Q3 2023 Agree Realty Corp Earnings Call

Good morning, and welcome to the agree Realty third quarter 2023 conference call.

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I'd now like to turn the conference over to Brian Hoffmann Director of corporate Finance. Please go ahead Brian.

Thank you good morning, everyone and thank you for joining us for Acorn Realty's third quarter 2023 earnings call before turning the call over to Joe in Peter to discuss our results for the quarter. Let me first run through the cautionary language. Please.

Please note that during this call we will make certain statements that may be considered forward looking under federal Securities law. Our actual results may differ significantly from the matters discussed in any forward looking statements for a number of reasons.

Please see yesterday's earnings release, and our SEC filings, including our latest annual report on Form 10-K for a discussion of various risks and uncertainties underlying our forward looking statements.

In addition, we discuss non-GAAP financial measures, including core funds from operations or core <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 all of them.

I'll turn the call over to Joey.

Thank you Brian Good morning, and thank you all for joining US today I'm pleased to report another quarter of strong performance as we executed our operating strategy in a disciplined manner.

We invested in high quality opportunities across all three external growth platforms, while increasing our investment grade exposure to an all time high of nearly 69%.

Our record investment grade exposure is emblematic of the strength of our portfolio, which should provide for more durable cash flows in today's environment.

Our portfolio is paired with a conservative balance sheet with four and a half times net debt to recurring EBITDA at quarter end and no material debt maturities until 2028.

We continued to push cap rates higher during the quarter without sacrificing quality and maintaining our stringent underwriting criteria.

Within our targeted sandbox there continues to be a lack of capitalized competition and our track record of execution makes it the buyer of choice in today's market.

We anticipate this dynamic will persist and consequently cap rates will continue to move higher, albeit slowly and steadily given the large and fragmented nature of the net lease space.

We are in an enviable position for the upcoming year, our fortress balance sheet has no material debt maturities until 2028, avoiding refinancing headwinds simultaneously our best in class portfolio with minimal lease maturities provide stable and growing cash flows.

Even in the absence of external growth this will enable us to deliver a F O where true cash growth over 3% next year on a per share basis.

Bedded in this base case is a conservative credit loss amount inflationary growth in G&A of over 5% and any outstanding borrowings on the revolver assumed at the current forward sulfur curve.

This base case <unk> growth combined with our current dividend yield sets the stage for high single digit returns in 2024, even in the absence of additional capital for external growth.

As discussed on previous calls we will continue to avoid going up the risk curve investing capital only in the country's leading operators with high quality underlying real estate.

While our relationships and acquisition funnel continued to provide a strong pipeline, we will remain disciplined capital allocators to ensure that our risk adjusted spreads are appropriate and our cap rates are reflective of broader market conditions.

This past quarter, we invested approximately $411 million and 98 high quality retail net lease properties, including the acquisition of 74 assets for $398 million.

The properties acquired during the quarter are leased to leading operators and sectors, including farm and rural supply auto parts tire and auto service convenience stores off price retail home improvement and warehouse clubs.

We executed several sale leaseback transactions this quarter with our retail partners, including best in class operators in the farm and rural supply and convenience store sectors.

As mentioned on prior calls sale leaseback activity has increased for US. This year is another example of our ability to be a full service comprehensive real estate solutions for leading operators.

The acquired properties at a weighted average cap rate of six 9%, a 10 basis point expansion relative to the second quarter and 70 basis points higher than full year 2022.

Weighted average lease term was 11 five years and approximately 73% of annualized base rents are derived from investment grade retailers.

We acquired seven ground leases during the quarter, representing approximately $35 million or eight 2% of total acquisition volume for the quarter.

Through the first nine months of the year, we've invested more than 1 billion in 265 retail net lease properties spanning 38 states.

Over 73% of the annualized base rent acquired is derived from leading investment grade operators.

These metrics demonstrate our continued focus on leveraging all three external growth platforms to execute on opportunities with best in class retailers.

Our development and DSP programs continue to see increased activity with a record of over $137 million of capital committed this year.

Our team continues to uncover exciting opportunities and our platform is uniquely situated to provide struggling merchant developers with the ability to lock in funding, while providing us with the opportunity to drive superior risk adjusted returns.

We continue to have dialogue with many of our retail partners to find solutions that fit within their store growth strategies.

We commenced two new development DSP projects during the quarter with total anticipated costs of $11 million construction continued during the quarter on 14 projects with anticipated costs totaling approximately $56 million.

Lastly, we wrapped up construction on eight projects during this past quarter with total cost of approximately $41 million.

Moving on to leasing we executed new leases extensions or options at over 655000 square feet of gross leasable area during the third quarter.

Notable new leases extensions or options, including a 220000 square foot Walmart in Wichita, Kansas 130000 square foot Lowe's in North Providence, Rhode Island, and a 40000 square foot Marshalls and Homegoods in Napa, California.

For the first nine months of the year, we executed new leases extensions or options on just over one 4 million square feet of gross leasable area.

We are in an excellent position for the remainder of the year with just eight leases are 30 basis points of annualized base rents maturing.

Our best in class portfolio now spans 2084 properties across 49 states, including 217 ground leases, representing 11 six of total annualized base rents.

Occupancy for the quarter remained very strong at 99, 7% and again, our investment grade exposure reached a record of approximately 69%.

Before I turn the call over to Peter I want to congratulate Nicole would've been on her promotion to Chief operating officer.

Coal has had tremendous accomplishments throughout her career at Avery and our operational prowess makes this promotion very well deserved.

<unk> has now stepped into the newly created role of Chief growth Officer will you have devoted full focus to our external growth platforms and tenant relations.

Lastly, I am extremely pleased to welcome Ed Aikoff to our team as executive Vice President of asset management and has nearly 40 years of industry experience and will help optimize our asset management platforms I'll hand, the call over to Peter and then we can open it up for questions.

Thank you Joey starting with earnings core <unk> per share for the third quarter of 99.

It was two 1% higher than the same period last year.

<unk> per share for the third quarter increased four 2% year over year to one dollar.

In the third quarter, we declared monthly cash dividends of $24 <unk> per share for July August and September. This represents a three 8% year over year increase while raising our dividend twice over the past year, we maintain conservative payout ratios for the third quarter of 74% of core <unk> per share.

And 73% of <unk> per share respectively.

Subsequent to quarter end, we again increased our monthly cash dividend to <unk> $24 seven per share for October the monthly dividend reflects an annualized dividend amount of over $2 96 per share or two 9% increase over the annualized dividend amount of $2 88 per share.

From the fourth quarter of 2022.

General and administrative expenses totaled $8 $8 million in the third quarter G&A expense held steady quarter over quarter at six 1% of revenue adjusted for the noncash amortization of above and below market lease intangibles or six 5% of unadjusted revenue.

For the full year, we still expect G&A to decrease a minimum of 50 basis points to 6% of adjusted revenue or lower.

Income tax expense was approximately $709000 during the third quarter for the full year. We continue to expect income tax expense to be between two five and $3 $5 million.

Moving to our capital markets activities during the quarter, we sold more than one 3 million shares of forward equity via our ATM program for net proceeds of approximately $87 million.

Including the shares sold in the period, we settled almost $4 3 million shares of forward equity during the quarter at an average price of more than $68 per share realizing net proceeds of approximately $290 million.

We further strengthened our balance sheet during the quarter and demonstrated our ability to access the bank debt market closing on the previously announced $350 million $5 five year term loan.

Prior to closing the term loan we entered into $350 million of forward, starting swaps to fixed sofer over the $5 five year period, including the impact of the swaps the interest rate on the term loan is fixed at 452%.

The term loan was a market leading financing with strong support from our key banking relationships and the five and a half year term allowed us to extend the maturity into 2029.

As Joey mentioned, our debt maturity schedule remains in excellent position with no material maturities until 2028.

At quarter end, we had total liquidity of over $957 million, including $951 million of availability on our revolver and more than $6 million of cash on hand.

In addition, our revolving credit facility and term loan have accordion options, allowing us to request additional lender commitments of 750 and $150 million respectively.

As of September 30th our net debt to recurring EBITDA was approximately four five times, our total debt to enterprise value was approximately 28%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend remained in a very healthy position at five one times.

Lastly, I'm pleased to report the MSCI, a leading provider of ESG indices upgraded our rating from B to Triple B last week. This follows the recent upgrade of our garage public disclosure score from D to b as well as the gold level recognition from Green lease leader, So that I discussed on last quarter's call. These achievements demonstrate the significant.

Progress that we've made at our ESG objectives and are a testament to the efforts of our ESG steering committee and our outstanding team with that I'd like to turn the call back over to Joey.

Thank you Peter to summarize we are very well positioned to drive earnings growth and provide a consistent and well covered growing dividend. Despite the turbulence. We're seeing today in the markets at this time, operator, we will open it up for questions.

We will now begin the question and answer session.

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Please limit yourself to two questions during this call.

At this time, we will pause momentarily to assemble our roster.

The first question today comes from Eric Wolfe with Citi. Please go ahead.

Hey, Thanks, good morning.

Just curious what level of acquisitions, you have under contract right now for the fourth quarter and as we think about it.

<unk> taught them pushing your guidance to get to that $300 million.

