Q4 2019 Earnings Call

Dead dead dead dead.

Good morning, and welcome to the agree Realty fourth-quarter and full-year 2019 conference call. All participants will be in listen-only mode. Should you need assistance place 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 * then 1 on your touchtone phone to withdraw your question, please press star then to each questioner will be limited to two questions only please note. This event is being recorded. I am now like to turn the conference over to Joey agree president and CEO, please go ahead Joey.

Thank you operator. Good morning everyone and thank you for joining us for a gorilla. Please fourth-quarter and full-year 2019 earnings call joining me. This morning is Clay Phelan our Chief Financial Officer wage.

I'd like to digress for a moment and start this morning to call with a thirty thousand foot perspective. I'll get to our most recent quarter and record full-year accomplishment shortly. But first, I think it's a forward to speak to recent activities. We've seen in the net lease space.

Recent retailer bankruptcies and negative headlines has served to a firm or investment thesis which is built upon a risk-averse perspective of the retail Universe over the course of the last several quarters. I have tried to emphasize and refocus investors away from not only per-share earnings growth, but also towards real estate fundamentals Market positioning and retailer balance sheets in an omni-channel retail world the world today is changing dynamically and Retail is going through constant disruption. Today's retail operators need to be Adept flexible and Nimble a strong consumer and low interest rates can prevent prolong the inevitable, but the reality facing today's poorly capitalized retailers has become abundantly clear.

The ability to invest it.

Cameras distribution price and market share are critical leverage balance sheets private-equity sponsorship for the lack of liquidity a nearly insurmountable challenges given these strong headwinds.

Our investment strategy has been focused on the brightest and strongest retailers in this omni-channel world of the retailers have been the headlines recently. We have one prominent location among them are dead and flagship store in Canton Township is the preeminent retail location in the state of Michigan store is located on Ford Road. One of the most highly trafficked corridors in the state site shares a Thursday intersection with Michigan's only IKEA store and is a regional draw for customers across the state as well as Northern Ohio it is this type of discipline and Bottoms Up underwriting which is the Hallmark of our investment strategy. I would remind listeners today that we undertook the development of this tour prior to Art Van and his family selling the company to th Lee which has since embarked on their aggressive growth strategy. We subsequently passed a number of additional opportunities to participate in Art Vans rapid growth the real estate we own in Canton is in our backyard. We know it extremely well and

We are very confident its long-term value and success. I encourage everyone to visit our YouTube channel and see our drone video of the site themselves.

Smart our 25th anniversary is a publicly traded company and another year of record growth for our company during the year. We accomplished several notable Milestones among them. We significantly improved folio quality increasing our investment great exposure by nearly seven hundred basis points. This is on top of a 740 basis point increase in 2018, as of year-end our portfolio consisted of an industry-leading 58% of annualised based rents leads least to these leading retailers.

In 2019 our portfolio seated 800 properties while undertaking further diversification. We added over 190 properties during the year across forty States and 22 age to retail sectors. We reduced our exposure to Sherwin-Williams our top tenant by 110 basis points to 4.9% of annualized basis friends while adding a number of leading retailers to our top 10 roster including Home Depot National Tire and Battery and Sunbelt Rentals. We further solidified our industry-leading balance sheet with several strategic Chef Marcus transactions ending the year with net debt to recurring even a a 4.5 times pre forward settlement and 3.7 * inclusive of the settlement of our outstanding forward off and lastly. We are proud to have surpassed four billion dollars in Enterprise Value.

moving on the 2019 with

I'd like to take a moment.

I think are fantastic and growing team members who amazed me every day with their commitment day in and day out to our dynamically growing company. In addition to these Milestones with also completed our state-of-the-art wage to support our growing team, which now has 46 team members throughout the course of the last year. We have continued to add towns and team members in all areas of our company including Acquisitions wage Asset Management Finance accounting human resource and due diligence are state-of-the-art campus includes the egg Wellness Center locker rooms and Auditorium integrated Technologies, a unique collaborative meeting spaces. We have created a best-in-class work environment to motivate and accommodate our best-in-class team.

During this past year. We in invested a record $720 in 196 high-quality retail net lease properties 186 of these properties were originated through Thursday and platform representing total acquisition volume of more than seven hundred 1 million dollars while we achieved yet another year record acquisition volume. Our rigorous underwriting standards continued focused on best-in-class retailers is again evidenced by a record 76.7% of annualized Base rent acquired being derived from leading investment-grade operators.

We closed out.

2019 with a strong fourth-quarter investing in 41 properties across three external growth platforms while executing several strategic Capital markets transactions that fortified our balance sheet repetition does for growth in the year ahead.

