Q4 2021 Agree Realty Corp Earnings Call
[music].
Good morning, and welcome to the agree Realty fourth quarter and full year 2021 conference call.
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I would now like to turn the conference over to Ruben treatment director of corporate Finance. Please go ahead.
Thank you good morning, everyone and thank you for joining us for AI Realty's fourth quarter and full year 2021 earnings call before turning the call over to Joey and Peter to discuss our record results for the year. Let me first run through the cautionary language. Please note that during this call we will make.
Certain statements that may be considered forward looking under federal Securities law, our actual results may differ significantly from the matters discussed in any forward looking statements for a number of reasons, including uncertainty related to the scope severity and duration of the COVID-19 pandemic the actions taken to contain the pandemic or mitigate it.
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 or Form 10-K for 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 <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 in our earnings release.
Website, and SEC filings I will now turn the call over to Joey.
Thanks, Ruben and thank you all for joining US. This morning I am pleased to report that 2021 was another terrific year for our growing company.
Several notable milestones over the past 12 months, including but not limited to record investment activity of 143 billion, surpassing our robust volume in 2020. The addition of 294 properties to our growing portfolio, including six walmart's, maintaining Walmart is our top tenant at Sig.
6% of annualized base rent the completion of our inaugural preferred equity offering with extremely attractive pricing sitting in non PSA record, surpassing 5 billion in equity cap, while approaching $7 billion in total enterprise value and most importantly, the investments in our team and our information technology infrastructure.
Led by our proprietary arc database had paid tremendous dividends.
While our investment volumes were once again at record levels. Our continued focus on best in class retailers was reinforced by nearly 70% of annualized base rents acquired being derived from investment grade operators. Our disciplined approach is further demonstrated by the ground lease opportunities that we executed on during this past year, we added 93 <unk>.
<unk> leases to the portfolio, representing nearly 30% of annualized base rents acquired and increasing our ground lease exposure to 14, 3% of our total portfolio <unk>.
Several notable ground lease assets were acquired during the year, including our second wegmans in precipitate in New Jersey, nine long term wawa convenient stores, three Walmart and Sam's clubs or lows in Ohio, and nearly 20 outlawed the dominant power and grocery anchored centers.
As a reminder, our ground lease portfolio derives 87% of rents from investment grade tenants and is largely comprised of the company's preeminent retailers.
We closed out the year with a strong fourth quarter investing $315 million 74 properties across our three external growth platforms over 67% of annualized base rents acquired during the quarter were derived from retailers with an investment grade credit rating, while over 22% of annualized base rents acquired were derived from ground leased out.
Assets to.
The 71 properties acquired during the fourth quarter are leased to 34 tenants operating in 18 distinct sectors, including general merchandise home improvement grocery off price retail convenience stores tire and auto service auto parts farm and rural supply in dollar stores. The properties were acquired at a weighted average cap rate of six.
1% and had a weighted average lease term of 10 one years.
We've entered 2022 with the largest pipeline in the history of the company as disclosed in our December prospectus supplement included in our pipeline or to portfolio transactions, including the largest portfolio of the company has ever pursued.
This portfolio is comprised of over 50 properties for an anticipated purchase price to more than $180 million. The first tranche of the transaction has closed in the second tranche is anticipated to close during the first quarter of this year.
Our portfolio has a weighted average lease term of nearly 10 years and drives approximately 90% of annualized base rent from investment grade retailers.
In addition, we are currently under contract on a portfolio of three high performing Walmart Supercenters and a home depot store.
While these portfolios demonstrate our capability to execute on a larger scale transactions. They are incremental to the more granular activity that is characteristic of our traditional acquisition volume.
As indicated by our initial guidance of one one to $1 3 billion.
We are extremely confident in our team's ability to aggregate high quality opportunities comprised of leading omnichannel retailers as.