For the quarter whats the best in the framework you are going to be using determine whether it makes sense to keep acquiring.

Good morning, Eric It's Joey.

Well first I think it's notable that we changed the phraseology in the release to approximately $1 $3 billion without giving any any any guidance or forward looking statements I'll tell you that we're going to maintain flexibility here in terms of what we acquired this year and so that approximately $1 $3 billion could.

Anywhere between one two and $135 billion, but I think it's it's prudent for us to watch the macro here and make some really really consequential decisions on whether or not we want to proceed.

With specific acquisitions or not so maintaining flexibility has the approximate.

Verbiage in the release is critical in terms of the framework the framework is going to be one.

In today's environment capital is at least semi precious and two I think we have to make sure that we're acquiring things that have been being patient, where we think cap rates are going to continue to creep up here without deploying capital at spreads that we think will improve.

Got it and then you mentioned that you can grow earnings per.

Sure more than 2% next year without any acquisitions.

Does that include the sort of the full impact of a $300 million of acquisitions in the fourth quarter or could you get there with just doing the sort of $200 million that you mentioned kind of on that lower end.

I'm just trying to understand whether if you did the full 300 million in the fourth quarter, even above that it would just be additive to that.

Percent growth that you mentioned in your remarks.

It's truly immaterial on a denominator of the size of ours today. So that you know call it $150 million ish range and they're embedded in that range is really immaterial in terms of that 3%, which I'll call a base case and just to clarify that that base cases, Joey takes up golf and margin can add.

Asset and we do nothing next year and so we're very confident irregardless of the amount of acquisitions.

We execute during the fourth quarter, there were going to grow a epiphone next year over 3%.

Without doing anything that's no new capital that's no new acquisition activity and so that is a we think a very strong I'll call. It again the base case.

Got it thank you.

Thank you Sir.

The next question comes from Joshua <unk> with Bank of America. Please go ahead.

Yeah, Hey, guys.

Joey last time, we spoke at our conference you were talking about some construction constructive conversations you were having with retail retailers on partnering with them.

Just as they kind of try to get their hit their store opening goal is just what's the latest on that.

Those conversations continue we are executing on on projects that are both announced and unannounced, but those conversations continue and I think retailers are.

I would tell you that they are quickly realizing even faster than at your conference that the new store deliveries that they are anticipating for merchant builders and private developers arent going to come to fruition.

And so we're going to be patient and allow these yields or these return on cost plus the cap rates on the stabilized assets to come to us here.

Obviously, we've seen the activity in the 10 year and that meet your meteoric rise over the past 60 to 90 days. So we're going to maintain patients here and not jump into anything too quickly and I think like I said I think it's going to come to us those conversations continue we're one of the one of the only few viable solution.

They have without just self developing and putting on balance sheet, if they have those capabilities.

And so we'll be ready and willing but again for us to pull the trigger it's gotta be appropriate risk adjusted spreads.

Okay I appreciate that color and then just.

I'm just trying to think through the dynamic like if if you. If you guys are pulling back I'm, assuming others might pull back like how do we think cap rates kind of respond or is there just like so much capital out there that wants to just have to be that has to be put to work, it's going to take a take a while I'm just kind of what you're trying to think through the dark dynamic.

Well, it's it's certainly not the ladder so much capital that has to be put to work here I think the 10 31 market is down over 50% in edging even higher some estimates are at 70% commercial real estate transactions are down massively and so.

We remain the buyer of choice here and now is the is at our discretion, where and when we want to execute I think if we roll the clock back to fall of last year, when we pre advertise the balance sheet.

And we put ourselves in a position to execute this year, we were very wary of the capital markets. We said cap rates would move slowly up we think that the standard answer frankly in the baseline expectation in a fragmented and illiquid market. The size of net lease we see that continuing I've heard comments.

They may have plateaued in the last few months I've heard comments they were going to move up roughly that's not what happens in a fragmented and large space like ours, and so we anticipate yields continuing to creep up and we will deploy capital as we see prudent therefore windows Youll do creep up.

Thanks, Joe.

Thank you.

The next question comes from Nate Crossett with BNP. Please go ahead.

Hey, Thanks for taking my question.

Operator: Good morning and welcome to the Agree Realty third quarter 2023 conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note, this event is being recorded.

The 3% growth for next year what percent I guess, you made for maybe credit loss and then can you just talk about.

Rite aid exposure.

And then are there any other tenant.

Excuse me should be about.

Good morning, Nate I'll I'll hit the first the last question first Rite aid exposure, we have a total of five rite AIDS in our portfolio too we acquired sub leased already to investment grade tenants.

We anticipate a credit upgrade their once one has already been rejected the prime lease and so we're entering into a sublease with a significant lift with an investment grade tenant that's already in place, which will increase term as well as rented approximately 50% from the former Rite aid Red So we truly have three rite aid.

Brian Hawthorne: I would now like to turn the conference over to Brian Hawthorne, Director of Corporate Finance. Please go ahead, Brian. Thank you.

Brian Hawthorne: Good morning, everyone, and thank you for joining us for Agree Realty's third quarter 2023 Arden's call. Before turning the call over to Joey and Peter to discuss our results for the quarter, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities law. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons.

In the portfolio, we have acquired a rite aid since the launch of the acquisition platform. In 2010. These are legacy assets, none of which are on.

The initial rejection list and we're very comfortable with the real estate and the rents there if we were to get them back and have already.

Frankly already received significant interest from national retailers to take to take those spaces again before I turn it over to Peter to talk about that 3% again base case I want to reiterate that base case as I said in the prepared remarks includes inflationary growth of G&A no new net acquisition activity in 2024.

Brian Hawthorne: Please see yesterday's earnings release and our SEC filings, including our latest annual report on form 10K for discussion of various risks and uncertainties underlying our forward-looking statements. In addition, we discussed non-gap financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO, and net debt to recurring EBITDA. Reconciliation of these non-gap financial measures to the most roughly comparable gap measures can be found in our earnings release, website, and SEC filings.

Sure.

And so that is a base case it is the baseline in the basement.

And I don't anticipate that materializes, but I'll turn it over to Peter to give those building blocks.

Sure.

To talk through some of the primary drivers of <unk> per share growth being north of 3% next year first is the impact of rent bumps in the portfolio, which should drive about 1% of growth next year, we typically see about 1% of growth from internal lease escalators in the portfolio. The second driver of growth will be the run rate impact of 2020.

Joey Agree: I'll now turn the call over to Joey. Thank you, Brian.

Joey Agree: Good morning and thank you all for joining us today. I'm pleased to report another quarter of strong performance as we executed our operating strategy in a disciplined manner. We invested in high-quality opportunities across all three external growth platforms, while increasing our investment grade exposure to an all-time high of nearly 69%. Our record investment grade exposure is emblematic of the strength of our portfolio, which should provide for more durable cash flows in today's environment.

Three acquisitions, which we already talked about in his which Joey mentioned have been very accretively financed with the forward equity raise coming into the year as well as the $350 million term loan that we closed in July at a rate of four 5% Lastly, we have free cash flow, which is approaching $100 million annually that we can use either to pay down our mouth.

Joey Agree: Our portfolio is paired with a conservative balance sheet with 4.5 times net debt to recurring EBITDA at quarter-end and no material debt maturities until 2028. We continue to push cap rates higher during the quarter without sacrificing quality and maintaining our stringent underwriting criteria. Within our targeted sandbox, there continues to be a lack of capitalized competition, and our track record of execution makes it the buyer of choice in today's market. We anticipate this dynamic will persist, and consequently, cap rates will continue to move higher, albeit slowly and steadily, given the large and fragmented nature of the net lease space.

Outstanding on the line or reinvest those proceeds and so those are the primary drivers of the 3% plus growth in <unk> per share next year.

Joe you mentioned that would be offset by growth in G&A of more than 5% as well as a conservative credit loss number we've assumed in there 50 basis points that compares to the credit loss that we realized this year of 10 basis points. So far through the first nine months of the year. That's in line with the the credit loss that we realized in 2022.

10 basis points, as well, but trends below our longer term average of 25 basis points in terms of credit loss and that's a fully loaded credit loss numbers. So we feel that 50 basis points is very conservative.

Joey Agree: We are in an enviable position for the upcoming year. Our fortress balance sheet has no material debt maturities until 2028, avoiding refinancing headwinds. Simultaneously, our best-than-class portfolio with minimal lease maturities provides stable and growing cash flows. Even in the absence of external growth, this will enable us to deliver AFFO or true cash growth of over 3% next year on a per-share basis. Embedded in this base case is a conservative credit loss amount, inflationary growth in GNA of over 5%, and any outstanding borrowings on the revolver assumed at the current forward sulfur curve.

Okay. That's helpful.

And then maybe just one on leverage like if you were to do acquisitions next year.

Like what's your tolerance could you lever up.

Yes.

We have.

Effectively 100% availability under our $1 billion revolver, excluding the accordion, we only have $350 million and baked at the term loan market is open to us the 10 year unsecured market is open but had unfavorable pricing.