During the fourth quarter. We invested more than $141 billion dollars of which $138 million was sourced through our acquisition platform consistent with our focus on quality throughout the year nearly 7.2% of annualized Base rents acquired during the fourth quarter are derived from retailers that carry an investment-grade credit rating the 39 properties acquired during the fourth quarter or lease 223 tenants operating in a 17 retail sectors including off price convenience store Auto Parts Tire and Auto Service dollar stores and Home Improvement.

The properties required in a weighted average cap rate of 6.9% and had a weighted average lease term of almost eleven years.

We continue to construct a net lease portfolio with secular reading retailers that are well positioned for success in the omni-channel retail world of today as previously mentioned. We Welcome Home Depot National Tire and Battery and Sunbelt Rentals to our top tenants during 2019 concurrently, we eliminated AMC and PetSmart for our top ten list since the fourth quarter of 2018. We will continue to call to meet our faith as we proactively and embrace a dynamic omni-channel retail world.

During this past year.

We uncovered several opportunities to add to our ground lease portfolio. We added 12 properties to this unique portfolio which now stood at 8.5% of annualised based rent as of 12:31 a.m. Normal ground lease assets acquired during the year include our first Costco in Newport News, Virginia and all the in Columbus Georgia a Chick-fil-A in Brockton, Massachusetts and a Wawa in Cocoa. Florida are groundless portfolio derives 89% of rents from investment-grade tenants and it's comprised of leading retailers including Walmart Home Depot Lowe's Wawa sheets off all the AutoZone Chick-fil-A McDonald's and Starbucks adversely only 1% is least two sub investment-grade tenants and the remaining 10% is least two leading unrated retailers.

We continue to identify and execute on high-quality opportunities to add assets to our ground lease portfolio.

Moving on to our development and partner Capital Solutions platforms. We had ten development and PCs projects either completed or under construction during the year that represented total committed capital of more than thirty million dollars eight of these projects were completed during the past year representing total investment volume of approximately 22 million dollars during the fourth quarter. We completed landlords work off all the in Harbor Freight Tools at the company's Redevelopment of the former Kmart in Frankfort, Kentucky. We're continued for Big Lots as of December 31st, and we can anticipate completion and full rack Management in the first quarter of this year.

construction continued during the

Fourth-quarter on our first development with Tractor Supply in Hart Michigan, which is expected to be completed in the first quarter of this year as well.

Subsequent to quarter-end we commence construction on to new projects including our first development for TJ Maxx and Harlingen, Texas immediately adjacent to a high-performing Target rent is anticipated that came to the third quarter of this year. We also come in start fifth development project with Sunbelt Rentals in Converse, Texas with rent anticipated to commence during the second quarter of 2020.

We continue to focus on providing full-service Real Estate Solutions deleting on me channel retailers many of which are on our top tenant roster the relationships we build with these retailers continue to create opportunities across all three external growth platforms as we seek to leverage the complete spectrum of our real estate investment capabilities.

While we strengthened our portfolio through record investment activity. We've also Diversified our portfolio through strategic asset management and disposition efforts. The fourth quarter was particularly active on the disposition front as we sold seven assets for gross proceeds of approximately 32 million dollars notable dispositions during the fourth quarter included in Academy Sports in Belton, Missouri a camper world in Tyler, Texas and an LA Fitness in Maplewood Minnesota, I anticipate additional disposition activities during the first quarter of this year as we continue to take advantage of market conditions off and aggressively moved to divest of assets that no longer fit within our investment philosophy.

For the full year we saw.

16 properties for total gross proceeds of approximately $67 million dollars of note we sold for Walgreens assets during the year bringing our exposure to 3.4% at your job representing a 200 basis-point reduction over the course of the year the high per square foot rents as well as continued disruption in the pharmacy space continues to drive our disposition activities. We anticipate are Walgreens exposure to continue this downward trajectory during the course of twenty-twenty. Our asset management team is also been diligently focused on addressing and incoming lease maturities as a result of their efforts are 20 20 lease maturity is represented just 5% of annualized Base rents at year-end our portfolio remains in the best shape off in our nearly 26-year operating history.

During the fourth quarter. We execute a new leases extensions or options and approximately fifty five thousand square feet of gross leasable space for the full year 2019 who executed a new leases walk-ins are options and approximately 370000 square feet. And as of January 1st of this year, we have exercised our recapture right on the last Kmart in our portfolio located in Grayling, Michigan Kmart has vacated the space and I am very pleased to announce. We have executed a lease with tractor supply to backfill the entire box. Additionally. We have carved out a pad in the parking lot off a future Outlet development. This transaction is a testament to our asset allocation decisions and granular approach to real and real estate analysis.

As you may recall.

