Q2 2021 Agree Realty Corp Earnings Call

July 27, 2021

[music].

And welcome to the equal Realty second.

The 'twenty 'twenty 1 conference call.

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Please go ahead Peter.

Thank you.

And on <unk>, everyone and thank you for joining us for Asia Realty second quarter 2021 earnings call.

Discussing our results on today's call will be Joey agree President and Chief Executive Officer, and Simon Leopold Chief Financial Officer before turning the call over to Joey Let me first of all 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 and 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.

Good morning that make or mitigated the 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 a discussion of various risks and uncertainties underlying.

Your line of our forward looking statements.

In addition, we discuss non-GAAP financial measures, including core funds from operations or <unk>.

<unk> adjusted funds from operations or <unk> and net debt to recurring EBITDA reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found.

And 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 of investment volume of more than $750 million. During the first 6 months of 2021.

Robust and high quality investment activity further.

Further increased our investment grade of concentration and raised our ground lease exposure to a record of nearly 13% on.

Our investment activities during the quarter were supported by more than $1 billion of strategic capital markets transactions debt fortified our best in class balance sheet and the positioned our company for continued growth and the quarters ahead.

During the second quarter, we invested approximately $366 million and 59 high quality retail net lease properties across our 3 external growth platforms 54 of these properties were originated through our acquisition platform representing acquisition volume of more than $345 million the.

The 50.

Properties acquired during the second quarter or at least the 32 tenants operating and <unk> distinct retail sectors, including best in class of the operators and the off price home improvement Autoparts General merchandize dollar store convenience store craft and novelties grocery and tire and auto service sectors.

And the acquired.

For property set of weighted average cap rate of 6.2% and a weighted average lease term of 11.8 years.

Through the first 6 months of this year, we've invested a record $756 million into 146 retail net lease properties spanning 35 states and 24 retail sectors.

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$732 million of our investment activity originated from our acquisition platform.

75% of the annualized base rents acquired and the first half of the year crumbs from leading investment grade retailers, while almost 1 third of annualized base rent is derived from ground leased assets.

These metrics 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 the new small format target on the University of Georgia campus and Athens, We're extremely pleased to expand our relationship with target as well as add another unique unique street retail asset to our growing portfolio.

We continued to invest and market.

<unk> dominant grocers during the quarter. Most significant was a 5 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.

The progress of course, the leader in the grocery space there are fortified balance sheet strategic omni channel initiatives and significant investment and ecommerce fulfillment are emblematic of our investment strategy.

Additionally, we closed on the purchase of of shop, right, which is owned and operated.

Tenants wake for and and New Rochelle, and New York share.

<unk> operated the tremendous operator, and the real estate located at the strategic interchange of I 95 as of yet. Another example of the diligent and bottoms up of analysis that we conduct on every asset we acquire.

Finally, as you May recall, we acquired our first wegmans ground lease and travel and Hill North Carolina.

And on during the fourth quarter of 2020.

We built upon that momentum this quarter with the acquisition of our second property ground leased the wegmans and the store located and precipitous and New Jersey is over 100000 square feet and was constructed at wegmans expense.

The ground lease is over 21 years of term remaining and is a welcome addition to.

Our growing ground lease portfolio.

Through the first 6 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 of 14 ground leases representing investment volume of more than $113 million.

Additional notable ground lease acquisition.

And during the quarter included our first capital grille, and Whippany, New Jersey of Walmart Supercenter, and Lowe's and Hook set New Hampshire, our first Cabela's and Albuquerque, New Mexico as well as 3 additional wawa assets, increasing our wawa portfolio to 25 properties, including their flagship store in downtown Philadelphia.

As mentioned at quarter and our overall ground lease exposure stood at a company record of 12, 7% of annualized base rents and includes the very unique assets leased to the best retailers and the country.

Inclusive of our second quarter acquisition activity of the ground lease portfolio now the rise nearly 90% of rents from investment grade tenants.

Tenants and has a weighted average lease term of 12.5 years. The majority of the portfolio includes rent escalators that result, and the average annual growth of close to 1%, while the average per square foot rent as the only $9.65.

This growing portfolio continues to be a source of tremendous risk adjusted returns when.

And reviewing the lease term credit underlying real estate attributes and of course of the free building and improvements of a tenant rubber to vacate and.

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 30.

Our portfolio of total investment grade exposure was nearly 68% representing a significant year over year increase of approximately 670 basis points on a 2 year stacked basis, our investment grade exposure of has improved by more than 3500 basis points. The.

The continued growth of our ground lease portfolio and the investment.

