Agree Realty Corporation

Good morning and welcome to the AGRI Realty fourth quarter 2023 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 limit yourself to two questions during this call. This event is being recorded today. I would now like to turn the conference over to Brian Hawthorne, Director of Corporate Finance. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for Agri Realty's fourth 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.

Thank you, Brian. Good morning, and thank you all for joining us today. I'm pleased to report that 2023 was another strong year for our company. Looking back on the past year, we executed several strategic initiatives that positioned our company for continued success. In anticipation of capital markets volatility, we pre-equitized our balance sheet in the fourth quarter of 2022 with $560 million of forward equity raised at a net price of just over $67.50. While at the time, many thought our mindset was conservative, we were confident that while interest rates rose rapidly, cap rates would be slow to exhibit expansion in our large, illiquid, and fragmented space. We were determined to avoid deviating from our core strategy for providing debt financing, expanding into new verticals, or going up the risk curve either via credit or tending concentrations. Instead, we continued to execute our disciplined and time-tested strategy of investing in the country's biggest and best retailers, those that had the balance sheets to invest in price, labor, and fulfillment while creating a unique value proposition for customers. While the performance of our stock has certainly been frustrating, we have not wavered. Management and our tremendous board of directors put their money where their mouths are with almost $12 million of insider purchases during 2023. Net lease is a long-term business. We believe in consistency, reliability, and quality of cash flows will ultimately lead to outperformance. While we can't control macroeconomic volatility, we can execute with a mindset of value creation, not simply short-term earnings accretion. The days of free money and ubiquitous capital are behind us, which demands a strong and strategic change in capital allocation philosophy. We have seen the result of investing into minimus spreads. It drives little to no AFFO per share growth. In this new economic paradigm, our focus is on achieving outsized investment spreads on the best risk-adjusted opportunities, not simply aggregating volume. We will not grow the denominator without driving meaningful AFFO per share growth, nor will we move up the risk curve to create short-term opportunities and growth. We are laser focused on allocating capital in a disciplined manner to drive growth that is sustainable. On last quarter's call, we outlined the do-nothing scenario in which we would drive over 3% AFFO per share growth in 2024 with conservative assumptions and the absence of external growth. With over $235 million of forward equity raised at the end of the year and anticipated free cash flow of approximately $100 million, we have visibility beyond the do-nothing scenario. We can invest approximately $500 million this year on a leverage-neutral basis, excluding any disposition proceeds and without the need for any additional equity capital. Most importantly, we remain nimble and opportunistic, ensuring we are well positioned to capitalize on the opportunities as we uncover them. With over $1 billion of total liquidity, including the outstanding forward equity raised in the fourth quarter, we have ample runway and complete optionality. In addition, we have no material debt maturities until 2028, and pro forma net debt to EBITDA stood at just 4.3 times at year end. Our Fortress balance sheet is paired with a best-in-class portfolio, and our record investment-grade exposure of over 69 percent provides for highly durable cash flows in today's dynamic environment. The strength of our balance sheet and the quality of our portfolio are evidenced by the positive outlook that S&P placed on our BBB credit rating last week. We believe that our credit metrics are emblematic of a higher-rated company, and the positive outlook is another step in gaining recognition for the manner in which we operate our company and manage our balance sheet. Moving on to our standard update, this past quarter we worked through significant market turbulence and ultimately invested nearly $200 million in 70 high-quality retail net lease properties across our three external growth platforms. This included the acquisition of 50 properties for over $187 million. The properties acquired during the fourth quarter leased to leading operators in sectors including home improvement, farm and roll supply, off-price, tire and auto service, as well as convenience stores. As our fourth quarter activity demonstrated, we can continue to push cap rates higher, piercing 7% for the first time since 2019. The acquired properties had a weighted average cap rate of 7.2%, a 30 basis point expansion relative to the third quarter, and 80 basis points higher than the prior year. The weighted average lease term was 10.1 years, and approximately 71% of annualized base rents were derived from investment-grade retailers. We acquired seven ground leases during the quarter, representing approximately $30 million, or 14.8% of total acquisition volume for the quarter. In 2023, we invested more than $1.3 billion in 319 retail net lease properties spanning 41 states. We continue to leverage all three external growth platforms to find compelling risk-adjusted opportunities. For the full year, nearly 74% of the annualized base rents acquired were from investment-grade retailers, while ground leases represented almost 9% of rents acquired. Notably, we increased sale leaseback activity in 2023, partnering with leading operators in the farm and rural supply and convenience store sectors. Sale leasebacks represented one-third of our acquisition activity in 2023, compared to just over 10% in the year prior, further demonstrating our ability to be a full-service, comprehensive real estate solution for our retail partners. Switching to our development and DFP platforms, we had a record year with 37 projects either completed or under construction, representing approximately $150 million of committed capital. We're continuing to see increased activity across both platforms as we work with our retail partners to help them execute their store growth plans and provide struggling merchant developers with the ability to lock in funding for their pipeline. We commenced four new development and DFP projects during the fourth quarter, with total anticipated costs of approximately $13 million. The new projects include a Burlington and a HomeGoods in Yuma, Arizona, and two Starbucks in Illinois. Construction continued during the quarter on 12 projects with anticipated costs totaling approximately $51 million. Lastly, we completed construction on four projects during the quarter with total costs of approximately $16 million. We disposed five properties during 2023 for total gross proceeds of approximately $10 million, including three properties that were sold during the fourth quarter. The weighted average cap rate for dispositions in 2023 was 6.1%. I anticipate additional opportunistic dispositions in 2024, as we will seek to sell assets at attractive cap rates and redeploy that capital on an accretive basis. On the leasing front, we executed new leases, extensions, or options on 425,000 square feet of gross leaseable area during the fourth quarter, including a TJ Maxx in New Lenox, Illinois, and a Walmart Supercenter in Hazard, Kentucky. For the full year of 2023, we executed new leases, extensions, or options on approximately 1.9 million square feet of GLA. We are in a great position for 2024 with only 28 leases or 110 basis points of annualized base rents maturing. At year-end, our best-in-class portfolio spanned 2,135 properties across 49 states, including 224 ground leases representing 11.7% of total annualized base rents. Occupancy ticked up slightly to 99.8%, and again, our investment grade exposure reached a record of over 69%. Lastly, I'd like to welcome Lin Long-Hee to our Board of Directors. Ling Long was Rocket's first software engineer over 25 years ago, and today serves as the chief leadership advisor for Rocket Central, where she is responsible for executive leadership development for the Rocket companies. Prior to that role, she served as chief information officer of Rocket Mortgage, one of the nation's largest mortgage lenders, for 10 years. Ling Long has over 25 years of experience, technology, and leadership, and we're truly excited to add her expertise to our esteemed board of directors. I'll now hand the call over to Peter, and then we can open it up for questions.