Opposed to retain three Kmart stores from our initial public offering that were not sold in the last several years Frankfort Kentucky Mount Pleasant Michigan as well as greatly we have now redeveloping a tenant all three stores with best-in-class retailers. Our decision to retain these assets has been confirmed by the quick turnaround by our asset management team.

As of December 31st are rapidly growing retail portfolio consisted of 821 properties across 46 states are tenants are comprised primarily of industry-leading retailers operation more than 28 retail sectors again with more than 58% of annualised based rents coming from investment-grade tenants, the portfolio remains effectively fully occupied and 99.6% and has a weighted average lease term of ten years. Our pipeline heading into twenty-twenty is robust, and I am very pleased with our progress to date as indicated by our strong initial acquisition Guys 600 to 700 million dollars. We are confident in our expanding teams capabilities to aggregate high-quality transactions while also continuing to review unique opportunities that cross our path. I'd like to take a moment to thank all of our oil stakeholders for their support during another record year for a real teeth with that said I get want to be clear that we remain intensely focused on constructing dead.

And constantly seeking to improve.

The highest quality retail portfolio in the country. I look forward to building Upon Our momentum in the upcoming year ahead. Thank you all for your patience happy to answer any questions after clay discusses our financial results for the fourth quarter and full-year.

Thank you, Joey. Good morning. Everyone. I'll begin by quickly running 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 wage actual results, May differ significantly from the matters discussed in any forward-looking statements. In addition. We discuss non-gaap Financial measures including core funds from operations or core ffo adjusted off operations and net debt-to-ebitda.

Reconciliations of these non-gaap Financial measures to the most directly comparable gaap measures can be found in our earnings release.

Core ffo was $0.81 per share for the fourth quarter and $3.08 per share for the full year 2019 representing 12.3% and 7.9% year-over-year increases respective or additionally a f f o was eighty cents per share for the fourth quarter and $3.02 per share for the full year representing 11. 5% and 6.6% year-over-year increase in wage.

General

Administrative expenses for 2019 total fifteen point six million dollars G&A expense was 8.3% of total revenue or 7.7% excluding the non-cash amortization of above and below Market lease intangibles representing a 50 basis-point year-over-year reduction for 2020. We expect that G&A expenses as a percentage of revenues will contract approximately additional fifty basis points.

Income tax expense for the full year 2019 totaled $538,000 inclusive of the one-time tax credit of $475,000 realizing the first quarter off for 2020. We anticipate total income tax expense to be in the range of 1 to 1.2 million dollars.

Any quarterly and four-year basis core ffo per share in a f f o r were impacted by dilution required under gaap related to our forward Equity offerings treasury stock is to be included within our divorce Share account in the event that prior to settlement our stock trades above the deal price from the offerings. The aggregate dilute of impact related to these offerings was roughly a penny to both core ffo and a f f o r share for the fourth quarter and $0.04 for the 12 months.

We mentioned we had another Act of year of capital markets activities raising or settling more than 740 million dollars of capital to fund our continued growth in position our company for 2020 and Beyond dead in addition to Capital raised. We also generated nearly one hundred million dollars through our disposition activity and free cash flow after dividend during the year.

In December, we entered into an amendment to our revolving credit facility in term loans to increase our credit facility to six hundred million dollars. The credit facility is comprised of a $500 unsecured revolving credit facility and 65 and thirty five million dollar unsecured term loans. The credit facility includes an accordion option that allows us to request additional lender commitments up to a total of 1.16 dollars. The revolving facility will mature in January 2024 with options to extend the maturity date to January 2025.

In December, we settled the entirety of the 3.2 million share forward Equity offering that was originally commenced in April 2019 receiving net proceeds of approximately $196.

during the

Quarter, we also entered into forward sale agreements in connection with our ATM program to sell an additional 2 million shares of common stock and an average gross price of $73.34 per share.

Upon settlement. The ATM forwards are anticipated to raise net proceeds of approximately $145 million dollars after deducting fees expenses and other adjustments to date. We have not receive any proceeds from the ATM forward offerings.

At December 31st. We had $89 outstanding on our unsecured revolving credit facility reflecting additional capacity of $411.

Our balance sheet remains an excellent position to continue to fuel our anticipated growth at Joey mentioned as of December 31st. Our net debt to recurring ebitda was approximately 4.5 x pro forma for the settlement of our Ford Equity. Our net debt to recurring even is approximately 3.7 times. Total debt to Enterprise Value is approximately 22% while fixed charge coverage ratio, which includes principal amortization stood at a company record four point three times.

the company paid

Dividend of 58 and 1/2 cents per share on January 3rd to stockholders of record on December 20th, 2019 representing a 5.4% year-over-year increase. This was the company's one hundred and third consecutive cash dividend since our IPO in Nineteen Ninety Four.

for the full year 2019 the company declared dividends of $2.28 per share a 5.8% year-over-year increase

our payout ratios for the fourth quarter were conservative 72% and 73% of core ffo and ffo per share for the full year 2019 on a per-share basis without ratios were 74% of core ffo and seventy 6% of the ffo respectively these payout ratios continue to reflect a growing and very well covered dividend with that. I'd like to turn the call back to Joey to conclude. I'm very pleased with our record performance during this past year. We're an excellent position for twenty twenty and we are focused on continuing to execute long time operator. We will open it up for questions.