Joey Agree: This base case, I have a foe growth combined with our current dividend yield sets the stage for high single digit returns in 2024, even in the absence of additional capital or external growth As discussed on previous calls, we will continue to avoid going up the risk curve, investing capital only in the country's leading operators with high quality underlying real estate While our relationships and acquisition funnel continue to provide a strong pipeline, we will remain distant We need to implement capital allocators to ensure that our risk-adjusted spreads are appropriate, and our cap rates are reflective of broader market conditions This past quarter we invested approximately 411 million dollars in 98 high-quality retail and at least properties, including the acquisition of 74 assets for 398 million dollars The properties acquired during the quarter are at least leading operators and sectors including farm and rural supply, auto parts, tire and auto service, convenience stores, off-price retail, home improvement, and warehouse clubs We have scooted several sell lease-back transactions this quarter with our retail partners, including best-in-class operators in the farm and rural supply and convenience store sectors As mentioned on prior calls, sell lease-back activity has increased for us this year, and is another example of our abilities to be a full-service comprehensive real estate solution for leading operators The acquired properties had a weighted average cap rate of 6.9%, a 10 basis point expansion relative to the second quarter, and 70 basis points higher than full year 2022 The weighted average lease term was 11.5 years, and approximately 73% of annualized base rents were derived from investment grade retailers We acquired seven ground leases during the quarter, representing approximately 35 million dollars, or 8.2% of total acquisition volume for the quarter For the first nine months of the year, we've invested more than 1 billion and 265 retail and net lease properties spanning 38 states Over 73% of the annualized base rent acquired is derived from leading investment grade operators These metrics demonstrated our continued focus on leveraging all three external growth platforms to execute on opportunities with best-in-class retailers Our development and DSP programs continue to see increased activity with a record of over 137 million of capital committed this year Our team continues to uncover exciting opportunities, and our platform is uniquely situated to provide struggling merchant developers with the ability to lock in funding while providing us with the opportunity to drive a system superior risk adjusted returns We continue to have dialogue with many of our retail partners to find solutions that fit within their store growth strategies We commence two new development and DSP projects during the quarter with total anticipated costs of 11 million dollars Construction continued during the quarter on 14 projects with anticipated costs totaling approximately 56 million dollars Lastly, we wrapped up construction on eight projects during this past quarter with total costs from approximately 41 million dollars Moving on to leasing, we executed new leases, extensions or options on over 655,000 square feet of gross leaseable area during the third quarter Notable new lease is extensions or options, including a 220,000 square foot wall mart in Wichita, Kansas 130,000 square foot lows in North Providence, Rhode Island, and a 40,000 square foot marshals in home goods in Napa, California Through the first nine months of the year, we executed new leases, extensions, or options on just over 1.4 million square feet of gross leaseable area. We are in an excellent position for the remainder of the year with just eight leases or 30 basis points of annualized based rents for Turing.

I said in the last call, we will get leverage year over a full cycle and so piercing five times has no problem no problem to us we're sitting at four five times levered with significant liquidity and frankly flexibility.

To execute on transactions that provide for the spreads that are necessary to drive <unk> growth you know what.

We will not do I think is as important as what we will do is we will not get onto the treadmill grow a denominator invest capital immaterial spreads are de minimis spreads.

That's just not something that is.

That frankly is in our strategy or is in our wheelhouse, we're sitting here with a portfolio now approaching 70% investment grade over 11, 5% ground leases no material debt maturities until 2028, no refinancing headwinds, we're not going to cause so we're not going to create self created yourself cause problems here or sell.

Inflicted wounds, we are going to be prudent and disciplined in turbulent times, we're going to watch them play out and read and react accordingly.

Okay I'll leave it there thank you.

Thanks, Dave.

The next question comes from Handhelds, Sanjay with Mizuho. Please go ahead.

Hey, good morning, Thanks for taking my question.

Joe I wanted to follow up on your comments about appropriate risk adjusted spreads.

Looking to underwrite here that kind of environment I guess I'm curious what exactly does that mean, what's the minimum spread.

You are looking for today in light of your higher cost of capital and then perhaps dispositions will that maybe play a greater role near term in terms of funding. Thank you.

Sure.

Good morning, and I'll certainly we'll look at dispositions, we have a high quality portfolio that we can dispose into the 10 31 market I've talked about that historically, it's not the most efficient or time effective but we have dispositions that are a potential source for us. If we so choose to go down that road in terms of appropriate.

I'd tell you, it's really across three external growth platforms does deviate right because duration equals risk there.

Also qualitative aspects, but investing capital sub 70, 75 basis points without a compelling underlying real estate case for the ability to mark to market doesn't make much sense and frankly it doesn't move.

<unk> the earnings needle here unless you did such an a massive quantities, which is inappropriate in today's environment.

And a bit more maybe on the hurdle rates the minimum spreads that you'd be looking to invest in today.

We view the hidden I'm sorry.

A bit more color on the appropriate risk adjusted spread maybe perhaps some color on how you're thinking about what level of spread versus your cost of capital that you would require today in the current environment.

Yes, I think again I think we will not be acquiring I can say fairly succinctly. This.

Time, we wont be acquiring sub seven certainly that doesn't make sense given our given the cost of capital in the environment. I don't think there is a purchase or a sub seven out there outside of a 10 31 buyer.

Second if we look at our development and Pcf's platforms, we're going to be looking to off.

Depending on duration and scope of the project 50 to 150 basis points spreads of where we could acquire or would acquire a like kind assets and a 70 day period.

Again, each transaction is specific one thing I would note is we don't have to qualitatively improved this portfolio, we're not going to degrade it but again, reaching record investment grade exposure here again, we are.

Insinuating any shadow ratings in that number either.

Joey Agree: Our best in class portfolio now spans two thousand and 84 properties across 49 states, including 217 ground leases representing 11.6 of total annualized based rents. Occupancy for the quarter remained very strong at 99.7%, and again our investment grade exposure reached a record of approximately 69%.

Have the qualitative aspects in terms of improving the portfolio sitting here, where we are today and so.

The number one driver for us is not sacrificing quality at the same time driving spreads there are appropriate based upon the credit risk underlying duration of the project or other real estate.

Joey Agree: Before I turn the call over to Peter, I want to congratulate Nicole Whittieveen and her promotion to Chief Operating Officer. Nicole has had tremendous accomplishments throughout her career at Agree, and her operational prowess makes this promotion very well deserved.

And then the long term viability of that asset with the real estate fundamentals.

Thank you.

Thanks Amanda.

The next question comes from Brad Hoffman with RBC capital markets. Please go ahead.

Joey Agree: Craig Grohlick has now stepped into the newly created role of Chief Growth Officer, where you would devote its full focus to our external growth platforms and tenant relations.

Yes. Thanks, operator, Joe you mentioned that you expect cap rates to increase gradually but both cap rates and cost of capital states sticky at current levels. How would you treat capital deployment would it just be free cash flow that you would deploy or do you think that you would still have the ability to use data or something like that to actually have acquisition activity beyond the free cash flow level.

Joey Agree: Lastly, I'm extremely pleased to welcome Ed Icoff to our team as Executive Vice President of Asset Management. Ed has nearly 40 years of industry experience and will help optimize our asset management platforms. I'll hand the call over to Peter, and then we can open it up for questions.

Peter Coughenour: Thank you, Joey. Starting with earnings, core FFO per share for the third quarter of 99 cents was 2.1% higher than the same period last year. AFFO per share for the third quarter increased 4.2% year over year to $1.

Well I think I think that cases, very I would tell you. After the rise we've seen in the 10 year for cap rates not to continue to incrementally adjust again. It will take time I think that is highly unlikely second I think what youre, referring to there is if they don't adjust in the 10 year stays in this 40% to five range, what will we do and I think.

Peter Coughenour: In the third quarter, we declared monthly cash dividends of 24.3 cents per share for July, August, and September. This represents a 3.8% year over year increase. While raising our dividends twice over the past year, we maintain conservative payout ratios for the third quarter of 74% of core FFO per share and 73% of AFFO per share respectively. Subsequent to quarter end, we again increased our monthly cash dividend to 24.7 cents per share for October. The monthly dividend reflects an annualized dividend amount of over $2.96 per share or a 2.9% increase over the annualized dividend amount of $2.88 per share from the fourth quarter of 2022.

Again that reflects back whether we can uncover opportunities through all three platforms that provide the appropriate spread in the unlikely event I would tell you most likely impossible event, we are unable to find any opportunities across those three platforms.

That reflects back to the base case, which Peter just gave the walk on over again over 3% <unk>.

<unk> growth.

Frankly, delevering or leverage neutral not investing any capital not raising any capital and I start taking golf lessons.

Okay fair enough.

And then if you do have a big decline in activity overall, where does the first dollar go is that largely development activity.

Peter Coughenour: General and administrative expenses told $8.8 million in the third quarter. The GNA expense held steady quarter over quarter at 6.1% of revenue adjusted for the non-cash amortization of above and below market lease intangibles or 6.5% of unadjusted revenue. For the full year, we still expect GNA to decrease a minimum of 50 basis points to 6% of adjusted revenue or lower. Income tax expense was approximately $709,000 during the third quarter. For the full year, we continue to expect income tax expense to be between $2.5 and $3.5 million.

Or.

Is it a mix of development and acquisition.

I would assume it's a hybrid.

We're seeing all different types of activities. Our funnel is has never been as wide as it is today, we're seeing all different types of opportunities across all three external growth platforms and so it's really it's individual transactional specific here and there.

