Agree Realty Corp (ADC) 2013 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Agree Realty Corporation's First quarter 2013 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 being 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 joining us for Agree Realty Corporation's First Quarter Conference Call. I'm pleased to have Al Maximiuk our Chief Financial Officer here with me this morning. As everybody is aware the company is a fully integrated, self-administered and self-managed real estate invest 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 considered forward looking under federal securities law. The company's actual results may differ significantly from the matters discussed in any forward-looking statements. Now let's get started with our real estate operations for the first quarter.

On the acquisitions front, we closed on five properties during the quarter for an aggregate purchase price of approximately $15 million at a cap rate exceeding 8%. These properties are leased to five tenants located in four states, representing five different retail sectors. The single tenant properties acquired during the quart are net leased to Dick's Sporting Goods and PetSmart in St. Joseph, Missouri; Dollar General Market in Statham, Georgia; AutoZone in North Las Vegas, Nevada and a Family Dollar in Memphis, Tennessee.

A little bit on the acquisition market in general, we continued to see a supply constrained market with significant demand for yield. I think it's fair to say that cap rates today are at pre-recession levels and we will continue to be disciplined in our approach as our underwriting has a significant tilt towards the bottom of analysis. For the remainder of the year we currently have a number of opportunities coming to our pipeline that we remain excited about.

During the quarter our development activity remained robust. We have five projects underway. This includes our three previously announced Wawa project in Florida; our Walgreens in Rancho Cordova, California; as well as our campus flagship Walgreens in Ann Arbor, Michigan. These are all 20 and 25 year turnkey and ground leases. Shortly after the end of the quarter, we announced our fourth Wawa development in St. Petersburg, Florida. During the quarter, we celebrated our first grand opening of a Wawa with a store in Kissimmee, Florida as well as the rent commencement of our first California ground-up Walgreens in Rancho Cordova. Total development costs for the two projects placed in service in April was approximately $8 million. Looking forward, we expect to deliver the Wawa in Pinellas Park in the second quarter; the Wawa in Casselberry in the fourth quarter of this year and the Walgreens in Ann Arbor and a Wawa in St. Petersburg during the first half of 2014.

Moving on to disposition activity for the quarter, in January we announced the sale of our Walgreens in Ypsilanti, Michigan for approximately $5.6 million. We were pleased to achieve a low 6 cap rate on the sale. I think this transaction is evident of a substantial demand for high quality, single tenant net lease assets that we see today. We intend to continue to opportunistically monetize assets, recycle capital and seek to create additional diversity of tenants, sector and region.

Moving onto our current portfolio metrics, our occupancy at March 31, 2013 was approximately 97%. As of March 31st our portfolio consisted of 113 properties. It spanned 30 states and contained an aggregate of approximately 3.3 million square feet of gross leasable area. It's comprised of 104 single tenant net leased properties as well as nine community shopping centers. The company has developed approximately half of these properties, including 46 of 104 single tenant properties and all nine of the shopping centers.

As of March 31st approximately 97% of our annualized base rent was from national and regional tenants. Approximately 60% of our rental income is derived from retailers that are investment grade. We also have a number of unrated credits that we believe would qualify for investment grade status if they choose to pursue a rating in the future. Portfolio-wise the weighted average base term remaining is 12 years. This increases to over 13 years specifically for our single tenant net leased properties. I think that about wraps up our real estate operations 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 agreerealty.com.

The company is pleased to announce that our revenues for the first quarter of 2013 increased 22% year over year from $8.4 million to $10.2 million. This strong increase in revenue is due to the success of the acquisition and development program while maintaining high occupancy levels. Funds from operations for FFO for the quarter increased by 16% to $6,383,000 from FFO of $5,507,000 for the first quarter of 2012. This equates to $0.49 per share compared with FFO of $0.50 per share a year ago. The decrease in FFO per share was primarily due to the impact of the increase in the weighted average shares outstanding as a result of the common share offerings in January of 2012 and 2013. Adjusted funds from operations or AFFO for the first quarter of 2013 was $.049 per share compared with AFFO of $0.51 per share for the first quarter 2012. In the first quarter the company paid its 76th consecutive cash dividend. We raised the dividend for the first quarter to $0.41 per share, an increase of 2.5% over the previous quarter. Both the current FFO payout ratio and the AFFO payout ratio are approximately 84%.

Moving to the balance sheet, in January, 2013 the company completed an underwritten public offering of a total of $1,725,000 of common stock including the full exercise of the underwriters' over-allotment options. The offerings resulted in net proceeds to the company of approximately $45 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 23%. The portfolio currently has 62 unencumbered assets. The company's interest coverage is healthy at 4.1 times and our debt to EBITDA ratio is at 4 times. Approximately $24 million or 21% of total mortgage indebtedness is self-amortizing, non-recourse loans that are tied to 13 Walgreens assets. These loans will be completely paid off between 2017 and 2026. Principal amortization for the first quarter was $850,000. Principal is amortized with 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 first quarter of 2013. I'd like turn the call back to Joey to bring to a close.