We will now begin.

The question and answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys off to withdraw your question, please press star then to each question or will be limited to two questions only at this time. We will pause momentarily to assemble our roster.

Our first question comes from Christy McElroy with City, please go ahead. Hey, good morning guys. Thanks. Just Joey in in the context of your comments on disposition. You talked about taking advantage of market conditions. And you know, we've we've talked about this in the past. It also came up as a topic on one of your peers calls yesterday in regard to the narrower spread between wage investment-grade and non-investment grade assets are being valued and trading today what could cause that to reverse?

Good morning, Chris. I'll be quite honest we had to really seen that spread necessarily contract in the world in which we operate on a scene. I tell you minimal cap rate compression and high-quality assets, you know are the retailers that we are are typically you're doing business with or either investment-grade or Shadow investment-grade. If you were to run them through a Moody's risk calculation, so I tell you where we're not really playing in that typical high yield pool are divestments in in our disposition activity really wage really is falls into a couple of buckets wanted 1031 buyers typically franchise restaurants. And as well as the Walgreens, we sold during the fourth quarter or so, we sold three Taco Bell franchise restaurants Thursday the 4th quarter as well as our Walgreens in Ypsilanti, Michigan and then assets such as the academy sports or the Camping World, which we discuss where we just want to pair back exposure wage.

With the real estate and or the operator.

Okay.

And then just clay in terms of the mechanics of settlement of the forwards. How should we think about the settlement of the forward ATM versus the prior settlements of of the forward Equity should we wear you did the priors more sort of all at once should we think about the forward ATM more rapidly through the year or would you expect that to be sort of all over Iraq as well?

Good morning, Christy no change in terms of thinking about thinking through settlement settlement ultimately be dependent on the timing and uses of capital and we have until December to settle down and no different than our previous forwards we can settle in tranches or in whole.

Okay, but just in terms of how you expect to do that through this year. How should we how should we be thinking about that from a modeling perspective? I think it will be it will be really subject in dependent upon our pipeline pipeline. Material is materializing is and as we managed the balance sheet, so there's a number of factors there. I think the, you know, one of the most interesting things about that ATM forward or just any forward it gives us total discretion to settle in in one chunk as we did at the end of 2019 or settle it randomly or match fund investment activities, so I wouldn't say there's any mo for us. I think you'll really be dependent upon market conditions in our pipeline. Okay. Thank you. Thanks Christy.

our next

Question comes from keeping him with SunTrust, please. Go ahead. Thanks. Good morning. So, can you talk about your pipeline in 2020? I know every wage claims big but that specific specific basket of deals that make sense for you the type of quality that you're looking at the pricing that makes sense. How does that kind of specific pipeline look like for young versus the past couple of years. I I tell you and it's indicated by our initial guidance of six to seven hundred million dollars and acquisition our pipeline entering the year was robust wage. It is very high quality. It's comprised of typical one-off aggregation, you know last year. Our average price point was four point two million dollars, four per transaction over 140 discreet transactions there and also has some other unique opportunities for us to invest in the highest quality retailers in the world. And so we're we're very exposed.

Read about our pipeline for q1 and building into Q2. We have visibility into the beginning of

You to at this point, we always talked about having 60 to 70 days of visibility, but I would tell you it is very high quality and emblematic of what we've been executing for the last several quarters any bigger portfolio page you're looking at or is it still calm or one-off? I wouldn't call it necessarily bigger portfolio. Obviously, that's that that's relative not bigger portfolio deals. We we we will welcome and we do anticipate executing on some I would call it smaller to medium-sized portfolios of single credit industry leaders. Okay, and just last question you have about five leads to Tractor Supply and Sunbelt Rentals just being honest. I don't, you know, really know those companies that well that part of his maybe cuz I live in Manhattan, but I was wondering if you can talk a little more about those tennis and why you feel very comfortable owning more of those

Sure know and I I appreciate you're talking about living in Manhattan. Well, first of all, we have a really a fantastic relationship with Tractor Supply Tractor Supply is dead be leading farm and Rural retail or in this country. They've least as a publicly traded company. So everybody can see their performance they're unrated so they don't fall into our investment-grade bucket, but there's sub two times. I believe least adjusted leverage a very conservative company been very successful in their Core Business. We spend a lot of time with their home team as well as their executive team really a dominant Market position interestingly Tractor Supply has also launched very successfully in e-commerce and a both his platform. And so it's a it's it's a very unique company very conservative company and we think a real winner in an omni-channel World Sunbelt Rentals. There are two large equipment rental companies in New Jersey.

