Agree Realty Corp (ADC) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Agree Realty Corporation's second 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.

Thank you. Welcome, everyone, and thank you for joining us for Agree Realty Corporation's second-quarter earnings conference call. I am pleased to have Al Maximiuk, our Chief Financial Officer, here with me this morning.

As 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 for the second quarter. On the acquisition front, we closed on four properties during the quarter for an aggregate purchase price of approximately $28 million. The properties are leased to four tenants located in four states representing four different retail sectors.

The single tenant-properties acquired during the quarter are net leased to Starbucks in Manchester, Connecticut; PetSmart in Rapid City, South Dakota; AutoZone in Chicago, Illinois; and Sam's Club in Brooklyn, Ohio, a suburb of Cleveland. The Sam's Club in Brooklyn, Ohio is a very attractive asset leased to Walmart and occupied by Sam's Club. It is a recently remodeled 148,000-square-foot store with strong demographics located immediately adjacent to a Walmart which was recently expanded to a Supercenter format. This store is a very high performer and is currently in percentage rent.

The four properties acquired during the quarter had an average cap rate of approximately 7.4%. We dipped below our normal hurdles in order to acquire the Sam's Club property, which we believe is a fantastic addition to our portfolio. As we disclosed at the time of the acquisition, Walmart is now the Company's fourth largest tenant. We would expect to return to the average 8% cap rate range for future acquisitions.

Since the start of our acquisition program in 2010, on our $200 million of acquisitions, the average cap rate has been 8.25%. For the six months, our acquisition activity totaled approximately $43 million. Thus far this year, we've selectively acquired nine single-tenant properties located in eight states representing seven different retail sectors. Approximately 69% of the annual rentals acquired year to date are derived from investment-grade retailers.

During the second quarter, we delivered three new development projects to industry-leading tenants. There are a couple significant milestones that I would like to mention. Our first Wawa development in Kissimmee, Florida was delivered and held its grand opening on April 3. Also, our first ground-up California Walgreens in Rancho Cordova was delivered on April 8 of this year. We also delivered our second Wawa development in Pinellas Park, Florida on May 29 of 2013.

Total development costs for the three properties placed in service during the second quarter was approximately $12 million.

During the quarter, our development activity remained robust. We currently have three additional projects underway. This includes our two previously announced Wawa projects in Castleberry and St. Petersburg, Florida, as well as our newest Walgreens on the University of Michigan's campus in Ann Arbor, Michigan. These projects are all 20- and 25-year turnkey and ground leases.

Looking forward, we expect to deliver the Wawa in Castleberry in the third quarter of this year and the Walgreens in Ann Arbor as well as the Wawa in St. Petersburg in the first half of 2014.

In addition, we are proceeding with the redevelopment of our Monroeville, Pennsylvania property. We've executed a lease with HomeGoods, a subsidiary of the TJX Companies. HomeGoods is an industry-leading home furnishing retailer with over 400 stores across the United States. We expect rent commencement during the third quarter of this year for this 29,000-square-foot store.

During the second quarter, we were also pleased to announce our first Joint Venture Capital Solutions project. We closed on a 4.2-acre parcel of land for the development of a 55,000-square-foot Hobby Lobby store in Grand Forks, North Dakota. Agree provided the necessary capital and will be sole owner of the project upon completion. Hobby Lobby has previously executed a 15-year lease for the project.

Moving on to our current portfolio metrics. Our occupancy at June 30, 2013 was approximately 97%. As of June 13, our portfolio consisted of 120 properties, it spanned 32 states and contained an aggregate of approximately 3.5 million square feet of GLA. It's comprised of 111 single-tenant net lease properties as well as nine community shopping centers. The Company developed approximately half these properties, including 48 of the 111 single-tenant properties and all nine of the shopping centers.

As of June 30, 2013, approximately 97% of our annualized base rent was from national and regional tenants. Approximately 63% of our total rental income is derived from retailers that are investment-grade, and approximately 75% of rental income from our single-tenant portfolio is from investment-grade retailers.

Our portfolio also contains a number of unrated credits that we believe would qualify for investment-grade status if they pursue a rating in the future.

As I mentioned previously, subsequent to the acquisition of the Sam's Club in Brooklyn, Ohio, Walmart became our fourth largest tenant. In addition, due to the delivery of the two new developments to Wawa, our top five tenants are now Walgreens, Kmart, CVS, Walmart and Wawa.