As mentioned at year end, our portfolio is investment grade exposure stood at 67% representing a two year stacked increase of more than 880 basis points are focused on best in class retailers will continue as we do not believe it prudent to move up the risk curve in a dynamic retail environment.
Moving on to our development and partner capital solutions platforms. Both platforms are seeing increased opportunities have been expanding and sizeable pipelines. We anticipate both of these platforms to produce outsized activity. This year as we focus on driving incremental value by leveraging all of our real estate capabilities and relationships.
While still quite earlier in the year early in the year I would anticipate commencing between 50 and $100 million through our development and Pcs platforms during 2022.
For comparison, we had seven development and Pcs projects, either completed or under construction. During 2021 that represented total capital committed of approximately $40 million.
Four of those projects were completed during this past year, representing total investment volume of $31 million.
<unk> continued during the fourth quarter on the Companys third project with Gerber collision in new Port Richey, Florida.
The company's first development with 711 in Saginaw, Michigan.
And our second Gerber project in Pooler, Georgia.
Dispositions during 2021 remained consistent with prior years as we sold 18 properties for total gross proceeds of $58 million.
These dispositions were completed at a weighted average cap rate of six 4%.
Notably we sold six franchise restaurants during the year, reducing the company's franchise restaurant exposure to less than 1% of annualized base rents.
Our asset management team, we remain diligently focused on addressing our upcoming lease maturities as a result of these efforts at year end, our 2022 lease maturities stand at just <unk>, 5% of annualized base rents represent representing a year over year decrease of approximately 80 basis points.
During the fourth quarter, we executed new leases extensions or options on approximately 256000 square feet of gross leasable area for.
For the full year 2021, we executed new leases extensions or options on over 603000 square feet. Notable new leases options or extension included a new 15 year lease with Gardner White furniture for the former art van flagship store in Canton, Michigan as well as a new 15 year lease with Burlington in Mount Pleasant, Michigan for the former <unk>.
C Penney space.
As of December 31, our rapidly growing retail portfolio consisted of 1404 properties spread across 47 states.
This represents an approximately 24% increase in total property count over the course of the year.
The portfolio remains nearly fully occupied at 99, 5%.
As evidenced by our increasing investment grade exposure are expanding ground lease portfolio and our minimal near term lease rollover our portfolio is better positioned than it has ever been with a balance sheet to match I envisioned 2022 being another significant year for our company.
Before I turn the call over to Peter to discuss our financial results I'd like to highlight the announcement of our new corporate headquarters as previously announced we recently closed on the acquisition of a former art van furniture store on Woodward Avenue here in Royal Oak, Michigan.
This building offers a unique redevelopment opportunity to create a state of the art space for our growing team plans call for additional training and development space health and wellness facilities and collaborative meeting areas aligned with our ADC University in ADC wellness initiatives construction is anticipated to commence to commence during the second quarter of this year.
With a targeted move in date during the first half of 2023.
With that I'll hand, the call over to Peter and then we can open it up for questions.
Thank you Joey I'll start by providing an update on our balance sheet and capital markets activities during 2021.
We had another very active year in the capital markets raising a record of $1 9 billion to fortify our balance sheet and position us for continued growth. In addition to external capital raise we also generated nearly $100 million during the year via asset sales and free cash flow after the dividend adjusting for the impact of the transition to a monthly dividend.
The first quarter of 2021, which resulted in 14 months of dividends being paid during the year. This figure would have been closer to $120 million.
We anticipate that our increase in free cash flow after the dividend will be a valuable source of capital as we continue to grow.
We completed several notable capital markets transactions during the past year, including the sale of almost 16 million common shares for total gross proceeds of approximately $1 1 billion via three follow on equity offerings, one of which was on a forward basis as well as the forward ATM program.
The completion of a dual tranche public bond offering for $650 million at a blended all in rate of two 1%, including the forward starting swaps that were terminated at the time of the transaction.
This transaction allowed us to repay all $240 million of our unsecured term loans and reduced our weighted average interest rate to three 2%, while extending our weighted average debt maturity.