The merits and considerations again, when you get to development or DSP when you get to those two points, you're really looking at the duration of those projects.

And so we'll be careful what we will be disciplined capital allocators and again have the appropriate premium for duration risk, whether that'd be 120 day retrofitting of existing building or a hunter era.

Peter Coughenour: Moving to our capital markets activities, during the quarter, we sold more than 1.3 million shares of forward equity via our ATM program for net proceeds of approximately $87 million. Including the shares sold in the period, we settled almost 4.3 million shares of forward equity during the quarter at an average price of more than $68 per share, realizing net proceeds of approximately $290 million. We further strengthen our balance sheet during the quarter and demonstrated our ability to access the bank debt market, closing on the previously announced $350 million $5.5-year term loan.

One one and a half year true ground up development.

Okay. Thank you.

Thank you.

The next question comes from RJ Milligan with Raymond James. Please go ahead.

Peter Coughenour: Prior to closing the term loan, we entered into $350 million of forward starting swaps to fix sofa over the 5.5-year period, including the impact of the swaps, the interest rate on the term loan is fixed at 4.52%. The term loan was a market-leading financing with strong support from our key banking relationships and the 5.5-year term allowed us to extend the maturity into 2029. As Joey mentioned, our debt maturity schedule remains an excellent position with no material maturities until 2028.

Hey, good morning, guys.

First quick question, just a slight impairment in the third quarter, just curious what drove that $3 million.

Yes, the impairment that was recorded during the quarter is related to one asset that we're targeting for disposition.

Tennant's leases expiring and they've opted not to renew that lease.

Any color as to what.

Industry.

<unk>.

Yes.

As in the grocery sector.

Okay. Thank you.

Joey just a follow up.

On the last quarter conference call. The stock was trading around $64 a share and you commented that ADC wouldn't be issuing equity at those levels and I'm. Just curious if that's still a line in the sand or what would need to change for you guys to be willing.

Peter Coughenour: At quarter end, we had total liquidity of over $957 million, including $951 million of availability on our revolver and more than $6 million of cash on hand. In addition, our revolving credit facility and term loan have accordion options, allowing us to request additional lender commitments of $750 million and $150 million respectively. As of September 30, our net debt to recurring EBITDA was approximately 4.5 times. Our total debt to enterprise value was approximately 28% while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend, remained in a very healthy position at 5.1%.

What would need to change for you guys to be willing to issue equity at a price below that or our current levels.

Cap rates would have to adjusted returns have to adjust again. This is at the end of the day, we're going to focus on driving spreads here and so we're not going to go up the risk curve, we're not interested in the entertainment family Entertainment or childcare Carwash space, we're not going to enter into sale leasebacks with.

Private equity sponsored retailers will then that is I'd say, that's the that's the firm line that's the Red line.

Peter Coughenour: Lastly, I'm pleased to report the MSVI, a leading provider of ESG indices, upgraded our rating from B to triple B last week. This follows the recent upgrade of our GRAS public disclosure score from D to B, as well as the gold level recognition from green lease leaders that I discussed on last quarter's call. These achievements demonstrate the significant progress that we've made on our ESG objectives and our testament to the efforts of our ESG steering committee and our outstanding team.

The line in the sand as if the wind shifts in cap rates move, which we anticipate them to move it's going to be incremental and take time, we'll look at what those appropriate spreads are where our cost relative cost of capital are.

And we would invest capital accretive appropriately accretive basis, if that were the case.

So again raising capital at.

Joey Agree: With that, I'd like to turn the call back over to Joey. Thank you, Peter. To summarize, we are very well positioned to drive earnings growth and provide a consistent and well-covered growing dividend despite the turbulence we are seeing today in the markets.

These types of yields unless we were to go significantly up the risk curve, which we won't do doesn't provide for shareholder returns at the end of the day.

Yeah.

Thanks, and my last question, Joe you sort of I guess second or third net lease REIT to report earnings thus far and give a little additional commentary on the transaction market.

Operator: 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 touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please limit yourself to two questions during this call.

More broadly sort of outside of ADC, how do you think the transaction volume trends in the fourth quarter and as we get into next year.

Undoubtedly significantly down.

There is no question.

Anybody who goes against the grain.

In terms of transaction volume are hits, the pedal right now in slams that pedal down needs probably needs to rethink that position given the in light of the macro environment, we're in and the rate environment that we're in.

Operator: At this time, we will pause momentarily to assemble our roster.

Eric Wolfe: The first question today comes from Eric Wolf with City. Please go ahead. Thanks, good morning.

Great. Thanks for the color.

Joey Agree: Just curious what level of acquisitions you have on your contract right now for the fourth quarter. And as we think about the remaining calls, pushing your dad in to get to that 300 million to the quarter, what's the investment framework you're going to be using to determine whether it can make sense to keep the quiet? Good morning, Eric, it's Joey. First, I think it's notable that we changed the phraseology and the release to approximately $1.3 billion.

Thanks RJ.

The next question comes from caller Seversky with Wells Fargo. Please go ahead.

Good morning out there. Thanks for taking the question a couple of quick ones for Peter on the term loan could you just walk us through the math on the swap again and then.

In the event that you were looking at the unsecured market instead of the term loan market any sense, what that would've looked like.

Joey Agree: Without giving any guidance or forward looking statements, I'll tell you that we're going to maintain the flexibility here in terms of what we acquired this year. So that approximately $1.3 billion could be anywhere between $1.2 and $1.35 billion. But I think it's proven for us to watch the macro here and make some really consequential decisions on whether or not we want to proceed with specific acquisitions or not. So maintaining flexibility has the approximate verbiage in the release is critical.

Sure so to hit on the $350 million term loan that we closed in July that's an all in rate, including the swaps that we entered into fixed at roughly four 5%. Those swaps were entered into in the mid threes and then theres a spread on top of that that gets us to the mid force. We also have in them.

<unk> an option on that for $150 million on that term loan we could exercise that accordion option today or look to a term loan of a different tenor with pricing likely in the mid fives today and we continue to have strong support from our bank group and the $350 million term loan is the only bank debt.

Joey Agree: In terms of the framework, the framework is going to be one, in today's environment capital is at least semi-freshist. And two, I think we have to make sure that we're acquiring things that have been being patient, where we think cap rates are going to continue to creep up here without deploying capital at spreads that we think will improve. You mentioned that you can grow, I have to share more than 2% next year without any acquisitions.

We have outstanding today, and so I think the bank debt market is certainly open for US today in terms of a public unsecured issuance of 10 year issuance today for us would likely be in the high sixes.

Obviously theres been a significant move in rates since our last call. The 10 year is up about 80 basis points since early August.

Joey Agree: Does that include the full impact of 300 million acquisitions in the fourth quarter or could you get there with just doing the 200 million that you mentioned on that lower end? Just trying to understand whether if you did the full 300 million in the fourth quarter even when above that, it would just be added to the 3% growth that you mentioned in your review. It's truly immaterial on a denominator of the size of ours today so that that, you know, call it 150 million dollars range in there.

Got it. Thank you and then maybe one for J D.

In the summer there was some commentary out there about certain blue chip retail operations were looking to expand their footprints and I'm just wondering in the context of rising rates. Since then if those conversations have died out somewhat and maybe those retailers are reconsidering those expansion plans.

Haven't seen any incidence of retailers.

Considering their expansion plans to true challenges is the motive method, which they execute those expansion plans and that continues to be as you would anticipate with the 10 year at $4 nine this morning, and so for where it is in the curve, where it is and frankly the regional banks, who are typically lending to merchant builders that continues to be the <unk>.

Joey Agree: Embedded in that range is really immaterial in terms of that 3% which I'll call base case. And just to clarify, that base case is Joey takes up golf and Maj and Kinesa and we do nothing next year. And so we're very confident in your regardless of the amount of acquisitions that we execute during the fourth quarter, that we're going to grow AFFO next year over 3% without doing anything that's no new capital, that's no new acquisition activity. And so that is, we think, a very strong, I'll call it again, the base case. Got it.

Eric Wolfe: Thank you.

Point, and so those conversations between us and retailers the growing retailers or retailers that want to grow continue but I'll tell you every day, they're getting a developer call them and telling them they need to move up the return profiles because they can't make that historic return work anymore, and so we're seeing a shift albeit.

It's slow because of the gradual and fragmented nature of this space, but we're seeing a shift upwards will continue to have dialogue with those retailers and see if we can come to.

Joshua Denowen: The next question comes from Joshua Denowen with Bank of America. Please go ahead. Yeah, hey guys.

A solution that makes sense for both parties.

Joey Agree: Joey, last time we spoke at our conference, you were talking about some constructive conversations you were having with retailers. I'm partnering with them just as they kind of try to get their store opening goals. Just what's the latest on that? Those conversations continue. We're executing on projects that are both announced and unannounced. But those conversations continue. And I think retailers, I would tell you that they are quickly realizing even faster than at your conference, that the new store deliveries that they're anticipating from merchant builders and private developers aren't going to come to fruition.

But I think we're going to only going to continue to see those trends continue.

Okay. Thank you for the time.

Thanks Connor.

The next question comes from Keybanc, Ken with Julie. Please go ahead.

Thanks, Joey good morning.