Portfolio-wide, the weighted average base term remaining is 12 years. This increases to over 13 years specifically for our single-tenant net lease properties.

I think that about wraps up our real estate operations. On another note, I am pleased to mention that Agree Realty Corporation was added to two stock market indices during the quarter. We were added to the MSCI US REIT index, or the RMV, on May 31, and S&P announced that we will be added to the S&P Small Cap 600 index on July 30. This is a direct result of the progress and growth we've experienced over the last three years and should lead to increased trading activity and liquidity in our shares.

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 will be providing a few highlights for 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 add at AgreeRealty.com.

The Company is pleased to announce that our revenues for the second quarter of 2013 increased 26% year-over-year, from $8.6 million to $10.9 million. This strong increase in revenues was due to the execution of our acquisition and development programs, while continuing to maintain our occupancy at 97%.

Funds from operations, or FFO, for the quarter increased by 19% to $6,804,000 from FFO of $5,723,000 for the second quarter of 2012. This equates to $-.51 per share compared with FFO of $0.50 per share a year ago.

Adjusted funds from operations, or AFFO, for the second quarter of 2013 was $0.52 per share compared with AFFO of $0.51 per share for the second quarter of 2012.

The Company's revenues for the six months of 2013 increased 24% year-over-year, from $17 million to $21.1 million. For the six months, FFO was $13,186,000 compared to FFO of $11,231,000 for the year prior. This equates to a $1.00 per share for the six months in 2013 compared with FFO of $0.99 per share for the prior year.

Adjusted funds from operations for the six months of 2013 were $1.01 per share compared with AFFO of $1.03 per share for the prior year.

For the second quarter, the Company paid its 77th consecutive cash dividend. The dividend for the second quarter amounted to $0.41 per share or $1.64 on an annual basis. Both our current FFO payout ratio and AFFO payout ratio are approximately 80%.

Moving to the balance sheet, 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 28%. The portfolio currently has 69 unencumbered assets. The Company's interest coverage is healthy at four times and our debt-to-EBITDA ratio is at 4.7 times.

Approximately $23.4 million or 20% of total mortgage indebtedness is self-amortizing nonrecourse loans that are secured by 13 Walgreens assets. These loans will be completely paid off during 2017 to 2026.

Principal amortization for the second quarter was $858,000 and $1,708,000 year-to-date. Principal is amortized at an average of $3.5 million to $3.8 million a year over the next few years. In total, approximately $28 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 the next few years.

That concludes the highlights of the Company's financial and operating results for the second quarter of 2013. I'd like to 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.

(Operator Instructions). R.J. Milligan, Raymond James.

Joey, I was just wondering what you've seen in the acquisition market out there, given the move in interest rates that we've seen. Have you seen a pause in the market? Have you seen movement in cap rates? Just any color that you can give us on that.

That's a great question. We have yet to see any true movement in terms of cap rates. I think that will take time to cascade down really through the net lease brokerage community on to sellers.

All I can speak to really is our reaction to the uptick. Obviously, everybody is aware that the ten-year is up essentially 100 basis points. Our actions in response -- first, we are not acquiring assets that are on the margin first and foremost. Second, I think we've taken a look at our pricing and adjusted accordingly, and I think you'll see that in terms of going forward in the third, fourth and into 2014. But I think it will take a matter of months, potentially to the end of the year, until we see a true material impact on cap rates.

So, Joey, when you say that you've adjusted it in your pricing, does that mean your required yield as you look at these projects, you have made that adjustment, or what do you mean by that?

Yes, we looked at the existing assets that we have under contract to acquire and the pricing, and potentially any repricing accordingly. And then on a go-forward basis, I think it requires everybody to take a look at their cost of capital and make adjustments, and we've certainly made those.

Okay. The portfolio is 60% investment-grade, which is high for the space. Obviously, that's a high concentration. Are you comfortable with the amount of investment-grade exposure that you guys have? Would you like to increase that or how do you feel about that exposure?

Well, as you mentioned, our portfolio today is approximately 63% investment-grade. That's a function of two things. It is a function of our acquisition platform and also our development platform. And we continue to execute and bring projects online in terms of development for investment-grade retailers, such as Wawa, as well as Walgreens here in the second quarter.

I think as we go forward, we are not adverse to taking that down slightly. I think we want to stay a high-quality, industry-leading portfolio. At the same time, if there are opportunities with non-rated credits, we will look to pursue those as well.