Country there's a a few that are smaller as well that consists of Sunbelt Rentals.

As as well as United Rentals Sunbelt Rentals is owned by the hashtag group and it's the only investment-grade operator in the country. If you look at the equipment ownership vs. Oil in this country and that goes from small equipment to larger equipment. It is very very low relative to Western Europe. And so there's a big opportunity in this country for a rental rather than ownership Sunbelt Rentals owned by the ass chat group again, investment-grade is taking advantage of a lot of that fragmentation and that lack of rental capacity in this country with a service all different types of users of renter's I should say and that goes from gas and oil to General equipment to power and Pomp. And so again a great partner of ours obviously starting our fifth project forum. We've acquired a number of them a great balance sheet and we think a business model that really makes sense in in a in a 20 20 20 21st century omni-channel. Will he dead?

All right. Thanks.

Thank you.

With Raymond James, please. Go ahead. Thanks. Good morning, Joey. Good morning Clay morning, How are you? First question from me is just going back to your prepared remarks Art Van. Can you just elaborate on what caution flags were raised that leg you to not do any additional deals with them you obviously mentioned private Equity, but could you just maybe expand on that a little bit more and then along those lines are there any other notable recent examples where you can provide where you've shifted course, whether it be because of private Equity or other changes that just impacted your original pieces as it relates to a consult. So the first part I I appreciate the question art van is a copy that's based in our backyard. I knew Art Van personally the family office is about three miles straight down would walk from our office here in Bloomfield Hills. I'll tell you we bought this property directly from our van. It was really a it was really the preeminent site in Michigan had to home.

with the Ikea and and proceeded with the reverse build-to-suit transaction with art van and really a unique

Our next question comes from calling wings.

No opportunity again. I really encourage people to look at our website and see this piece of real estate for themselves. And the Drone video Ford Road is a dominant retail Corridor. We are literally head-to-head with the only choice servicing, Michigan Northern Ohio in Northern Indiana prior to the transaction with th Lee Art Van had it still does as a dominant Market position in in terms of birth and home accessories in southeast, Michigan, you know, once th Lee entered the equation, we had a second transaction under contract with Art Van we actually sold that purchase agreement and did not proceed and decided to keep only the flagship store in Canton and proceed with that transaction. So a combination of the real estate office the residuals anticipated and printing out proven store performance of that location and obviously being heads up in the traffic signal with Ikea was very unique and we were very comfortable with that with with that dog.

The action, you know in terms of private Equity ownership in real estate. I feel like I've been pounding on this for several years.

Now we just see a a total misalignment of investment Horizons. And and today as I as I mentioned in our prepared remarks the ability to invest in price to withstand not truly bottom line margin compression to have a balance sheet that can invest in e-commerce distribution. An omni-channel world is a critical component of almost every single retail sector off. This is a fast dynamically changing world. And so we will continue to avoid private Equity sponsorship in The Limited cases where we have private Equity ownership. We will continue to divest of those assets including the franchise restaurants pays and will continue to invest in the strongest and best balance sheets in in in the top retailers of the world.

Okay, and then just wanted to switch gears and you previously discussed that on the development front you'd become increasingly selective with regards to committing humor at the one-off deals and really avoiding situations where there wasn't really a chance to enhance kind of a long-term relationship sounds like you've added a couple of deals to the backlog since the end of last year, but just curious on this front is your relationships continue to grow your platform expands. Why hasn't the mix of PCS and development really kind of kept pace with acquisition activity again argue little bit of a differentiator for you vs. So just you lie to stop on that front. Yeah first we had we had significantly scaled. You may notice my prepared remarks. We have not scaled the human capital in regard to development activity. However, we scaled the remainder effectively of every every Department in this in this country in this company, excuse me, and at the same time with return on coughing

Where they are today for merchants developers who are performing turnkeys generally for retailers. We're not going to compete or do a turnkey for a an industry-leading retail or with with a 6% initial on Thursday.