So the deals you closed on this quarter at a six nine cap rate. Obviously those deals were probably underwritten a couple months ago at least.

When you look at the conversations Youre, having today and I realized cap rates can take a while to change, but how much has it changed so far from that six 9% to today.

Joey Agree: And so we're going to be patient and allow these yields or these return on costs plus the cap rates on a stabilized assets to come to us here. Obviously we've seen the activity in the 10 year and that meteor, meteor rise over the past 60, 90 days. So we're going to maintain patients here and not jump into anything too quickly. And I think I said I think it's going to come to us.

Well I'll tell you that we anticipate printing.

North of 7% in Q4 again volume is still up in the year that will be at our election.

Those conversations continue to move gradually keeping this is these are one on one one off sellers and there are sellers that.

Some are still hopeful for yesteryear, hence the challenge in moving cap rates.

Quick and decisive manner. There are those that need immediate liquidity I anticipate the year end closers now really rethinking their pricing of the closures I should say that the owner.

Joey Agree: Those conversations continue. We're one of the only few viable solutions that they have without just self-developing and putting on balance sheet if they have those capabilities. And so we'll be ready and willing. But again, for us to pull the trigger, it's got to be a appropriate risk of justice spreads. Okay, I'll appreciate that color.

Owners that want to sell by year end and have a closing by year and rethinking their strategies, we still see a wide range of asking cap rates, it's truly amazing how many E mail blast, we get that are still asking for handles in front of things with the tenure at four nine and so we will continue to see that move upwards youre right in terms of our Q.

Joey Agree: And then just kind of think through the dynamic. If you guys are pulling back, I'm assuming others might pull back. How do we think cap rates kind of respond? Or is there just so much capital out there that has to be put to work? It's going to take a while. Well, you're trying to think through the market dynamic. Well, it's certainly not the latter. So much capital that has to be put to work here.

Three transactions again averaged 70 days to close here that from letter of intent to execution to closing those.

Those transactions were pre funded with equity and debt. It honestly frankly at different different cost structures and different pricing. So we're going to continue to see cap rates move up we will be patient, it's difficult to really frankly impossible for us to tell you what pace they will move up.

Joey Agree: I think the 1031 market is down over 50% and edging even higher. Some estimates are at 70% to racial real estate transactions are down massively. And so, look, we remain the buyer of choice here. And now it's that our discretion where and when we want to execute. I think if we roll the clock back to fall of last year when we pre-equitized the balance sheet and we put ourselves in a position to execute this year, we were very wary of the capital markets.

That's going to be dependent upon individual sellers plus the macro environment here.

And if you had to raise new bank debt so not on the accordion feature but just you get a raise new bank debt what would that be.

Assuming that we enter into a swap to fix the rate on our term loan whether that's exercising the accordion on the $350 million term loan in July or entering into a net new term loan the cost today would be in the mid fives.

Joey Agree: We said cap rates would move slowly up. We think that the standard answer, frankly, in the baseline expectation and the fragmented and illiquid market the size of net lease. We see that continuing. I've heard comments that they may have plateaued in the last few months. They've heard comments they were going to move abruptly. That's not what happens in a fragmented and large space like ours. And so, we anticipate yields continuing to creep up. Then we'll deploy capital as we see prudent there for when those yields do creep up.

Okay. Thank you guys.

Thanks, Kevin.

The next question comes from Michael Gorman from D. E E. Please go ahead.

Yes. Thanks, good morning, So I'm just trying to triangulate, obviously, a lot of conversations about the acquisitions market and the capital markets as we as we think about your strategy over the next three months given what youre seeing in the marketplace today.

How are you thinking about your ability to finance versus the pricing that is actually flowing through your.

Our deal pipeline right. So we get to the end of the year will we see the debt to EBITDA move up towards that five times or are you seeing cap rates, where you would also be comfortable issuing on the ATM. If you if you can close enough volume.

Joshua Denowen: Thanks, Johnny. Thank you.

Nathan Crossett: The next question comes from Nate Crossett with BNP. Please go ahead. Thanks for taking my question. The 3% growth for next year, what percent are you assuming for maybe credit loss? And then can you just talk about your right aid exposure and then are there any other tenant issues we should be aware of?

I think it's really case specific for us I would anticipate that debt to EBITDA, we're sitting at four five times.

Most likely migrate up.

Dominic.

But in terms of issuing capital on the ATM. If again, if we saw something that was a sizable notable.

Joey Agree: Good morning, Nate. I'll hit the last question first, right aid exposure. We have a total of five right aids in our portfolio. Two, we acquired sub-least already to investment grade tenants. We anticipate a credit upgrade there once one has already been rejected, the prime lease. And so we're entering into a sub-least with a significant lift with an investment grade tenant that's already in place, which will increase term as well as rented approximately 50% from the former right aid rent.

<unk> was frankly risk adjusted appropriate.

That's possible, but I would tell you I think most likely hear we exhibit patience and discipline.

Okay, and then maybe just on the.

On the retailer side of the buybacks are you seeing anything in the underlying macro data or in the financing markets for your tenants that that's shrinking.

Targeted retailers or leading you to kind of.

Joey Agree: So we truly have three right aids in the portfolio. We haven't acquired a right aid since the long to the acquisition platform in 2010. These are legacy assets. None of which are on the initial rejection list, and we're very comfortable with the real estate and the rent there if we were to get them back. And I've already, frankly, already received significant interest from national retailers to take to take those spaces.

Take some of them off of your target list because of the current environment.

Generally no we're always looking at the retailers with it are quote unquote sandbox evaluating them both in terms of exposure within our portfolio, but also how they're performing.

Inclusive of their balance sheet, and any challenges or refinancing headwinds they have there.

Peter Coughenour: Again, before I turn over to Peter to talk about that 3% again, base case. I want to reiterate that base case, as I said in the prepare remarks, includes inflationary growth of GNA, no new net acquisition activity in 2024. And so that is a base case. It is the baseline. It's the basement. And I don't anticipate that materializing, but I'll turn over to Peter to give those building blocks.

Really arent seeing any challenges again, we're starting with the biggest retailers in the world here generally did have.

A large liquid balance sheet and are primarily investment grade or if you ran them through some risk calc would spit out investment grade some of them frankly have no debt the private.

Or unrated retailers, so were not seeing any of that flow through yet if we see a material slowdown in consumers again in the consumer behavior I would tell you, it's probably a <unk> to the benefit of the retailers in our portfolio because it's due to the trade down effect.

Peter Coughenour: Sure, Nate, just to talk through some of the primary drivers of AFFO for share growth being north of 3% next year. First is the impact of rent bumps in the portfolio, which should drive about 1% of growth next year. We typically see about 1% of growth from internal lease escalators in the portfolio. The second driver of growth will be the run rate impact of 2023 acquisitions, which we already talked about, and as which Joey mentioned, have been very accretively financed with the forward equity we raised coming into the year, as well as the $350 million term loan that we posed in July at a rate of 4.5%.

Great. Thank you.

Thank you.

The next question comes from Rob Stevenson with Janney. Please go ahead.

Joe It looks like you added a few Cvs is in the quarter. What are you, adding pharmacy given the issues in the store closures going on in that space.

Well historically those are very specific here I mean, if you go through the major pharmacies Rite aid, obviously with the bankruptcy Walgreens, which we've called out now for years and reduce to a de minimis piece of our portfolio used to be a top tenant for us going through their challenges Cvs store closures I primarily stores at all.

Peter Coughenour: Lastly, we have free cash flow, which is approaching $100 million annually, that we can use either to pay down amounts outstanding on the line or reinvest those proceeds. And so those are the primary drivers of the 3% plus growth in AFFO for share next year. As Joey mentioned, that would be offset by growth in GNA of more than 5%, as well as a conservative credit loss number. We've assumed in their 50 basis points that compares to the credit loss that we realized this year at 10 basis points so far through the first nine months of the year.

Our high occupancy rates and frankly lease explorations.

We're targeting an work jointly with our retail partners for a low basis.

Low basis assets those are low rent per square foot high performing stores blend and extends <unk> ground leases at the same time, our pharmacy exposure now.

It's fairly de Minimis I mean, it's down to four 4% in the aggregate that's including the three rite AIDS of the overall portfolio. When you looked at relative to any peers or most peers I would tell you that that's on the very low end and so we've curated now a pharmacy portfolio, which we think has the cost structure.

Peter Coughenour: That's in line with the credit loss that we realized in 2022 at 10 basis points as well, but trends below are longer term average of 25 basis points in terms of credit loss. And that's a fully loaded credit loss number, so we feel that 50 basis points is very conservative.

Nathan Crossett: Okay, that's helpful.

Peter Coughenour: And then maybe just one on leverage, like if you were to do acquisitions next year, like what's your tolerance to do, like, lever up? Yes, we have effectively 100% availability under our billion dollar revolver excluding the accordion. We only have 350 million dollars in bank that the term loan market is open to us. The 10-year-unsecured market is open but at unfavorable pricing. I said the last call, we will get leverage year over a full cycle.

Be successful in an Omnichannel world.

And also but in a vertically integrated healthcare world and so we work we work closely with specifically with the tenants in the pharmacy space and Theres only one that we acquire to identify high performing stores and <unk> opportunities.

