Agree Realty Corp (ADC) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Agree Realty Corporation's fourth-quarter 2012 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the formal presentation the conference will be open for questions. As a reminder, this conference is been recorded. It is now my pleasure to introduce Joey Agree, President and Chief Executive Officer of Agree Realty Corporation. Mr. Agree, you may begin.

Welcome, everyone, and thank you for participating in Agree Realty Corporation's fourth-quarter and year-end earnings conference call. I'm pleased to have here with me Al Maximiuk, our Chief Financial Officer. As hopefully everyone is aware, the Company is a fully integrated self-administered and self-managed real estate investment trust focused on the acquisition and development of single tenant properties leased to industry-leading retailers throughout the continental United States. During this call, we will make certain statements that may be considered forward-looking under federal securities law. The Company's actual results may differ significantly from the matters discussed in any forward-looking statements.

Let's get started with our real estate operations. We had a very busy and highly successful fourth quarter. On the acquisition front, we closed on 11 properties during the quarter for an aggregate purchase price of approximately $32 million at a cap rate exceeding 8%. These properties are leased to eight tenants located in seven states and are in six different retail sectors. The single tenant properties acquired during the fourth quarter are now leased to Mattress Firm in Morrow, Georgia; Harris Teeter in Charlotte, North Carolina; a Dollar General Market in Lyons, Georgia; Big Lots in Fuquay-Varina, North Carolina; AutoZone in Minneapolis, Minnesota; LA Fitness in Lake Zurich, Illinois; an Advance Auto Parts in Lebanon, Virginia; and a portfolio of four Applebee's located in Harlingen, Texas; Wichita Falls, Texas; and two in Pensacola, Florida.

For the full year, our acquisition activity totaled just north of $81 million. 2012 was a record year for the Company, doubling any previous year's total acquisition activity. Some general information on these acquisitions -- in 2012 we acquired 25 properties; these properties are leased to 18 different retailers that are located in 15 states; these acquisitions represent 14 e-commerce resistant retail sectors. We are pleased at the added diversification that we've been able to achieve.

During the fourth quarter our development activity remained robust. We currently have five projects under way, including our most recent announcement of the redevelopment of an 18,000-square-foot building in a historic district of downtown Ann Arbor directly across from the Diag on the central campus of the University of Michigan. This exciting project is pre-leased to Walgreens under a 20-year agreement and will be Walgreens' first new campus flagship store in the country. Additionally, construction continues on our Walgreens in Rancho Cordova, California, as well as the three previously announced projects currently underway for Wawa. These three projects are located in Kissimmee, Florida; Pinellas Park and Casselberry, Florida.

All three transactions with Wawa are 20-year corporate ground leases with options to extend at the tenant's election. As most of you are aware, Wawa is an industry-leading gas and convenience store operator based in the mid-Atlantic. They're a Fortune 50 private company with over 560 stores and carry a BBB Fitch Rating. We are extremely pleased to be a development partner and participate in Wawa's growth.

During 2012, we completed developments for McDonald's in Southfield, Michigan, and JPMorgan Chase in Venice, Florida. We also completed the expansion for Super One Foods in Ironwood Commons in Ironwood, Michigan. This brings our total anticipated investment in announcing completed developments to approximately $21 million for 2012.

We also sold six non-core assets during 2012. The dispositions included three vacant properties formerly leased to Borders and three shopping center properties. Proceeds from these sales amounted to approximately $16.1 million. Subsequent to year end, we announced the sale of a Walgreens in Ypsilanti, Michigan, for approximately $5.6 million. We achieved a low 6% cap rate on this sale. This shows a substantial demand for high-quality single-tenant net lease assets.

Moving on to our current portfolio metrics, our occupancy at 12/31/12 was approximately 98%. As of December 31, 2012, our portfolio consisted of 109 properties, it spanned 27 states, and contained an aggregate of approximately 3.3 million square feet of gross leasable area. Our portfolio is comprised of 100 single-tenant net lease properties as well as nine community shopping centers. The Company has developed 56 of these properties, including 47 of the 100 single-tenant properties and all nine of the centers.

As of December 31, 2012, approximately 97% of our annualized base rent was from national and regional tenants. Approximately 61% of our rental income is derived from retailers that are investing grade. Portfolio-wide, the weighted-average base term remaining is 12 years. This increases to 14 years specifically for our single-tenant net leased properties. At this point, I'd like to turn the call over to Al Maximiuk, our Chief Financial Officer, who will provide a financial update. Al?