The cost that doesn't make sense for it. I'm very happy to announce the T.J.Maxx in Harlingen subsequent to quarter-end. That's our first ground up for TJ Maxx 2 V project. It were Sunbelt Rentals in Converse, Texas. I'll tell you since we've been together last we have a number of other projects that we anticipate that have come to fruition. We're really focused. It will announce it in the next in the next probably in the next quarter and get a few of them in the ground like shortly here post winter. I'm I'm really pleased with our efforts and our activities reviewing vacant boxes and then working with are really our sandbox of the backfield we but we have a lot of in this country twenty four square foot per capita. I think there's a lot of perhaps related to that. I personally think there's a lot of opportunity for retailers to walk take over vacant boxes and we've been very focused on former drug stores on the former Pier One sites and former Shopko sites, and so a number of those opportunities are material.

Rising in our pipeline today and we're working with our top retailers to look at it and there should be some interesting opportunities as in there as well.

You calling?

Our next question comes from Crossett with berenberg, please go ahead. Hey, good morning guys. Appreciate the caller on our van. What else is on the watch life right now? I think there was an article that bedbathandbeyond is closing 41 stores. I think you have a couple of those and maybe just give us an update there and then just come back on furniture in general is is this an area that ultimately goes online or how do you feel about furniture?

Yeah, great question. I appreciate you joining us nato in in terms of a couple of Bed Bath & Beyond's we have those were real estate plays. I'll tell you where the Bed Bath & Beyond in Texas paying seven dollars and fifty cents a foot off in the dominant Center there immediately adjacent to a TJ Maxx and HomeGoods. We're excited. We have one in Texas. That's a fantastic piece of real estate. We were frankly never big fans of Bed Bath & Beyond in their merchandise stacked to the ceiling and lack of experience the stores. So those are there were very comfortable with those couple of stores in the real estate underneath them and potentially even have some upside in terms of furniture off and back to an end. ER we had in in New York and then it was repeated in Chicago about twelve to eighteen months ago and and we really used the opportunity to speak to Melissa both in our office and on the road about what their consumer and there are consumer preferences and buying preferences are we talked specifically about the furniture space?

Thanks, Joey.

I asked a group of of Millennials call it an average age of twenty-eight to Thirty where they purchase Furniture how they purchase furniture and I got

Basically got cross-eyed looks and they looked at me and said purchase Furniture. If anything, we buy it online or it's in the lobby of our building downstairs. Now, that's obviously and we just take it for free now. That's obviously I'm more of an urban perspective what I'll tell you is that as long as we fear we'll lose sixteen to Seventeen dollars online per shipment as long as you are able to return mattresses that you never see and they show up in a house and can just keep them for 60 or 90 days and then send it back some cases even longer and as long as the capital markets are willing to support and we don't see any end in sight start up businesses. They don't care about bottom line. But only Top Line I will tell you the home accessory in Furniture space reminds me very similarly to the old days when the plasma TVs more from five thousand dollars to a few hundred dollars Furniture in this country for the vast majority outside of high-end furniture is becoming disposable today when you sell your house you don't bring your dog.

With you they they set on the wall and the successive purchaser keeps them. I think we're heading down the road. We're Furniture doesn't

Had moved for the vast majority of residences when they sell their house today similar to the LCD and the LED TVs we see today on the wall. And so there's significant disruption. There is priced disruption. There is not any channel disruption and American Consumer preferences today are changing very quickly. And so I think it's a space that we will continue to avoid absent a unique circumstance and it's a birthday. We've been very very selective. There's a couple of winters in this space. I'll mention Lazyboy a fellow Michigan company Lazy Boy is a winner in the space that has brick-and-mortar and has a frankly a cult-like following among the Millennials, which is very unique. But at the same time we're going to be very very selective in any in any investment activities there.

Okay, that's helpful. And then maybe just one on G&A outlook for 2020 looks like even able to keep it flat roughly for the last three quarters. Can you just remind us the size of the sales force? Are you anticipating any new hires in the near-term? Yeah. So we we we we we we benefited from approximately as we mentioned fifty basis points in terms of Gina's a percentage of revenues a year over year. We anticipate benefitting approximately, uh, another fifty basis points this year. We are actively with our new building open next door. We are actively growing and scaling free aspect of this organization. You know, first quarter is the largest in terms of GNA generally just from from from aberrations historically for us not run right activities, which is on a quarterly activities, but this is a company that's growing over 30% top-line. We're going to continue to invest in our people both individually and in their professional development as well as grow this month.

I'm pretty dynamically, you know, we went.

From about thirty three people. I believe at the end of last year 3233 to call it forty six. And so we're growing we grew headcount by about 30% at the same time or gaining efficiencies in through all of the system work we've done the process would be instituted and really the rapid growth of the portfolio.

Okay. Thanks guys. Thank you.

Our next question comes from Rob Stevenson with Jani, please. Go ahead. Good morning guys, Joanne. I think you mentioned completing some dispositions in first-quarter here at this point is the office 5 to $75 billion of guidance likely to be front end loaded.