That are frankly would be very different than the 350 to 400000 dollar per year in rent prototypical suburban pharmacy with a competitor across the street.

Okay. That's helpful and then given the commentary.

Peter Coughenour: And so piercing five times has no problem through us. We're sitting at four and a half times levered with significant liquidity and frankly flexibility to execute untransactions that provide for the spreads that are necessary to drive AFFO growth. What we will not do, I think, is as important as what we will do. We will not get onto the treadmill, grow a denominator, invest capital, immaterial spreads or diminimus spreads. That's just not something that frankly is in our strategy or is in our wheelhouse.

On asset pricing.

And given that you have this grocery box that's soon to be vacated how much demand is out there in the marketplace.

To sell vacant assets today, who is buying those I mean, you've talked about the <unk>.

Cap rate inflation on existing performing assets for nonperforming assets are vacant assets. How is that market is that something thats gone south even faster how should we be thinking about that.

It's really case specific Rob if you have a fungible box.

Peter Coughenour: We're sitting here with a portfolio now approaching 70% investment grade, over 11.5% ground leases, no material debt maturities until 2028, no refinancing headwinds. We're not going to create self-caused problems here or self-inflicted wounds. We are going to be prudent and disciplined in turbulent times. We're going to watch them play out and read and react accordingly.

The one asset that Peter referenced in the grocery space, we took an impairment on it was a small format of rural grocery store acquired several years ago in the grocers home town. It was a very frankly rare store closure for them.

And it has caused some upheaval in that frankly in that community, but they had a second store in the community, which they thought was more viable on a go forward basis in terms of asset pricing for empty for vacant box, it's really all over the board based upon what the obviously with the demographics and transactional activity and really that.

Nathan Crossett: Okay, I'll leave it there. Thank you. Thanks, thanks.

Haendel Juste: The next question comes from Handel St. Just with Muzuhu. Please go ahead. Hey, good morning. Thanks for taking my question. Jerry, I want to follow up your comments about appropriate risk-adjusted spreads that you're looking under right here in the current environment. I guess I'm curious what exactly does that mean? What's the minimum spread you're looking for today in light of your higher cost of capital? And then perhaps dispositions? Well, that may be playing a greater role near term in terms of funding.

Micro sub market looks like but also the fungibility of that box and so the adaptive reuse of the box, which we always stress here is we wanted the ended the day.

If and when we were to have a vacancy you to have a fungible box that has a strong demand curve to it.

<unk> site for usage. So if you have a large format vacant box today, and I will say large format being anything over 40000 feet youre going to most likely have challenges.

Haendel Juste: Thank you. Good morning, Handel. Certainly we'll look at dispositions. We have a high quality portfolio that we can dispose into the 1031 market. I've talked about that historically. It's not the most efficient or time effective, but we have dispositions that are a potential source for us if we so choose to go down that road. In terms of appropriate spreads, I tell you, it's really across three external growth platforms, those deviate right because duration equals risk there.

If it's a smaller box again in reference to our three Rite AIDS. If we were to get those back we're going to have significant demand and so a lot of it is related to the adaptive reuse of the box.

Redeveloped larger boxes cutting them up today with the cost challenges is a very challenging.

Something we'd want to endeavor on.

So again, we're focused on those smaller those smaller assets that have the high quality tenancy in place, but also the residual that we can get our arms around that.

Haendel Juste: And then also qualitative aspects, but investing capital sub the 7075 basis points without a compelling underlying real estate case for the ability to mark to market doesn't make much sense. And frankly, it doesn't move the AFFO or the earnings needle here, unless you did such in massive quantities, which is an appropriate in today's environment. And a bit more maybe on the hurdle rates, the minimum spreads that you'd be looking to invest in today.

And to be clear the grocery box youre looking to sell that or are you in the process of trying to re tenant that.

That will most likely be a disposition. Okay. Thanks, guys I appreciate the time.

Thanks, Rob.

The next question comes from Al <unk> with Baird. Please go ahead.

Hi, Thank you for taking my question today.

The first one is does ADT, specifically target investment grade tenants and what is the competition like for those deals right now relative to the beginning of the year.

Haendel Juste: Will you be there, Handel? Sorry. A bit more color on the appropriate risk adjusted spread, maybe perhaps some color on how you're thinking about what level of spread versus your cost of capital that you would require today in the current environment. Thanks.

So we've always said thats really an output of rating an investment grade rating is really an output focusing on with the 30% to 35 best retailers in the country. We have a number of retailers that were actively targeting and we're working with.

Joey Agree: Yeah, I think again, I think we will not be acquiring, I can say fairly succinctly at this time, we won't be acquiring sub sevens. Certainly, that doesn't make sense given our given the cost of capital in the environment. I don't think there's a purchaser sub seven out there outside of a 1031 buyer. Second, if we look at our development and PCS platform, we're going to be looking to do off depending on duration scope of the project 50 to 150 basis points, breads of where we could acquire or would acquire a like time to asset in a 70 day period.

Hobby lobby publix Alta in the portfolio today.

And in the future that don't carry chick fillet being another one.

We actively target and work with.

So that is really an output for us.

What was the second question.

It's on the competition for those.

Investment grade type very little yes.

Very little today at the at the price points, we're competing added with the rare 10, 31, or a private buyer, which has slowed down dramatically.

Joey Agree: Again, each transaction is specific. One thing I would note is we don't have to qualitatively improve this portfolio. We're not going to degrade it, but again, reaching record investment grade exposure here. Again, we aren't insinuating any shadow ratings in that number either. We don't have the qualitative aspects in terms of improving the portfolio sitting here where we are today. And so the number one driver for us is not sacrifice in quality at the same time driving spread. There are appropriate based upon the credit risk underlying duration of the project or of the real estate. And then the long term viability of that asset with the real estate fundamentals. Thanks, Haendel.

And so there's very little competition, except sellers' expectations of themselves.

In this environment.

Okay helpful. Thank you and on the two development deals you guys signed this quarter was that in the later half of the quarter or closer to the beginning.

Peter you have it offhand.

Don't have the timing for those two specific projects off hand, we can get back to you al on the specific timing.

Okay. Thank you guys.

Hello.

The next question comes from Ronald Camden with Morgan Stanley. Please go ahead.

Hey, just two quick ones one on the pipeline I think you talked about over seven.

Coming through just just curious does this pipeline look any different from what it did early in the year, whether in terms of size or tenant mix just trying to figure out how that pipeline has shifted if at all.

Haendel Juste: The next question comes from Brad Heffern with RBC Capital Markets. Please go ahead. Yes, thanks, operator. Joe, you mentioned that you expect to cap rates to increase gradually, but if both cap rates and costs of capital state, sticky at current levels, how would you treat capital deployment? Would it just be free cash flow that you would deploy, or do you think that you would still have the ability to use debt or something like that to actually have acquisition activity beyond the free cash flow level?

Haendel Juste: Well, I think that case is very, I would tell you, after the rise, we've seen in the 10 year for cap rates not to continue to incrementally adjust again, it will take time, I think that is highly unlikely. Second, I think what you're referring to there is if they don't adjust in the 10 year stays in this 48 to 5 range, what will we do? And I think that, again, that reflects back whether we can uncover opportunities through all three platforms that provide the appropriate spread.

Tenant mix is the same as <unk> seen throughout throughout the year and we will continue to be similar as we've executed in years past size again is really at our election subject to where we think the appropriate risk adjusted spreads are so we have a number of assets that are currently under our properties that are currently under control.

We will make decisions were non refundable on purchase agreements, we have letters of intent executed given the rapid rise in the 10 year and the relative cost of capital will make decisions in the upcoming weeks on whether or not we want to pursue those acquisitions to close or we want to be patient and remain disciplined capital allocators.

Great and then on the ground leases.

Joey Agree: In the unlikely event, or I'll tell you most likely impossible event, we're unable to find any opportunities across those three platforms, that reflects back to the base case which Peter just gave the walk on over, again, over 3% AFFO growth, frankly, de-levering or leverage neutral, not investing any capital, not raising any capital, and I start taking golf lessons. Okay, fair enough.

During the quarter as well as the portfolio. Maybe can you talk about are those cap rates behaving any differently from <unk>.

The rest of the market.

And what opportunities are how are you seeing opportunity shake out on.

On the ground lease Ron.

Yeah, really really no differentiated behavior than the rest of the market.

I would tell you right now our Q4 pipeline is.

That could change based upon the election of what we proceed with as well as what we source our Q4 pipeline as a as a material component of ground leases.

Brad Heffern: And then if you do have a big decline in activity overall, where does the first dollar go? Is that largely development activity? Or is it a mix of development and acquisitions? I would assume it's a hybrid. We're seeing all different types of activities, our funnel has never been as wide as it is today. We're seeing all different types of opportunities across all three external growth platforms. And so it's really, it's individual transactional specific here.

But it's been pretty consistent throughout the year at that call it eight plus or minus percent, but no no true differentiated.

Trends that you can see there versus standard or typical net leases.

Thanks, so much.

Thanks, Ron.

The next question comes from Linda Tsai with Jefferies. Please go ahead.

Brad Heffern: And the merits and considerations, again, when you get the development or DFP, when you get to those two points, you're really looking at the duration of those projects. And so we'll be, we will be disciplined to capital allocators, and again, have the appropriate premium for duration risk, whether that be 120-day retrofit in the existing building, or one and a half year true ground-up development. Okay, thank you. Thank you.