Thank you, Joey. Good morning, everyone. I would like to provide a few highlights of the results for the quarter. Please note that we will be discussing non-GAAP financial measures, including funds from operations and adjusted funds from operations. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the Company's earnings press release issued yesterday. This release is available on our website at www.AgreeRealty.com.

The Company is pleased to announce that the revenues for the fourth quarter 2012 increased 24% year over year from $7.7 million to $9.6 million. This strong increase in revenues is due to the success of the acquisition and development program while maintaining high occupancy levels. The Company's revenues for the 12 months of 2012 increased 14% year over year from $31.4 million to $35.8 million. Funds from operations, or FFO, for the quarter increased by over 27% to $6.081 million from FFO as adjusted of $4.786 million for the fourth quarter 2011. This equates to $0.52 per share compared with FFO as adjusted of $0.48 per share a year ago. The increase in FFO per share was primarily due to positive acquisition and development results offset by the impact of the increase in the weighted-average shares outstanding as a result of the common share offering in January 2012.

Adjusted funds for operations, or AFFO, for the fourth quarter 2012 was $0.52 per share, compared with AFFO as adjusted to $0.48 per share for fourth quarter 2011. For the year, function of operations were $23.363 million compared to FFO as adjusted of $22.015 million for the year prior. This equates to $2.03 per share for the year 2012, compared with FFO as adjusted of $2.20 per share for the prior year. Both FFO and FFO per share for the year were impacted by the increase in the weighted-average shares outstanding as a result of the common share offering in January 2012, the timing of investment activities, the disposition of various non-core properties, and the impact of Borders bankruptcy in February 2011. Adjusted funds from operations for the year 2012 were $2.08 per share, compared with AFFO as adjusted of $2.24 per share for the prior year.

In the fourth quarter, the Company paid its 75th consecutive cash dividend. The dividend for the fourth quarter amounted to $0.40 per share and remains well covered. Both the current FFO payout ratio and the AFFO payout ratio are approximately 78%. Moving to the balance sheet, we closed on several financings during the fourth quarter. In December 2012, we closed on a $25 million secured financing with PNC Bank. This non-recourse loan is secured by 11 single-tenant properties. The interest rate has been swapped to a fixed rate of 2.49% and will mature April 2018.

We also closed on $23.6 million secured CMBS financing with Morgan Stanley. The 10-year, non-recourse loan is secured by 12 single-tenant properties. This loan bears interest at a fixed rate of 3.6% and matures January 2023. Both of these new loans are interest only.

Lastly, we amended our $85 million unsecured revolving credit facility. The amendment extends the maturity to October 2015 and provides for two one-year options at the Company's discretion to extend to October 2017, subject to customary conditions. The annual interest rates on the borrowings have been reduced to LIBOR plus150 to 215 basis points, depending on the Company's leverage. The Company currently operates at LIBOR plus the 150 basis points [spread]. The facility includes a $50 million accordion feature to increase capacity to $135 million, subject to certain conditions, to accommodate our business plans.

In January 2013, the Company completed an underwritten public offering of a total of 1.725 million shares of common stock, including the full exercise of the underwriters over-allotment options. The offering resulted in net proceeds for the Company of approximately $44 million. The Company's balance sheet continues to be in a very strong position. At quarter end, the Company's debt-to-enterprise value was approximately 34%. The Company's debt-to-enterprise value decreased approximately 24% after taking in account the proceeds for the recent stock offering being used to pay down amounts outstanding under the credit facilities.

The portfolio currently has 57 unencumbered assets. And the Company's interest coverage is healthy at 4.2 times, and our debt-to-EBITDA ratio is at 5.6 times. Approximately $25 million, or 21% of our total mortgage indebtedness, is self-amortizing, non-recourse loans that are tied to 13 Walgreens assets. These loans will be paid off from 2017 to 2026. Principal amortization for the fourth quarter was $836,000 and approximately $3.165 million for the full year. Principal as amortized is an average of $3.5 million to $3.6 million per year over the next few years. In total, approximately $30 million of amortizing debt will be paid down between 2013 and 2026. Between now and 2017, the Company's debt maturities are well staggered with only $18 million maturing in that time frame.

That concludes the highlights of the Company's financial and operating results for the fourth quarter and year 2012. I'd like to turn the call back to Joey to bring to a close.