So I think the 63% is a good number. Obviously, I believe it's the highest in the net lease space today. But we also think it's important to continue to maintain a high-quality portfolio.

Great, thanks guys.

(Operator Instructions). Wilkes Graham, Compass Point.

This is Ryan Gilbert on with Wilkes. Just a quick question about your acquisition program. You guys had a very strong quarter, certainly well above our estimates. How does the pipeline look for the rest of the year? Do you think you can maintain this pace or have you pulled a little bit of some of your pipeline forward in the first half?

We haven't pulled any of our pipeline forward towards the first half of this year. Those closings really occur naturally. In terms of on a go-forward basis, we continue to source opportunities. That hurdle, as adjusted, as I mentioned in the previous question from R.J. We continue to source opportunities that hurdle industry-leading retailers, predominantly investment-grade, similar type names that everybody's familiar with in our portfolio.

In terms of a crystal ball going forward, we don't give guidance. We have a significant pipeline, both under contract and through purchase agreement negotiations currently. And we'll take those through diligence and hopefully bring them to a close.

Great, thanks very much.

(Operator Instructions). Dan Donlan, Ladenburg Thalmann.

Thank you and good morning. Joey, we've covered the acquisitions fairly well here this morning. Could you maybe talk about developments and kind how does the pipeline look there, and has anything new kind of creeped into that that you might be announcing in the next six months or anything like that?

We have got interesting opportunities in the pipeline, really in the Midwest, as well as California and Florida. We hope to announce some of those opportunities by year-end, and I anticipate we will get at least a couple of those out.

We continue to target industry-leading credits in the fast food sector, in the C-store space, as well as the pharmacy sector. And we continue additionally to really -- to work with additional tenants in those sectors that aren't currently in our portfolio to expand our relationships. So we are highly focused on growing the development pipeline in both depth as well as breadth.

And then just going digging a little further, are some of these projects that may have been tabled as a result of the recession are finally starting to come back to fruition or is it just expansion from existing retailers or a little bit of both?

Nothing has come back to life post-recession. It's typically expansions, as well as high-priority relocations of existing units, potentially combinations or what they call 2-for-1. So nothing that has been brought back to life per se, but really new opportunities that have arisen post-recession.

Okay. And then the Wawa development that you guys have in Ann Arbor, could you remind us of when you think that's going to open up?

You mean the Walgreens?

Sorry, yes -- sorry, Walgreens.

We think the Walgreens will be open and operating hopefully near the beginning of first quarter. So we continue to progress in terms of construction, and given some winter conditions, we hopefully -- we are anticipating a first-quarter opening there.

Okay. And then lastly, on dispositions, are you guys -- or should we be modeling anything else for the rest of the year? And how is -- in the shopping center portfolio, is there anything you think you might be able to announce this year or maybe into next year?

So far, year-to-date, we have disposed of about $5.5 million in assets, and that would be the Ypsilanti Walgreens. I think going forward, I think it would be fair to say that we will continue to look for both non-core net lease dispositions as well as potentially shopping center dispositions. And we hope to announce some progress by the end of the year.

Okay. And then -- sorry, one more -- as far as the lease maturities that you guys have, I would imagine that's mostly coming from the shopping center portfolio over the next two years. Would you say -- how should we be thinking about rent adjustments there? Do you think that the existing leases are above or below market? Any color you could give us on what we should be modeling there.

First, all of the near-term expirations over the course of the next few years, the medium-term expirations, frankly, are in the shopping center portfolio. So the net lease portfolio has a weighted average base term remaining of over 13 years. So all those expirations you see are in the shopping center portfolio.

In 2014, we've got about $1.4 million in annualized base rent turning over. In terms of rental growth there, I think it's difficult still to model anything. Most of these tenants have been in the shopping center for, if not 20 years, upwards of over 10 years. Most of them have contractual options with minimal increases that frankly is probably immaterial. So most of the growth is going to come external, as you are aware, Dan, from both developments and acquisitions coming online.

Okay, all right. Thanks, guys.

(Operator Instructions). And showing no additional questions in the queue, this will conclude our question-and-answer session. I would like to turn the conference back over to Joey Agree for his closing remarks.

Well, that about wraps it up. Again, I'd like to thank everyone for joining us and we look forward to speaking to all next quarter. Thank you.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.