And great exposure demonstrates our disciplined focus on building of the highest quality retail portfolio and the country.

Moving on to our development and partner capital solutions platforms, we continue to uncover of compelling opportunities with our retail partners.

We had 6 development and Pcs projects, either completed or under construction during the first half of the year.

And that represent total capital committed of more than $36 million.

And 3 projects were completed during the second quarter, including of grocery outlet and Port Angeles, Washington of Gerber collision of Buford, Georgia and of floor and decor in Naples, Florida.

Pleased to announce we also commenced construction during the quarter on our second development with Gerber collision.

Improve the Georgia <unk>.

<unk> will be subject to a new 15 year net lease upon completion, and we anticipate rent will commence and 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 develop.

<unk> was 711 and Saginaw, Michigan, we anticipate delivery will take place and the first quarter of next year at which time 7 of 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 omnichannel retailers and I look forward to providing an update on our continued progress and the company.

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 and as well as franchise restaurants, as we sold 7 properties for gross proceeds of approximately $28 million with the weighted average cap.

<unk> rate of 6.7%.

In total we disposed of 10 properties for the through the first 6 months of the year for gross proceeds of more than $36 million with the 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.

Physician guidance of $50 million per the year.

While the high and remains at approximately $75 million.

Our asset management team has also been proactively and diligently addressing upcoming lease maturities their efforts to reduce the remaining 2021 maturities of just 3 leases representing 20 basis points of annualized base rents.

During the second quarter, we executed new leases extensions or options on approximately 209000 square feet of gross leasable 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 and Canton, Michigan as you may recall.

All of this was the art van flagship we developed prior to the Companys acquisition by Th Lee.

We delivered the space the gardener white in June and rent commenced in July, allowing us to recover of close to 100% of prior rents with just over 1 month of downtime.

This is the second time, we have released this asset and effectively full recovery since.

Since the art van bankruptcy Gardner White as Michigan based family owned and operated and has been on 1 of the preeminent and furniture retailers and the state from more than a century and.

And the company is led by Rachel <unk>, 1 of the brightest minds and the retail furniture industry and of former high school classmate of mine. We are extremely pleased to have Rachel and her team as partners.

This flagship asset.

I'm also pleased to announce the addition of Burlington to Central Michigan, Commons and Mount Pleasant, Michigan, 1 of the only 2 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.

<unk> and out of that 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 6 months of the year, we executed new leases extensions or options.

Options and approximately $2.175000 square feet of gross leasable area and as of June 30 of our expanding retail portfolio consisted of 1262 properties across 46 states, including 134 ground leases and remains nearly.

Nearly 100% occupied and 99.5.

And 5% with that I'll hand, the call over to Simon and then we can open it up for any questions.

Joey.

Starting with the earnings core funds from operations for the second quarter was <unk> 89 per share representing a record 17, 3% year over year increase adjusted funds from operations per share for the quarter was 88.

The increase of 15, 9% year over year.

As a reminder, treasury stock is included within our diluted share count prior to settlement, if and when ADC stock trades above the deal price of our outstanding forward equity offerings and.

The aggregate dilutive impact related to these offerings was less than half of penny in the second quarter.

Perfect set.

The current analyst estimates for full year <unk> per share range from $3.40 per share to $3.53 per share, which implies year over year growth of 6% to 10% is.

As mentioned on last quarter's call. We continue to view this level of growth is achievable and expect the end the year toward the higher end of this range given current visibility.

Our investment pipeline and the broader operating environment.

Building upon our 6% of <unk> per share growth and 2020 of this implies 2 year stacked growth and the mid teens.

General and administrative expenses totaled $6.2 million and the second quarter.

G&A expense was 7.6% of total revenue or 7.1%.

And towards the noncash amortization of above and below market lease intangibles.

And as we continue to invest and people and systems to facilitate our growing business. We anticipate the G&A as a percentage of total revenue will be and the lower 7% area for full year 2021, excluding the impact of lease intangible amortization on total revenues.

And as.

And as mentioned last quarter G&A expense for our acquisitions team fluctuate based on acquisition volume for the year and our current anticipation for G&A expense reflects acquisition volume within our new guidance range of 1.2 to $1.4 billion.

Total income tax expense for the second quarter was approximately $485000 for 2021.

1 we continue to anticipate total income tax expense to be approximately $2.5 million.

Moving on to our capital markets activities for the quarter and.

And may we completed of $650 million dual tranche tranche public bond offering comprised of $350 million of 2% senior unsecured notes due in 2028.

And $300 million of 2.6% senior unsecured notes due in 2033 and.