Our inaugural preferred equity offering for gross proceeds of $175 million at a four and a quarter coupon a record for rates aside from public storage Lastly in December we amended our revolving credit facility, increasing the capacity from $500 million to $1 billion.
The facility includes an accordion option that allows us to request additional lender commitments up to a total of $1 75 billion.
We also extended the term of the facility and reduced our cost of borrow by five basis points based on our current credit ratings and leverage ratio.
As a result of our capital markets activities, our balance sheet is exceptionally well positioned to start the year and affords us tremendous flexibility we had over $1 4 billion in liquidity at year end, including cash on hand, a largely undrawn revolver and almost $520 million of net proceeds available to us from our outstanding forward.
Equity. Additionally, consistent with our hedging strategy. We have previously entered into $300 million of forward starting swaps in contemplation of a future long term unsecured debt issuance effectively fixing the base rate at approximately one 7%.
Together with our outstanding forward equity, we have hedge the cost of more than $800 million of capital to fund this year's investment activity.
When considering the free cash flow after the dividend as well as disposition proceeds the majority of our capital needs for the year have been satisfied.
Our significant liquidity more than $800 million of hedged capital and a robust pipeline gives us confidence that we can achieve high single digit <unk> per share growth in 2020 to build.
Building upon our nearly 10% <unk> per share growth in 2021. This implies two year stacked growth in the high teens. We view this level of per share growth is very compelling when combined with our best in class portfolio and our fortress like balance sheet.
Our net debt to recurring EBITDA stood at four nine times on December 31, or three four times pro forma for the settlement of our almost $520 million of outstanding forward equity at year end total debt to enterprise value was approximately 24, 5% fixed charge coverage, which includes principal amortization and the preferred.
Dividend remained at a company record five two times.
As demonstrated by these metrics our balance sheet remains a consistent source of strength for our company as we navigate uncertainty in the capital markets and as Joey mentioned, we are very well positioned to fund our robust pipeline without reliance on the capital markets.
Moving to earnings core <unk> was <unk> 92 per share for the fourth quarter and $3 58 per share for full year 2021, representing 10, 2% and 10, 9% year over year increases respectively.
<unk> per share was <unk> 91 for the fourth quarter and $3 51 for the full year, representing nine 2% and nine 7% year over year increases respectively.
On a quarterly and full year basis core <unk> per share and <unk> per share were impacted by dilution related to our outstanding forward equity offerings in accordance with GAAP Treasury stock is to be included within our diluted share count in the event that prior to settlement our stock trades above the deal price from the offerings the aggregate dilutive impact related to these offer.
<unk> was less than half a penny to both core <unk> and <unk> per share for the fourth quarter and approximately one penny for the 12 months period.
Our consistent and reliable earnings growth continues to support a growing and well covered dividend during the fourth quarter, we declared monthly cash dividends of $22 seven per common share for each of October November and December on an annualized basis. The monthly dividends represent a nine 8% increase over the annualized dividend from.
In the fourth quarter of 2020 for the full year. The company declared dividends of just over $2 60 per share and eight 3% year over year increase and a 14% increase on a two year stacked basis, our payout ratios for the fourth quarter and full year remained at or below the low end of our targeted range of 75%.
Sent to 85% of <unk> <unk> per share.
Subsequent to quarter end, we declared monthly cash dividends of $22 seven per common share for January and February the monthly dividends reflect an annualized dividend amount of $2 72 per share or a nine 7% increase over the annualized dividend amount of $2 48 per share from the first quarter.
2021.
As in years past and sticking with our consistent dividend policy investors can anticipate our monthly dividend to grow at or just below <unk> for the upcoming year, indicating significant dividend growth once again.
General and administrative expenses in 2021 totaled $25 $5 million G&A expense was seven 5% of total revenue or 7%, excluding the noncash amortization of above and below market lease intangibles for 2022, while we continue to support our growing organization, we expect that Geo.