Hi.

One of your deals have been sale leasebacks year to date and would you expect that to grow.

As a percentage headed into next year.

Good morning, Linda So this year approximately 25% of our transactions have been sale leaseback that in comparison to historic coupled this past year's here that was about 10%.

We're always working with retailers on potential sale leaseback transactions. We did have a couple of new work with a couple of new retailers. This quarter on sale leaseback transactions, most notably in the the farm and rural supply space we.

RJ Milligan: The next question comes from RJ Milligan with Raymond James. Please go ahead. Hey, good morning, guys. First, quick question, just a slight impairment in the third quarter, I'm curious what drove that $3 million impairment? Yeah, the impairment that was recorded during the quarter is related to one asset that we're targeting for disposition. The tenant's lease is expiring, and they've opted not to renew that lease. Any color, so what industry that tenant is in? Yeah, the tenant is in the grocery sector.

We will continue to evaluate that market are engaged in active dialogue. It again it comes down it comes down to cap rate and risk adjusted returns for us.

And then how do you think about the retailer environment right now I think people thought it might have been in a recession by now, but clearly that hasnt happened and so do you feel better about the overall consumer environment now versus say a quarter ago.

It's been a long a 90 days, it's tough to remember a quarter ago.

Look I think we have talk as hard landings again, I think we're looking at a consumer that is.

Joey Agree: Okay, thank you. And Joey, just to follow up on the last quarter conference call, stop straighting around $64 share, we commented that ADC wouldn't be issuing equity at those levels, and I'm just curious, that's still a line in the sand, or what would need to change for you guys to be willing, what would need to change for you guys to be willing to issue equity at a price below that, or at current levels?

That is really trifurcate, it and not bifurcated I think we're seeing pressure on that consumer with multiple different data points.

And so it is it's a it's a unique year because this is a unique and one of a kind environment that we've never been through with history. There is I'm not going to pontificater guests and the probability of a hard landing or a soft landing or no landing at all but I do think we're going to watch the consumer but I think most importantly again this is <unk>.

Joey Agree: Caprates would have to adjust and return to have to adjust. Again, this is the end of the day we're going to focus on driving spreads here. And so we're not going to go up the risk curve. We're not interested in the entertainment family entertainment or childcare or car wash space. We're not going to enter into sell these facts with private equity sponsored retailers. That's the firm line, that's the red line. The line in the sand is if the wind shifts and caprates move, which we anticipate them to move, it's going to be incremental and take time.

Not a discretionary based portfolio its not an experiential base portfolio. This is a portfolio that consist primarily of core brick and mortar goods and services with the largest retailers in the country. So if and when that consumer weakened significantly I would expect the retailers of the largest retailers in the.

World.

That are that are contained within our portfolio to outperform and take share and that's been the consistent theme that we've seen all year, even in the absence of a recession as these retailers that have the balance sheets to invest in price fulfillment strategies.

Joey Agree: We'll look at what those appropriate spreads are, where our costs relative cost of capital are. And we would invest capital in a creative appropriately, a creative basis if that were the case. So again, raising capital at these types of yields, unless we're in a vote, significantly up the risk curve, which we won't do, doesn't provide for sure how they're returned at the end of the day.

RJ Milligan: Thanks.

As well as labor are taking market share from smaller retailers today and so those three thread those three strategies of investment are really taking hold and we see it in walmart's prints, we see it in home depot spreads we see you didnt lows as prints, we see it in all of the larger retailers out there.

RJ Milligan: My last question, Joey, you're sort of a second or third and at least re to report earnings thus far and give a little bit additional commentary on the transaction market. I'm just more broadly outside of ADC. How do you think the transaction volume will trend in the fourth quarter and as we get into next year?

Today are still successfully navigating this environment for the most part and so again, we had a an experiential where discretionary based portfolio, where our luxury based portfolio I would be concerned I think ultimately if and when we do enter into a recession.

Joey Agree: Undoubtedly significantly down. There's no question in any, you know, anybody who goes against the grain in terms of transaction volume or hits the pedal right now and slams that pedal down, needs probably needs to rethink that position given the in light of the macro environment we're in in the rate environment that we're in. Great. Thanks for the color. Thanks, RJ.

Retailers in this portfolio benefit.

Thank you.

Thanks Linda.

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

Well, thanks, everybody for joining us today, we look forward to talking to you or seeing you in the near future and we appreciate everybody's time. Thanks again.

Conor Siversky: The next question comes from Conor Sversky with Wells Fargo. Please go ahead. Morning out there. Thanks for taking the question. A couple quick ones for Peter on the term loan. Could you just walk us through the math on the swap again and then in the event that you were looking at the unsecured market instead of the term loan market. Any sense what that rate would have looked like? Sure. So to hit on the $350 million term loan that we closed in July that all in rate including the swaps that we entered into fixed at roughly four and a half percent.

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

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Conor Siversky: Those swaps were entered into it in the mid threes and then there's a spread on top of that that gets us to the mid force. We also have an accordion option on that for $150 million on that term loan. We could exercise that accordion option today or look to a term loan of a different tenor with pricing likely in the mid fives today and we continue to have strong support from our bank group and the $350 million term loan is the only bank that that we have outstanding today.

Yeah.

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Peter Coughenour: So I think the bank that market is certainly open for us today in terms of a public unsecured issuance a ten year issuance today for us would likely be in the high sixes and you know obviously there's been a significant move in rates since our last call the ten years up about 80 basis points since early August. Got it. Thank you.

Conor Siversky: And then maybe one for Joey. Late in the summer, there's some commentary out there that certain blue chip retail operations were looking to expand their footprints. I'm just wondering in the context of rising rates since then if those conversations have died out somewhat and you know maybe those retailers are reconsidering those expansion plans.

Joey Agree: Haven't seen any instance of retailers reconsidering their expansion plans. The true challenge is the mode and method which will execute those expansion plans, and that continues to be, as you would anticipate, with the 10-year-old 4-9 this morning and so for where it is, and the curve where it is, and frankly, the regional banks who are typically lending to merchant builders, that continues to be the choke point. And so those conversations between us and retailers, the growing retailers and retailers that want to grow continue, but I'll tell you every day they're getting a developer call them and telling them they need to move up the return profiles because they can't make that historic return work anymore.

Joey Agree: And so we're seeing a shift albeit bit slow because of the gradual and fragmented nature of the space, but we're seeing a shift upwards. We'll continue to dev dialogue with those retailers and see if we can come to a solution that makes sense for both parties, but I think we're going to only continue to speed those trends continue.

Conor Siversky: Okay, thank you for the time. Thanks, Donna.

Key Benkin: The next question comes from Key Benkin with Truist.

Joey Agree: Please go ahead. Thanks, Joey. Good morning. So the deals you close on this quarter at a 6-9 cap rate, obviously those deals were probably underwritten a couple months ago, at least. When you look at the conversations you're having today, and I realized cap rates can take a while to change, but how much has the change so far from that 6.9% to today? Well, I'll tell you that we anticipate printing north of a 7 in Q4.

Joey Agree: Again, volume is still up in the air. That will be at our election. So if conversations continue to move gradually, this is one-on-one, one-off sellers, and there are sellers that some are still hopeful for a yesteryear, hence the challenge in moving cap rates in a quick and decisive manner. There are those that need immediate liquidity. I anticipate the year end closers now really rethinking their pricing or the closures. I should say the owners that want to sell by year end and have a closing by year and rethinking their strategies.

Joey Agree: We still see a wide range of asking cap rates. It's truly amazing how many email blasts we get that are still asking four handles in front of things with the 10 year at 4.9. We'll continue to see that move upwards. You're right in terms of our Q3 transactions. Again, average 70 days to close here, that's from a letter of intent execution to closing. Those transactions were pre-funded with equity indebted, honestly, frankly, at different cost structures and different pricing.

Joey Agree: We're saying cap rates move up. We'll be patient. It's difficult. They're really frankly impossible for us to tell you what pace they will move up. That's going to be dependent upon individual sellers plus the macro environment here. If you had to raise new bank that's not on the accordion feature, but just if you had to raise new bank that, what would that repeat? Assuming that we enter into a swap to fix the rate on a term, whether that's exercising the accordion on the $350 million term loan in July or entering into a net new term loan, the cost today would be in the mid-fact.

Key Benkin: Thank you guys.

Michael Gorman: The next question comes from Michael Gorman from B.T.I.G. Please go ahead. Yeah, thanks. Good morning. Joe, I'm just trying to triangulate obviously a lot of conversations about the acquisition market and the capital markets. As we think about your strategy over the next three months, given what you're seeing in the marketplace today, how are you thinking about your ability to finance versus the pricing that is actually flowing through your deal pipeline, right?

Michael Gorman: So, we get to the end of the year. Will we see the debt to EBITDA move up towards that five times, or are you seeing cap rates where you would also be comfortable issuing on the APM if you can close enough volume? It's really case-specific for us. I would anticipate that the EBITDA were sitting at four and a half times to most likely migrate up, nominally, but in terms of issuing capital on the APM, again, if we saw something that was sizeable, notable, and was frankly risk adjusted appropriate, that's possible, but I would tell you, I think most likely here, we exhibit patience and discipline.