Good question. I think that it is possible that there will be some front-end loading for that disposition activity will continue to dispose we have another Walgreens that is under contract anticipate them being at or below 3% by 331. We have some additional franchise restaurants that are under contract that we will look opportunistically divest into the 10:31 Mark and then we are working on one or two other transactions that are similar to The Academy Sports Camping World dispositions where we just don't feel that the residuals are the long-term interest in our end is there so damn cute one could be fairly active on dispositions. Frankly. I I hope it is that's in purchasers hands today. We're under contract with a number of assets going through diligence, but you will continue to see us be aggressive and possibly raise the bottom end of of that guidance pretty shortly.

Okay, and then they came up.

In Michigan that you're doing with Tractor Supply. Is this a scrape and rebuild or just a box rehab? And then how much is that plus the new TJ Maxx and the Sunbelt Rental developments expected to cost you guys. Yeah. So that's the it's it's a it's a small format free-standing Kmart. Again, the last Kmart in our portfolio. We had waited patiently to exercise that choice capture right for upwards of two years with Tractor Supply waiting patiently with us and we thank them for that. They are going to read we're retaining that whole entire box will not be a scrape and rebuild wage. Um, and then the Sunbelt Rentals as well as TJ Maxx and Harlingen, Texas, I would tell you it's about aggregate cost of approximately five million dollars.

Okay. Thanks guys.

Thank you.

Again, if you'd like to ask a question, please press * then 1 our next question comes from John with Lautenberg, please go ahead Thursday morning.

John so, you know, it sounds like you're pretty aggressively and you have been for awhile selling down the kind of Walgreens exposure. I mean is Walgreens kind of in the same bucket now as long as some of your franchise restaurant tenants where it's the ultimate goal is probably to get down to zero or close to zero.

Well, I know I don't think it's to get it 2-0. I tell you we've rationalize the exposure. If you you hearken back several years, they were 40% of our portfolio. You know, we have some significant gains. I think the challenge with some of the Suburban Walgreens and pharmacies in this country is a very high per square foot rent and the 13 to 14,000 square-foot rectangle plus the drive-through that sits on top. So we have you know, you have great pieces of real estate hard Corners great access visibility parking, but I tell you the tenant pool today and how retailers have morphed wage. You are either backfilling those boxes generally with dollar stores that are paying anywhere between twenty-five and thirty-five percent of the Walgreens rent or you are forced to demise those 13 to 14,000 square-foot boxes in a small strip centers, which we have no interest in doing and so we think on a risk-adjusted return basis for us to divest of Walgreens typically in the mid 6 a.m.

lower or

Mid 6 is for approximately the ten eleven year Walgreens into the 10:31 Market continues to make significant sense for us. The second half of that of that is I I continued to see each option in the pharmacy space and anticipate more disruption the front end of the stores continued to really suffer from week sales and the middle of the stores frankly remind me of the middle of the grocery stores and Thursdays environment. And I think we're going to have to see the major drug store chains in this country who Vermin rely upon Baby Boomers. We're going to have to see some significant re merchandising efforts to drive traffic into those stores with higher-margin items. And so will continue for all of those above reasons continue to look to dispose of the stores that we do not like we have stores in our portfolio that are off frankly fantastic pieces of real estate our flagship store in Ann Arbor Michigan on the campus of the University of Michigan. We will not sell unless somebody came with an offer we couldn't refuse it's the best piece of real estate in, New Jersey.

Harbor so, you know, there are a

A number of stores that are either super high performing. We really like the real estate and we want to hold it absent a compelling offer. But in terms of suburban pharmacies, we are very critical of their future.

Okay, and then and bigger picture and there's a perception it's kind of played out historically that larger footprint retail boxes are or are less fungible order to kind of Roulette in a in a a tenant credit situation. Um, how do you kind of mitigate some of that risk? I know obviously a lot of your larger box assets are on our ground lease a that's but is there anything else you kind of do to kind of mitigate the risk associated with that? Um with these kind of less granular type assets you have on the portfolio.