<unk> expense will continue to scale decrease in between 20 to 50 basis points as a percentage of total adjusted revenue Lastly income tax expense for the full year 2021 totaled $2 4 million for 2022, we anticipate total income tax expense to be in the range of $2 5 million to $3 5 million.
With that I'd like to turn the call back over to Jody <unk>.
Peter at this 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 Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
And our first question will come from Wes Golladay of RBC capital markets. Please go ahead.
Hey, good morning, everyone I'm actually out there.
I have a quick question on the developer PCF program going to $50 million to $100 million.
Can you talk about the relative economics of the yield that you're going to get on those on those deals and how big would you like that pipeline to get.
Good morning Wes.
Relative yields for our for the development and Pcs programs are in line historically with what we've what we've talked about 100 250 basis points spreads over market cap rates, our expectation for that program is to continue to ramp throughout the course of this year, we think we'll see significant activity.
During the first quarter in terms of starts as well as Q2, but we have some programmatic relationships that were focused on the we're excited to roll out and have already begun putting shovels in the ground there.
Got it and are you getting new relationships out of this expansion of the program.
I'd say, we're really our focus is working on working with our existing tenant base. The sandbox of retailers. We always refer to that are now in either growth phase or looking at high priority relocations, but another a number of them have approached us.
Really our system in the in their growth ambitions.
Really throughout the country.
Got it and then when we look at this pipeline that you have right now that the $1 2 billion at the midpoint of guidance how much of that will be more at the more granular acquisitions versus the I guess you did highlight a few of the small portfolios.
It's a great question, we'll have to see as the year continues to transpire, given the disclosure and the process up in the commentary today, we have approximately $260 million between the two portfolios. The first tranche of the $180 million portfolio of already closed so about $260 million.
Those two portfolio as well and I'll tell you there are other portfolios.
We are working on currently but at the end of the day, we don't rely on portfolio the level of activity. The more granular approaches is our day to day, but we'll be prepared from a balance sheet as well as our human capital position to execute on anything that comes our way.
Got it thanks for the questions.
Thanks Ross.
The next question comes from Brad Heffern of RBC capital markets. Please go ahead.
Hey, good morning, everyone. I was wondering if they were going to say it was with Baird.
Constant capital is obviously higher than it was a couple of months ago I know you've locked in most of the capital for this year, but can you pursue the same types of opportunities and still generate attractive spreads on a longer term basis.
Well I think it is.
As you mentioned, we have a $520 million and Peter detailed in the prepared remarks $520 million of forward equity $300 million.
Forward, starting swaps on the debt side at approximately one 7% as a as a 10 year base rate and so from a capital from a capital position, we are very well capitalized and our overall hedging policy continues to pay dividends. So we're very pleased that we completed the follow on offering in December we feel like we.
Taken most of our capital needs off of the table for the year.
<unk>.
Significant amount of free cash flow after the dividend plus disposition proceeds.
We're in a great great position to execute on our pipeline.
Okay got it and maybe trying in a different way I mean.
Do you think that cap rates eventually youre going to start adjusting to these higher rates and how long do you think that will take.
Okay.
So that's the.
That's a difficult question I think here with the 10 year approaching 2% historically, there is causation between cap rates and in the 10 year U S. Treasury, usually it has a lag of three to six months and we haven't started to see cap rates material materially move up yet, but my expectation is that the cap rates will.
Follow like they have historically, the 10 year treasury.
So I think we're in a good position not only given our balance sheet and liquidity position today, but also to execute.
On the latter half of the year.
Okay. Thank you.
Once again, if you would like to ask a question. Please press Star then one.
And our next question will come from Linda Tsai of Jefferies. Please go ahead.
Hi, good morning.
In terms of the 180 million dollar portfolio, how does the cap rate for this compared to the weighted average cap rate of six 1% in <unk>.
Yes, good morning, Linda we talked we talked about that during the during the transaction in December that cap rate is just south of where we've transacted.