Michael Gorman: Okay, and then maybe just on the retailer side of the buy box, are you seeing anything in the underlying macro data or in the financing markets for your tenants that shrinking the targeted retailers or leading you to kind of take some of them off of your target list because of current environment? We generally know we're always looking at the retailers with our quote-unquote span box, evaluating them both in terms of exposure within our portfolio, but also how they're performing, inclusive of their balance sheet and any challenges of refinancing how do we have there?

Michael Gorman: We really aren't seeing any challenges. Again, we're starting with the biggest retailers in the world here generally that have large liquid balance sheet and are primarily investment grade or if you ran them through some risk kelp would spit out investment grade. Some of them frankly have no debt, the private or unrated retailers, so we're not seeing any of that flow through yet. If we see a material slowed out in consumers, again, in the consumer behavior, I would tell you, probably a nerd of the benefit of the retailers in our portfolio because it's due to the trade down effect. Great, thank you.

Michael Gorman: Thank you.

Rob Stevenson: The next question comes from Rob Stevenson with Jenny. Please go ahead. Joey, looks like you added a few CVSs in the quarter. What has you adding pharmacy given the issues and store closures going on in that space? Well, the store closures are very specific here. I mean, if we go through the major pharmacies, right-aid, obviously, with the bankruptcy Walgreens, which we've called out now for years and reduced to a diminimous piece of our portfolio, used to be a top ten for us, going through their challenges.

Rob Stevenson: CVS store closures are primarily stores that are high occupancy rates and frankly least expiration. We're targeting and we're jointly with our retail partners for low basis assets. Those are low rents per square foot, high-performing stores, blend and extend vandor grounds, at the same time our pharmacy exposure now is fairly diminimous. I mean, it's found a 4.4% in the aggregate that's including the three right aids of the overall portfolio. When you look at relative to any peers or most peers, I would tell you that's on the very low end.

Rob Stevenson: So we've curated now a pharmacy portfolio, or do we think has the cost structure to be successful in an omnichannel world and also, but an overtically integrated healthcare world. And so we work closely with specifically with the tenants in the pharmacy space and there's only one that we acquire to identify high performing stores and or opportunities that are frankly very different than the $350,000 to $400,000 per year and rent prototypical suburban pharmacy with a competitor across the street.

Rob Stevenson: Okay, that's helpful.

Joey Agree: And then given the commentary on asset pricing and given that you have this grocery box that's soon to be vacated, how much demand is out there in the marketplace, you know, to sell vacant assets today who's buying those? I mean, you've talked about the cap rate inflation on existing, you know, performing assets for non-performing assets and vacant assets. How is that market? Is that something that's gone, you know, south even faster?

Joey Agree: How should we be thinking about that? It's really case-specific, Rob. If you have a fungule box, the one asset that Peter referenced in the grocery space we took in impairment on was a small format rural grocery store acquired several years ago. In the grocery home town, it was a very frankly rare store closure for them. And it's caused some upheaval in that frankly in that community. But they had a second store in the community, which they thought was more viable on a go-forward basis.

Joey Agree: In terms of asset pricing for empty, for vacant boxes, it's really all over the board based upon what the, obviously, what the demographics and transactional activity and really that micro-submarket looks like, but also the fungibility of that box. And so the adaptive reuse of the box, which we always stress here is we want to the end of the day, if and when we were to have a vacancy, to have a fungible box that has a strong demand curve to it on the backside for uses.

Joey Agree: So if you have a large format vacant box today, and I'll say large format being anything over 40,000 feet, you're going to most likely have challenges. If it's a smaller box, again, in reference to our three right aids, if we were to get those back, we're going to have significant demand. And so a lot of it is related to the adaptive reuse of the box, redeveloping larger boxes, cutting them up today with the cost challenges is very challenging.

Joey Agree: That's not something we want to endeavor on. And so again, we're focused on those smaller assets that have the high-quality tendency in place, but also the residual that we can get our arm down. And to be clear, the grocery box, you're looking to sell that, or you go in the process of trying to retenit that. That will most likely be a disposition.

Rob Stevenson: Okay, thanks guys, appreciate the done.

Al Fagan: The next question comes from Al Fagan with Baird. Please go ahead. Hi, thank you for taking my question today.

Joey Agree: The first one is does ADC specifically target investment-grade tenants? And what is the competition like for those deals right now relative to the beginning of the year? We've always said that's really an output. A rating, an investment-grade rating is really an output-focused thing on with the 30 to 35 best retailers in the country. We have a number of retailers that we're actively targeting and we're working with. Hobby Lobby, Publix, Alta, in the portfolio today and in the future that don't carry Chick-fil-A being another one that we actively target and work with. So that's really an output for us.

Joey Agree: What was the second question? It's on the competition for those investment-grade tenants. Very little. Very little today at the price points we're competing at. It's with the rare 1031 or private buyer which is slowed down dramatically. And so there's very little competition except sellers' expectations themselves in this environment.

Al Fagan: Okay, helpful. Thank you.

Al Fagan: And on the two development deals, you guys find this quarter was that in the later half of the quarter or closer to the beginning? You do have it offhand? I don't have the timing for those two specific projects offhand. No, we can get back to you, Al, on the specific timing. Okay, thank you guys.

Ronald Camden: The next question comes from Ronald Camden with Morgan Stanley. Please go ahead.

Joey Agree: I hate two quick ones. So one on the pipeline, I think you talked about over a seven coming through. Just curious, does this pipeline look any different from what it did early in the year, whether in terms of size or tenant mix? Trying to figure out how that pipeline is shifted if at all. Ten and mix is the same as you've seen throughout the year and will continue to be similar as we've executed in years past.

Joey Agree: Size again is really at our election subject to where we think the appropriate risk of justice spreads are. So we have a number of assets that are currently under a property that are currently under control. We'll make decisions were non-refundable and purchase agreements. We have letters of intent executed given the rapid rise in the 10 year and relative cost of capital. We'll make decisions in the upcoming weeks on whether or not we want to pursue those acquisitions to close or we want to be patient and remain disciplined capital allocators.

Joey Agree: Great. And then on the ground leases acquired in the court as well as the portfolio, maybe can you talk about are those cap rates behaving any differently from sort of the rest of the market? And what opportunities are, how are you seeing opportunities shake out on the ground lease run? Yeah, really, really no differentiated behavior than the rest of the market. I tell you right now, our Q4 pipeline has a, and that could change based upon the election, what we proceed with, as well as what we source.

Joey Agree: Our Q4 pipeline has a, has a material component of ground leases. But it's been pretty consistent throughout the year that called that eight plus or minus percent, but no, no true differentiated trends that you can see there versus standard.

Ronald Camden: Thanks so much.

Linda Tsai: Thanks, Ron. The next question comes from Linda Tsai with Jeffrey. Please go ahead.

Linda Tsai: Hi, what percent of your deals have been sale least back here today, and would you expect that to grow as a percentage headed into next year? Good morning, Linda. So this year, approximately 25 percent of our transactions have been sale least back that's been comparison to historic couple of past years here that was about 10 percent. We're always working with retailers on potential sale least back transactions. We did a couple of new work with a couple of new retailers, this quarter on sale least back transactions, most notably in the farm and rural supply space. We'll continue to evaluate that market or engage in active dialogue, and again, it comes down to cap rate and risk adjusted return force.

Joey Agree: And then how do you think about the retailer environment right now? I think people thought we might have been in a recession by now, but clearly that hasn't happened. And then so do you feel better about the overall consumer environment now versus say, you know, a quarter ago? It's been a long 90 days. It's tough to remember a quarter ago. Look, I think we have talked with hard landings again. I think we're looking at a consumer that is really tri-fricated and not bifurcated.

Joey Agree: I think we're seeing pressure on that consumer with multiple different data points. And so it is a unique, this is a unique and one of a kind environment that we've never been through with history. There's, I'm not going to pontificate or guess the probability of a hard landing or soft landing or no landing at all, but I do think we're going to watch the consumer, but I think most importantly, again, this is not a discretionary base portfolio with an experiential base portfolio.

Joey Agree: This is a portfolio that consists primarily of core brick and mortar goods and services with the largest retailers in the country. So if and when that consumer weakened significantly, I would expect the retailers, the largest retailers in the world that are contained within our portfolio to outperform and take share. And that's been the consistent theme that we've seen all year even in the absence of a recession is these retailers that have the balance sheets to invest in price, fulfillment strategies, as well as labor, are taking market share from smaller retailers today.

Joey Agree: And so those three strategies of investment are really taking hold. We see it in Walmart's prints, we see it in Home Depot's prints, we see it in Loses prints, we see it in all the larger retailers out there today are still successfully navigating this environment to the most part.

Operator: So again, if we had an experiential or discretionary base portfolio or a luxury base portfolio, I would be concerned. I think ultimately, if and when we do enter into a recession, the retailers in this portfolio benefit. Thanks, Linda. This concludes our question and answer session.

Joey Agree: I would like to turn the conference back over to Joey Agree for any closing remarks. Well, thanks everybody for joining us today. We forward to talk if you are seeing you in the near future and we appreciate everybody's time.

Operator: Thanks again. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.