In connection with the offering we terminated related swap agreements of $300 million that hedged. The 2033 notes receiving approximately $17 million upon termination and considering the effect of the terminated swap agreements of the blended all in rates.

Rates for the 2028 notes and 2033 notes or to 1.1% and 2.3% respectively.

We used a portion of the net proceeds from the offering to repay all of $240 million of our unsecured term loans.

The termination costs related to the early pay down of our unsecured term loans totaled.

Approximately $15 million.

Given the onetime nature of the termination costs of these amounts have been added back to our core <unk> and <unk> measures.

The offering and combination with the prepayment of of all of our unsecured term loans extended our weighted average debt maturities of approximately 9 years and reduced our effective weighted average interest rate.

2 of approximately 3.2%.

In June we also completed a follow on public offering of $4.6 million shares of common stock. Upon closing we received net proceeds of approximately $327 million.

During the second quarter, we entered into forward sale agreements in connection with our ATM program to sell on an aggregate of roughly.

And <unk> 2 million shares of common stock for anticipated and net proceeds of approximately $81 million.

And May we settled roughly 164000 shares and received net proceeds of approximately $10 million.

At quarter, and we had approximately $3.9 million shares remaining to be settled on our existing forward sale agreements.

Which are anticipated to raise net proceeds of approximately $259 million upon settlement.

Inclusive of the anticipated net proceeds from our outstanding forward offerings cash on hand, and availability under our credit facility, we had nearly $950 million and available liquidity at quarter end.

The balance sheet continues.

Continues to be a huge strength for us.

As of June 30, our pro forma net debt to recurring EBITDA was approximately 3.6 times, including our outstanding forward equity offerings.

Excluding the impact of unsettled forward equity our net debt to recurring EBITDA was approximately 4.5 times.

Total debt to enterprise value of quarter and was approximately 20.

The 5% while fixed charge coverage remained at a record 5 times.

During the second quarter, we declared monthly cash dividends of 21, 7 <unk> per share for April may and June.

The monthly dividend reflected on annualized dividend amount of 2.6 to $2.60 per share representing an 8.5%.

It's over the annualized dividend amount of $2.40 per share from the second quarter of last year.

Our payout ratios for the second quarter were a conservative 73% of core <unk> per share and 74% of <unk> per share respectively.

Subsequent to quarter, and we declare a monthly cash dividend of $21.7 per share for July.

Lie the monthly dividend reflects an annualized dividend amount of $2.60 per share or an 8.5% increase over the annualized dividend Devin and amount of $2.40 per share from the third quarter of 2020.

With that I'd like to turn the call back over to Joey.

Thank you Simon at this time, operator, we will open it up for questions.

We will now begin the question and 1 quick question.

You asked the question normal close call 1 on 1 on the Wilcox zone.

If the user with vehicles 1 please pickup your handset this whole question Duffy.

Okay, and then Paul on your quest.

<unk> has the nature and we would like to withdraw your question. Please go ahead.

And then too.

At this time, we will pause momentarily to assemble all of them.

Yeah.

The first question comes from Taipei, and Kim with true. It. Please go ahead.

Thank.

Good morning out there.

Julie.

When I look back at your transaction history of Europe.

Been buying in the past like in the Miss and then a few years ago, and then the 7% and the past.

I think in 19, and and 18 and debt yield has gone down to the low sixes lately.

So I'm just curious when you look at that as it.

Is it because cap rate compression across the sector or is it that you're targeting certain types of <unk> that sounds like ground leases.

Nevertheless, when you have lower yields on this.

I'm trying to understand.

What was the cause of that and if of low 6% of it.

Is what we should be expecting from you guys for the foreseeable future.

Yeah No I appreciate the question Keith and I think in general generally speaking, we've seen and several years of cap rate compression of cap rates at historic lows.

And as of today, and so we continue to target high quality assets out of that you've seen any change there.

We've launched the acquisition platform and 2010, and we've said historically that our ground lease assets generally fall within the range the cap rate range of the turnkey acquisitions that we make so we continue to see very aggressive capital chasing high quality retail net lease retail properties and I think what youll see from us.

Since we have to.

The other acquirers out there that we're continuing to drive towards quality without sacrificing yield and so it's a.

It's a competitive environment, we don't see that changing but the team is doing a fantastic job, creating value throughout all sorts of transactions.

Okay and the second question.

Relative when can you just help me understand the ground lease portfolio on.

Strategy.

And I forget what the lease duration is for that for that segment of the portfolio and when the lease does come due.

And how are you thinking about that and.

And is there is that fair market value resets.

Or is the contractual rent.