Historically and in this quarter, given the composition of that portfolio being 90% investment grade really tenants that fit within our wheelhouse and just the synergies would obviously reduce frictional costs, we thought that was appropriate.
But we also see additional opportunities that will pull that cap rate backup, but we anticipate printing.
<unk> for Q1 in terms of acquisition volume and that will definitely be a robust quarter for us.
And then you mentioned Theres high quality tenants within that portfolio are there any other new tenants that you would be acquiring.
In that portfolio, yes.
There's a couple of miscellaneous tenants in there that wed be acquiring that wed be.
Acquiring that would potentially be dispositions, but they are fairly de minimis, the bulk of that portfolio fits extremely well within our top call. It 15 tenant roster.
Thanks, and then.
Could you just remind us what your bad debt expectation would be in 2022, and then just a follow up.
Moving and credit environment are there new tenants that your tenant types that youre looking at.
So Linda with respect to our bad debt expectations for 2022, we specifically identify potential bad debt issues based on our assessment of Recoverability with any troubled credits.
There are no significant outstanding balances for which we haven't already recorded a reserve so pending any developments with existing tenants, we don't anticipate any meaningful bad debt expense in 2022.
Thanks, and then just in terms of a better credit environment are there any tenants that youre looking at.
I would say are our sandbox remains fairly constant theres always tenants that we'll look at for minority investments are there on the fringe of that sandbox that we monitor historically that had been tenants such as boot barn, where we've done a number of transactions. We will continue to monitor I think I think given the <unk>.
<unk> sale.
The surge sales of the pandemic and the adjustments with some of the balance sheets that will prove to be temporary as we continue to migrate toward that a true omnichannel future. So while we see improved balance sheet with some weaker performance was pre COVID-19 some of whom have gone.
Gone public and entered <unk>.
<unk> to <unk>.
Execute on an initial public offering our focus is still going to be on those leading operators that everybody is familiar with that we consistently transact with.
Got it thank you.
Thanks Linda.
The next question comes from Josh <unk> of Bank of America. Please go ahead.
Hey, guys hope everyone is doing well.
So Peter just maybe.
Kind of Big picture, how are you thinking about capital raising.
Rising interest rate environment and is there any kind of maybe shift or anything even lean into.
Okay.
Well the good news is we don't have to think about capital raising in this type of environment to date, given the December offering and just the position of the balance sheet. The expanded credit facility. The swaps that we have in place and so we think we are most important in this business. We think is to have the capital to deploy with meaningful spreads that are external.
Growth strategies, such as any net lease company that said, we will consistently I'll throw in there to the execution of our inaugural preferred fourth quarter last year looks extremely attractive.
From our perspective, so I think we will take advantage and I'll, let Peter follow up with anything else, we will take advantage of opportunistic capital when it's out there whether that be common equity debt or preferred but most importantly, our balance sheet is as discussed at length. In here is a fortress and so it will continue to be able to enable our.
Our growth trajectory and execute on a robust pipeline that we see that we have frankly.
Today to execute on any of the Peter Yes, Josh I would just add look we're always evaluating the capital markets to determine what's the most efficient and effective way for us to raise capital to support our continued growth as Joey mentioned the balance sheet is in excellent shape today and I think it's evidenced.
We will look for alternative ways to raise capital as evidenced by the preferred equity offering we completed last year to fund growth, but we're always going to evaluate all options available to us with respect to any particular capital risk.
One other thing I would add there Josh is we have never believed in just in time funding at times, we've been criticized for being under Levered, but at an external growth business, that's growing on a relative and absolute basis as quickly as this company is just in time funding.
To me means a just in time potential problem and so whether it's the use of the forward equity or forward starting swaps on the debt side, we always want to maintain our balance sheet as that offensive line I understand people will say you are under Levered at times well. My response to that is that that's always it's very easy to increase leverage it is not.