Thank you for the update Al. At this time, I'd like to open it up for questions.

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If your question has been answered and you would like to withdraw from the queue, please press star then two. At this time we will pause momentarily to assemble our roster.

The first question will come from Robert Milligan from Raymond James. Please go ahead, sir.

Hey guys, good morning.

Good morning, RJ.

Joey, occupancy ticked down, I think, 100 bps in the quarter, what was driving that?

That was primarily due to the four Fashion Bug locations that were vacated in the shopping centers. We are currently working on a number of replacement opportunities and will hopefully have leases signed within the quarter on at least a couple of them.

Okay. Are there any more vacancies or space you expect to get back this quarter?

No, none that we're aware of. The single tenant portfolio continues to perform and continues to be near 99% occupancy. And we have minimal roll over in the shopping center portfolio. We have addressed significant occupancies with the two Kmart options that were extended so far this year. So we've got minimal roll over in 2013 remaining and we don't anticipate any significant occupancies going forward.

Okay. And turning into the Kmart extensions, can you give any more color on the discussions you had with them or did they just send in a letter and say we're extending, any color you had on that?

Yes, that's a great question RJ. I think they -- in context of our overall ongoing discussions with Sears Holdings, we talk about individual assets including the two assets with the extended options, so we're constantly in dialogue regarding any store performance or opportunities for either Sears or the company. Those two stores were extended by typical option notifications. We fully anticipated that those options would be extended. They're two of the lower paying stores in our portfolio and they are performing stores with strong underlying real estate, so we fully anticipated that Kmart would exercise those options, and of course they did subsequently.

Great. And my last question is so you guys sold Walgreens this quarter. Obviously cap rates are trending lower. Are you guys thinking about pruning anything else in the portfolio?

We are always looking at both the shopping center portfolio as well as the net lease portfolio to recycle proceeds and divest of assets that we've either deemed non-core or opportunistically divest of assets such as the Walgreens in Ypsilanti. But the Walgreens in Ypsilanti specifically had about 21 years of term, I believe, on it, base term remaining. There was a 1031 purchaser, traded in the low 6 cap rate range. We'll be obviously adding another Walgreens in Washtenaw County that will be the Ann Arbor campus flagship store, as well as the Rancho Cordova, California Walgreens with right commencement. So we were looking to divest of a Walgreens at the time and we thought that was the opportunistic transaction for us. I wouldn't rule out any STNL divestments for the remainder of the year. If we can take advantage of cap rates and redeploy that capital on an accretive basis, we'll look to do so, and also to increase diversification by tenant sector as well as geographical.

Okay, great. Thanks guys.

Thanks RJ.

Our next question will come from Dan Donlan of Ladenburg Thalmann. Please go ahead.

Thank you and good morning.

Good morning, Dan.

The Fashion Bug, the tenants you guys were talking to, would you expect to see roll ups on the rent there or what can you give us there?

I think it varies across the four stores. I think there will be opportunities for us to have roll ups on the rent. I think they will be immaterial. These aren't significant rental revenues we're looking at either with Fashion Bug or with replacement tenants. A majority of the Fashion Bug leases were on essentially percent rent on a gross basis. So some of those rental rates were extremely low and we'll see an uptick not only on rent, but credit and term as well. So I think net net we're looking at even or positive on those spaces. Those leases were converted to percent rent, straight percent rent leases a number of years ago when Fashion Bug was struggling and those options came due.

Okay. And then the additional disclosure that you provided in the press release on the shopping centers is very helpful. I just want to make sure I understand what's in that base rent number. That would include all of the Kmarts with the exception of the two freestanding Kmarts, is that correct?

That is correct, yes.

Okay. Any idea, if you could give us a ballpark number, of what those two freestanding Kmarts are, how much they account for in rent?

That would be Grayling and Oscoda. Al will give a number (inaudible).

Yes, I think that they are typical of all the Kmarts, so I think pretty much if you took the total Kmart rent that we have and divide by the number of Kmarts, which is nine, you'd get the number.

Okay, perfect. I'll do that. I'm just trying to bifurcate shopping center Kmart (inaudible) so that way I'm allocating a cap rate for each of those rental streams. And then Joey, from kind of acquisitions going forward, obviously with your stock price increasing, you probably -- you have a lower cost to capital. Historically you've acquired assets around 8% caps or above. Where are you looking? Have your expectations come down a little bit or do you think you can pay a little bit more now than you have historically or what's your viewpoint there?