Yeah, that's another good question the ground lease portfolio eight and a half percent at 12:31. We anticipate that frankly picking up at 3:31. We have a number of assets currently under contract to purchase or have acquired subsequent to quarter-end. I think it was a few mitigants first credit. So number one our our big box exposure typically on a ground lease. Typically very low bases with the leading operations in this country. That's Walmart Home Depot and Lowe's generally. So we we have no interest in Big Box exposure with private equity-backed retailers privately-held retailers generally or retail jobs that are on the sub investment-grade spectrum that that's very challenging second. When we look at any big box transaction, you can assume that we are in conversations with the retailer of the productivity of that store of that unit and isolated basis. And then also how it Compares relative to other stores in the district. We also get on the ground and our diligence team does a fantastic job

of understanding the local

Markets in in conjunction with our local partners and then third we're looking at the overall parcel. Not only the Box itself. We're looking at the overall parcel generally at the amount of money of Frontage. It has on a road if there are any current Outlets that are blocking our ability to one day Redevelopment, but I'll give you an example. We looked at a large box recently. It had six hundred feet of six inch and a major retail Corridor. It was the least of the the largest retailer in the world and we look at it paying a few dollars a square foot and we say if they ever left this store. It's a highly prestigious store. If they ever left his store will have six hundred feet of Frontage which results in four to five Outlets paying $80,000 a year and we will quickly recapture the just from the outlets alone, even the big box of the future had to be if the tenant never left self-storage or or some other use

That's it for me.

Thank you.

Our next question comes from Linda's I with Jeffries, please go ahead.

Yes, Joey, you seem pretty emphatic about the eventual demise of lower-cost Furniture and Mattress stores. Are there other categories where you're concerned like this?

Trying to think I I I think overall this country. We are still in the early Innings of of retail disruption. I think if you look across if you these are binary outcomes, if you go across retail sectors in this country, it's very difficult to find a sector outside of consumer electronics that has gone through the disruption that we anticipate and and we'll go through additional store closures and retailers disappearing consumer electronics Best Buys The Last Man Standing because huge rally did a fantastic job and the turnaround they had an investment-grade balance sheet Circuit City, hhgregg CompUSA, and now we see a a couple of the smaller Regional spelling. It's effectively The Last Man Standing. I think it's just that you look across even sectors such as office supplies. We still have Max Depot and Staples you look across General Merchants. We still have Sears stores in this country and so yep.

Is going to be we believe a lot of closures in this country. I don't think there's necessarily binary outcomes. But our goal is to pick the winner with the strongest balance sheet the most competent management team in the best underlying. So the furniture space was quite obvious to us what was going on there there.

For other sectors that were not overly interested office supplies again that movie theater space. I tell you we are not overly interested in the movie theater space a sporting goods. I'm not overly interested in Easy easily commoditized hard or soft goods that can be purchased on the internet without experience. And so there's a number of sectors that we we aren't interested in pet supplies being another one month that we're kind of we I won't say we red line, but absolutely Unique Piece of real estate or compelling opportunity. We won't touch

Thanks for that.

Our next question comes from Chris Lucas with Capital One Securities, please go ahead. Good morning guys. I had a couple of questions this what really kind of relative kapre questions and and Joey so I guess the question for me on the on the ground leases is could you give us a sense as to what the sort of cap rate Gap is between the ground lease, you're buying and a fee ownership position that you would acquire on a similar asset tenant. Good morning, Chris. I'll tell you first off many of the tenants will be acquired randomly says they don't even have TurnKey. So I'll tell you we bought a Chick-fil-A ground least during the quarter. We had previous quarter. We bought a Sheetz ground leaves, obviously a weeding guard format gas and convenience store last quarter. They don't have TurnKey deals out there. And so but I would tell you ground leases typically trade a hundred and fifty to two hundred basis points inside turkey leases for white kind assets that that's kind of that's kind of the rule of thumb but there are a number of retailers out there that simply don't wage.

Turkey leases. Okay, and then I guess if I look at your top hold your top investments in terms of tenant credit concentration any thoughts about wage cap Right movement has been the greatest either compression or expansion among those over like the last

a couple of years

an attendant specific basis. Yeah.

Yeah, look all in all I would tell you cap rates over the last couple of years were at historic lows given the interest rate environment have effectively been we've seen some marginal compression in the smaller price point on a super high quality retailers, you know, obviously that flows the 10:31 Market it flows into the franchise restaurant and Market which we don't consider super high-quality. It's off when I think in to the to the O'Reilly's and the auto zones of the world, you know, the one that two million dollar one off transactions that carry super, you know, fantastic balance sheets high school has been great credit ratings and then lower price point. I'll tell you that said again operating in the in the fragmented space that we are we acquired a 13. Sorry O Rileys in for 11, we were able to acquire those O'Reilly's because of our relationship both with the tenant and repeat developers. They range from having 8 years on the lease the full twenty year leases.

um, and so even though you see that

Compression in the market. I'm very confident and I'm proud of our team being able to dig up asymmetrical opportunities out there.

Great. Thank you. That's all I have this morning.

Good. Thank you Chris.

This concludes our question-and-answer session. I would like to turn the conference back over to Joey for any closing remarks.

Well, thank you everybody for joining us this morning. We look forward to catching up during the upcoming conference season and good luck with the rest of earnings. Appreciate your time.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.