The rent increases built into that and I'm just trying to understand eventually 1 day when that comes due on like what will actually happen.

So the the ground lease portfolio.

Weighted average lease term of about 12, and a half years as we mentioned in the prepared remarks rent per square foot is only 9.

And towards the 65 with annual embedded growth of approximately 1% and is 90% investment grade. So when you look at our ground lease portfolio I would tell you from a from a credit real estate and.

And return perspective, I think it is a very unique sub portfolio that obviously, the drilling trending towards 13% of our overall per.

Portfolio, we continue to fine.

And just compelling opportunities there now.

On.

Exploration or failure to renew and option, we would effectively get the building and the entire premises per free now.

And that's very rare tenants typically don't want to giveaway improvements that are sitting on their balance sheet and.

And so the upside.

Upon lease expiration of failure to exercise, an option or or rejection and a bankruptcy. Once the contractual leases is broken as is very compelling as well. So I think when you look at the front and the economics of the underlying credit profile of the lease duration, the embedded growth and the portfolio and you combine that with the residual value.

And real estate, that's not on our balance sheet and tenant paid for well for.

For example, the wegmans of the capital Grill that we acquired and Whippany and precipitous New Jersey here, it's a pretty compelling risk adjusted return.

So when you say.

And that's the kind of of has an option is that option based on like the contractual.

Cash flow of rent increase of.

Whatever the state of X percent or is it.

And it's the fair market value and we use that type of option the form.

And the vast majority is the former so of contractual increases throughout the base terms and contractual increases pursuant exercising any options.

Okay. Thank you Gerry.

Thanks Steven.

Operator, I think we can go to number 2.

The next question comes from the call quick with Bang Bang. Please go ahead.

Hey, good morning, guys.

And maybe just following up on that ground lease question. What can you maybe provide us and in terms of helping us the value.

And that Optionality of the ground lease portfolio.

Do you guys track kind of your cost basis versus.

The appraised value of everything that's on top of the ground lease.

No I think look.

First off we're not going out and appraising every single asset we are not getting asset level financing, we're not and looking at valuations really and that perspective, we're looking at price per pound that we're acquiring the building if and when we were.

To get that back we're looking at price per acre and then we're looking at replacement rents for free.

Of that specific use so again the ground ground leases range just to give you a sense of the ground leases range from Mcdonald's, where he chase ground lease on a 1 acre parcel of 3500.4000 square foot building 2 of 2 of.

A walmart supercenter of Costco and sitting on 20 acres and so those are very different construct so obviously if were to get 1 of the Walmart or or in this case. Our first cabela's building back we would have effectively of 20 acre parcel with 600 feet of frontage, where we could develop 5 years to fix out lots of plus 100 of 200000.

But building back from.

The free and the rear, which which used to formally housed the obviously the store and so theyre very different analyses and comparison to a wildlife C store that the C store always the C store and.

I think it really takes and individual bottoms up real estate analysis to be able to understand.

And each and every asset.

But at the end of the day, we are always getting the improvements and the building back for free of the tenant were to vacate for any reason.

Okay and then.

That's helpful.

Maybe I was wondering if you could parse out I think the average yield in the quarter was 6.2.

And what was the yield on the ground and the stock versus the non ground the stuff.

Yes.

Of that range I don't have the exact number in front of me, but it's really right in that range of what we're buying generally speaking between 5 of the low end of the 7 sometimes and sometimes higher frankly, and when we're doing things with tenants.

Such as blend and extends our early exercises of options of working in conjunction and but.

And that's the general range here, we acquire a number of shorter term ground leases or medium term ground leases with the asymmetric information and we're working in conjunction.

With the tenant on a longer term prospect.

Okay.

Maybe just 1 last 1 on pricing I was just curious on what the leasing spreads were like on the renewals and.

Kind of what what's the expectation per.

And what's left this year and now it's not a lot but.

Yes, I mean really really effectively every single option has been exercised this year absent.

And we are prudently pleased to have Burlington.

Added to Mount Pleasant and that was a former jcpenney, where they're paying $2.50, a foot or something ridiculous and so obviously as a significant positive leasing spreads but on the overall scheme of things, it's very de Minimis, obviously, and then with the with the former art van and the former loves furniture, we're thrilled to have Gardner weighted and there as I mentioned in the.

The remarks, no garden of widespread and business for over 100 years I think the since 1914 to $19.16, it's led by a fourth generation leader and Rachel <unk> seen to date.

And the store is now their flagship they have or are effectively relocating the store from down the street they've been in the.

Q2 2021 Agree Realty Corp Earnings Call

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