That's a great question, Dan. I think first off, our acquisitions year to date have not deviated from that historical benchmark. That benchmark, we really look at it on a blended basis, not on a particular asset. As I mentioned during the prepared remarks, cap rates continue to either remain flat or compressed, differentiating between really region, sector and tenant. We will look to opportunistically acquire things, higher yield assets at the 8% while maintaining credit and term. At the same time, we've got some opportunities in our pipeline that we think we will be execute on during the second and third quarters here that are pretty unique. There are some value added components to those opportunities as well as some relationship driven opportunities that we look forward to executing on. Our cost of capital has decreased, whether or not it's a material decrease or not really is up for debate. We think we can deviate and lower our threshold, excuse me, and continue to maintain spreads. At the same time, as I mentioned in our remarks, we truly have a bottom up approach. So we're looking at residual values on real estate and you and I have discussed it at different times. We're looking at residual values on real estate. We're looking at rental rates. We're looking at demographic trends and we're looking at structures and uses of building to really understand what makes sense from a residual perspective. So those two competing forces, we blend them together and hopefully find the right solution. But as I said, we've got some opportunities in the pipeline that will be unique to the portfolio and we look forward to executing on them.

Okay. And then just one last question if you can disclose this, looking at your major tenants, Walgreens, Kmart, CVS, CVS is 6%. What are your next two largest tenants, if you can give that or if you'd rather talk about it another time, that's fine? I was just kind of curious who they were.

At this point there are no other tenants in excess of 5%.

Okay.

But at this point we are not disclosing them, but we will consider that in the future as diversification occurs.

Sure, sure. Okay, thanks guys, appreciate it.

Thanks Dan.

And as a reminder, to ask a question, you may press star then one on your Touch-Tone phone. The next question will come from Wilkes Graham of Compass Point Research & Trading. Please go ahead.

Hey, good morning guys.

Wilkes, how are you?

Good. Just a quick question on the development side, as you're talking to Wawa, can you just remind us what kind of yields you're seeing on those developments, and have those -- as cap rates have compressed, have those yields come down at all on pro forma development yields with Wawa, and then potentially if you're talking to any other partners about developments down the road, are the sort of underwritten yields that you're looking where they were a year ago?

Very good question, Wilkes. From a tenant specific standpoint I can't comment on yields. We're subject to confidentiality in terms of those development relationships. What I can tell you, on a blended basis is we have not deviated from our historical hurdle. While it's great to see cap rates continue to compress in terms of valuations, in terms of NAV. We think, we're really projecting forward in a development pipeline. So these are two year average projects. We can't predict cap rates on a 24 or 30 month basis on a forward basis, sorry. So we've continued to maintain our discipline and keep those spreads intact. We're continuing to seek yields that are nine plus on the development front. We're often hitting double digits on the development front, and it's on a year one basis. In terms of tenant resistance, there's really two types of relationships with tenants. One is more of an up and open book format where we will submit on a return on cost and that will be per a tenant's -- per tenant dictated return on cost, but we also undertake a number of developments where we're not submitting a budget, and frankly we're handing a tenant a rental number and it's a negotiation from there, so really two types of projects in the development pipeline. That said, we're still hitting our historical hurdles. We're still selective about the projects that we undertake, but I think hopefully in the not so distant future we'll have some new tenants as well as existing projects for existing tenants in the portfolio and even potentially some different geographies.

Okay. That's helpful. Maybe another way to ask or maybe a slightly different question is it's probably harder to find acquisition opportunities out there to hit your hurdles than it was a year or two ago. Is it any more difficult now given the people you're talking to to find those (inaudible) development properties or opportunities?

You're first statement is that on acquisition opportunities unless you're willing to pay market rates, and we simply are a market buyer, have become highly competitive. As I said, we've got a number of opportunities. We've got $15 million in the first quarter we've got a number of opportunities coming forward. On the development front, again, it's a role reversal, so we have probably the cheapest cost of capital of any FP&L developer in the country, and that is due to our publicly traded nature, our access to capital as well as superior to other net lease developers. So we have a unique advantage in the development space compared to our competitors and peers. We see a number of tenants looking for projects, looking for net new stores, continuing to relocate either poor performing or high performing stores throughout the country, and we continue to try to take advantage of those opportunities at numbers that work for us and work for the company and work for its shareholders. So I think while yields have compressed and while there is some tenant resistance on the development front, due to our relationships and our pipeline we're able to maintain our appropriate spreads and hit our hurdles. And it's also important to remember the projects we're announcing today that means we're essentially breaking ground simultaneously. Those projects were tenant approved probably 24 to 30 months ago. So when we take a project that can be today for a retailer, those are typically groundbreakings where we -- late 2014 or early 2015.

That's a good point. Thank you.

Thanks Wilkes.

And once again, to ask a question, it's star then one. And showing no additional questions in the queue, this will conclude our question-and-answer session. I would like to turn the conference back to Mr. Joey Agree for any closing remarks.

That about wraps it up. Again, I'd like to thank everybody for taking the time in joining us this morning and we look forward to speaking to everybody again next quarter. Thanks.

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