Thank you very much, Al. We are pleased with the substantial progress we achieved over the past few years. We've acquired $167 million of high-quality net lease assets, grown our development pipeline and relationships with superior investment grade tenants, reduced our Kmart exposure by nearly 30%, and made significant progress in our goal of achieving additional diversification of our portfolio by tenant, by sector, and geography. We've reduced our cost of capital, enhanced our liquidity profile, and kept our balance sheet in fantastic shape. At this time, I'd like to open it up for any questions.

Thank you. (Operator instructions)

Our first question is from Richard Milligan with Raymond James.

Good morning, guys.

Good morning, RJ.

Joey, question for you on the acquisitions. This year, obviously, you ramped up quite a bit in terms of dollar volume. Curious what your expectations are for 2013? Maybe, where is the flow right now? Has it increased or decreased and where you are seeing cap rates?

Yes, obviously, in 2012 we were able to achieve significant volume in context of our portfolio and the size of the Company. We haven't put out any guidance for 2013 in terms of acquisition volume. What I can tell you is year-to-date, we've closed almost $15 million similar credits, similar terms, similar cap rates that we were acquiring in 2012. We are seeing good volume. I think as everyone is aware, yields continue to compress or remain at historically low levels. I think for the remainder of the year, we're focused on sourcing opportunities that fit within the context of our portfolio. But also value add opportunities where we think we can substantially beat market cap rates. So, I am hesitant to give guidance. I think for the first couple months here, as I said, we have acquired almost $15 million in net lease assets. And going forward our goal is to continue to scale our pipeline as well as our closing.

And then in the context of the Walgreens that you disposed of, are you looking to do anymore dispositions? I know, obviously, Kmart is on the radar but you're not looking to rush anything out the door because you took care of the three properties that you wanted to in 2012. But maybe more on the Walgreens or some of the other higher credit quality tenants? Are there any thoughts about dispositions for this year?

Yes, that's a great question. The Walgreens that we deposed of in January in Ypsilanti really was an opportunistic disposition for us. That was in the low 6% cap rate range. And we felt that the underlying real estate as well as marking to markets the rent combined with the store sales at that location really made it an opportunity for us to recycle that capital into higher quality assets with stronger residuals. I think based upon where we see cap rates today and based upon our pipeline, we will consistently be looking at the net lease portfolio on an opportunistic basis to recycle capital in an accretive manner.

Okay. And then my last question is obviously you have ramped up your relationship with Wawa in terms of development. And I'm curious as to what you think for 2013? Is it going to be working with the retailers that you currently have relationships with? Or do you envision developing new development relationships?

Right. We are in the throngs of Wawa's growth in Florida. As you know, we have three stores currently under construction. I think on a going forward basis we should be able to achieve that with Wawa. We are consistently working with retailers in our portfolio, the McDonald's, the Walgreens, the JPMorgan Chases of the world to expand those relationships. But, simultaneously, we are focused on not only deepening existing relationships, but really broadening relationships with new tenants. Potentially in new geographic areas throughout the country. So, we are highly focused on expanding both the depth, but importantly also the breadth of those relationships. All in sectors with tenants that are industry-leading that everybody is familiar with.

Great, thank you, guys.

Thanks RJ.

Our next question is from Paul Adornato with BMO capital markets.

Hi, good morning. Hey Joey, given all of the large net lease portfolios that have traded hands, was wondering if you could comment on cap rates for portfolios versus the smaller assets that you buy? Have there been any changes in the market due to the large portfolios that have been out there?

That's a great question, Paul. I think, really, the three larger portfolio transactions that we have seen in our space, I think are one, they're emblematic of what is going on overall in this space. I think it is fair to say that there is a premium, a small premium on those portfolios. But at the same time, most of those transactions also have a currency in the form of stock involved in the consideration component and that is obviously a factor in those transactions. We continue to see cap rate compression on the one-off transactions. I think our Ypsilanti disposition is a good example of that. That asset had approximately 20 years of base term remaining. Obviously, Walgreens corporate credits.

The demographics and the retail synergy at that location were weak and we're able to achieve a low 6% cap. We continue to see McDonald's ground leases come out in the 4% cap range, JPMorgan ground leases coming out in the 5% cap range, Walgreens trading in the low 6%s. So, these are pre-recession type cap rates that we are seeing by really a yield driven environment as everyone is aware. But I think it is fair to say that there is a small premium on the larger transactions that we have seen those portfolio transactions. But it is also indicative of what we are seeing on a one-off basis and it is just a voracious appetite for yield, high credit quality with strong underlying residuals.