It's painful to increase leverage as it is to Delever. The balance sheet is it is a lever that we can pull in the future. If we feel feel that it's appropriate or the cost.
The respective capital.
We are we are.
Aligned with but I think.
The adjusted time funding as we have proven time and time again.
In this space can lead to disastrous consequences and so we're very happy with the December raise we're very happy with our position from a financial perspective today.
Great. Thank you guys.
Thanks, Josh.
The next question comes from Tayo Okusanya of Credit Suisse. Please go ahead.
Yes, good morning Julien.
My question is kind of more of a high level question again balance sheet in great shape and will focus on investment grade tenants and higher credit quality and all of that's great, but I'm just kind of curious again, you paint a positive picture of the retail backdrop.
With some of your comments.
Have peers again, who is still kind of further out on the risk curve.
Not doing quite as much investment grade higher leverage things like that and the street seems to be rewarding the stocks might a bit with their premium valuation or are you just kind of curious why do you think thats happening and what do you think changes that do we.
Rising rates that results in tenant credit blow ups or just kind of trying to get a sense of why do you think thats happening.
Well, it's a grill, it's a great macro question I think we will look back on the last two years, one day and historically understand maybe contextually, what's actually occurred but if we look at the recession caused by the pandemic and then we can look at the Reacceleration in the recovery of this economy led by.
Terry and fiscal policy as well as the rapid development of vaccines that had never been heard of before I think all investors are out there frankly, and looking around and saying what trying to get their own bearings that said, we don't believe that the pandemic and or the recovery is change the risk profile of <unk>.
<unk> underlying real estate or single purpose buildings and so those risk adjusted returns. We don't think makes sense in an omnichannel World I think I've mentioned this before on earnings calls or at least with investors in numerous meetings in 10 years I don't believe my children are going to remember, whether Wal mart's third the brick and mortar.
<unk> or Amazon started as an e-commerce retailer and so we see the world converging. We think we've done a good job in terms of the rethink retail strategy on the website and the white papers articulating that but.
But we just don't see it appropriate to go up the risk curve, what we see again this morning with Lowe's print and Walmart's print I believe it was late last week earlier. This week is the big retailers, who have the capital to invest in an omnichannel strategy in price and labor pressure in their distribution.
<unk> networks are going to continue to thrive in this world because they have the resources from a financial perspective to invest and we think that is absolutely critical so.
We're going to focus on our strategy investing in the best and brightest retailers in this country that we think are going to survive for not only years, but for decades to come. This is a long term business, we signed long term leases or acquire subject to long term leases. Our full expectation is those tenants are there to pay their rent for the duration of their base lease base term of their lease and is extended.
By options.
Okay. That's helpful. And then second question just around again the.
Land deals.
I'm just kind of curious how much opportunity you are seeing on that side and ultimately.
Target of how big that becomes as part of the portfolio. I think is about 14% now I don't know whether you call it 20%, 25% in three years.
Yeah, No real go those opportunities ebb and flow they come from the same sourcing and origination mechanisms as the remainder of any opportunities is just a different lease structure. We found we found tremendous opportunities we highlighted some of them the wegmans in parsippany, the aldi portfolio, we acquired the YY as I believe it was.
Nine worldwide.
On ground leases, where the tenant has invested significant capital in the improvements in the buildings those opportunities truly ebb and flow. There is no long term goal for that portfolio with approximately $50 million in NOI today as we mentioned in the prepared remarks, almost 90% investment grade is extremely unique well.
We will continue to execute on those opportunities, but as we've mentioned before we're not going to reach in terms of pricing or drive cap rates down and so they'll ebb and flow. They are typically one off opportunities that will that will transact on.
Great. Thank you.
Thanks Pat.
This concludes our question and answer session I would like to turn the conference back over to Joey agree for any closing remarks.
Well. Thank you everybody, we look forward to seeing everybody hopefully in person during the upcoming conference season I appreciate everybody's time, thanks again.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.