategy. Our fortress balance sheet enables us to execute on many exciting opportunities while most of our competition is sidelined. As mentioned on prior calls, there continues to be a lack of competition within our targeted sandbox. and our ability to move quickly and with certainty makes us the buyer of choice in today's market. As seller fatigue continues to settle in, we've been able to execute on extremely high-quality opportunities while pushing cap rates 60 basis points above last year's average. Through the first half of this year, we've invested $638 million across 189 retail net lease properties spanning 36 states and 22 retail sectors. Approximately 607 million of our investment activities originated from our acquisition platform. Close to three-quarters of the annualized base rent acquired in the first six months of the year comes from leading investment-grade retailers. These metrics demonstrate our continued ability to execute in opportunities with best-in-class retailers across multiple different avenues, including one-off acquisitions from both individual and institutional counterparties, sell leasebacks with our retail partners, diversified portfolios, development, and our partner capital solutions program. In light of the increased interest in that program, and to more clearly define it for future prospective developers, we are renaming the program a developer funding platform, or DFP. The increased activity we're seeing across our development and DFP platforms is evidenced by the 31 projects completed or under construction, representing a record capital commitment of approximately $126 million. As of June 30th, we incurred approximately $78 million of costs related to 31 completed or ongoing projects. During the quarter, we commenced two new projects with total anticipated costs of approximately $10 million. Construction continued during the quarter on 20 projects with over $87 million of anticipated total costs. Six projects were completed during the quarter, including a HomeGoods in South Elgin, Illinois, a Sunbelt Rentals in St. Louis, Missouri, and three Gerber collision developments. Moving on to leasing, we executed new leases, extensions, or options on over 280,000 square feet of gross leaseable area during the second quarter, including a Walmart in Lansing, Michigan, and a Hobby Lobby in Mount Dora, Florida. Through the first six months of the year, we executed new leases, extensions, or options on approximately 793,000 square feet of gross leaseable area. We are in excellent position for the remainder of the year with just 10 leases or 30 basis points of annualized base rents maturing. As I mentioned earlier, our best-in-class portfolio now spans more than 2,000 properties across 49 states, including 210 ground leases representing 11.9% of total annualized base rents. Occupancy this quarter remained very strong at 99.7%, and our investment-grade exposure is approaching 68%. With that, I'll hand the call over to Peter, and then we can open it up for questions.