Okay. Looking at the portfolio over the last couple of years, you have made great progress getting rid of some of the troubled tenants. Was wondering if you could talk about diversification now that you have a nice roster of high-quality tenants? For instance, how much Walgreens would be considered too much for your?

Right. I think our portfolio today spans 112 assets, 30 states, 17 sectors that we believe to be e-commerce, both mobile and static resistant. I think our portfolio, it will continue to scale, it will continue to diversify. Obviously, the Walgreens concentration that we have is a function of our 15 year preferred development relationship with Walgreens. All but one store, so 29 stores that are currently open and paying rent, we have developed. And we have achieved returns that are obviously significantly better than market cap rate. So, I think our Walgreens concentration is a function of two things.

It is a function, one, of us continuing to scale our portfolio and grow our rental revenue base, and then we will obviously look as we did in January with Ypsilanti to divest of assets that we believe to be non-core or we're not comfortable with the residual value. So, I think we have obviously two Walgreens coming on line in the near or intermediate future here with Rancho Cordova, which is currently about to get wrapped up here during the second quarter, as well as Ann Arbor. So, I wouldn't be surprised if we were able to divest Walgreens on a one-off basis and recycle those proceeds.

Okay, great, thank you.

Our next question is from Wilkes Graham with Compass Point.

Good morning, guys.

Hi, Wilkes. How are you?

Good. A couple of questions to follow-up on a couple of RJ's questions on external growth in 2013. Can you currently give any sort of sense of how you think the mix between acquisitions and developments might come out this year?

Well I think it is extremely difficult to predict. Our acquisition committee meets twice a week, reviews potential opportunities, and we are talking everyday, all day about potential opportunities in addition to those two formal meetings. So, it is very difficult to predict what our acquisition volume is going to be for the year. That said, I think the mixture that you saw between development and acquisitions in 2012, which is approximately 80%/20%, is probably in the ballpark. Obviously, that number can get distorted by opportunities on the acquisition side or it could get distorted by additional development commencements. But, we have a pretty good handle on our development pipeline for 2013.

So, the biggest variable there is our acquisition volume, which I don't have a crystal ball to tell you what that volume will be in 2013. All I can tell you is that we are diligently sourcing and leveraging and utilizing all of our relationships that have grown exponentially over the course of almost three years now since the launch of our program, and we are seeing good opportunities and we are creating significant value for our shareholders.

Can you say at all how the acquisition pipeline or how the market looks now compared to the beginning of last year?

Yes, I think generally speaking we've seem some incremental cap rate compression since the beginning of last year. I think to Paul's question, the portfolio transaction has made the net lease space, has garnered additional attention in the net leased space. I think we are seeing private individuals enter the market from an acquisition perspective. There is more financing readily -- more debt capital readily available today than a year ago for those individuals. We still see a supply constrained market, which is a function of the lack of development activity that's taking place since the recession. But we are seeing sellers also come to the market with products that are looking to monetize real estate and take advantage of current cap rates.

At the same time, we are working with retailers really throughout the country. Working hand-in-hand really with them as they look at their existing portfolios, short-term leases, medium-term leases, and potential booking of creative solutions to right-size their existing portfolios and lease terms. So, generally speaking, the net leased space has garnered significant attention. Obviously, investors are yield hungry and we don't anticipate that going away anytime soon. And there's a lot of capital that continues to flow into the space. So, we don't envision them loosening up. I think, most importantly, we can control our response, our proactivity, our persistency. And we can roll up our sleeves and continue to look for ways to leverage our relationships and seek out opportunities.

Okay, thanks. Al, just one question for you. If I'm doing my math right, I think the weighted average acquisition date for the assets in the fourth quarter was around December 17 or so. So, there was very little income I think in the fourth quarter that came from that $32 million of acquisitions. Can you say how much of the $9.1 million of rental income came from the acquisitions?

I can't say that I have a good handle on that, but if you look at the press release that we give the base rents number at the end of the quarter, which is the $38 million [one], that is really our in-place rents at the end of the year. So, that would be our run rate going forward.

Okay, that's helpful thanks.

(Operator instructions)

Showing no further questions in our queue, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Joey Agree for any closing remarks.

Great, thanks for joining us again. I'd like to thank everyone and we look forward to speaking to you next quarter.

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