Agree Realty Corp (ADC) 2013 Q4 法說會逐字稿

Good day and welcome to the Agree Realty fourth-quarter and 2013 year-end earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Joey Agree, President and Chief Executive Officer. Please go ahead, Sir.

Thank you, Denise. Good morning, everyone, and thank you for joining us for Agree Realty's fourth-quarter and 2013 year-end earnings call. With me today are Brian Dickman, our new Chief Financial Officer; and Al Maximiuk, our Vice President of Finance and Accounting.

2013 was another strong year for the Company as we continue to expand and diversify our portfolio, while generating positive returns for our shareholders and maintaining a best-in-class balance sheet. For the year, we invested approximately $100 million in high-quality properties that leads to industry leading retailers.

We acquired 18 properties for approximately $73 million and developed or redeveloped six additional properties for an aggregate cost of approximately $26 million, including our joint venture Capital Solutions project. These 24 properties are located in 17 different states and leased to tenants representing 12 diverse retail sectors.

Approximately 56% of the rents generated by these properties are derived from investment grade retailers, and the average cap rate on our investments was approximately 8.4%. We continue to focus solely on net lease retail opportunities where we were able to leverage the Company's long-standing relationships and expertise to pursue investments that result in greater portfolio diversification as well as growth in our operating results.

At the end of the year, after considering the recently announced disposition of the Ironwood Common Shopping Center, our portfolio consisted of 130 properties across 33 states and encompassing approximately 3.7 million square feet of GLA that was 98% leased. The portfolio included 122 net leased assets, which generated 86% of our annualized rent, with the remainder being derived from our eight remaining community shopping centers.

As a reminder, the Company develop nearly half of these properties, including all eight remaining shopping centers and 52 of the net leased assets including the Hobby Lobby in Grand Forks, North Dakota and our newest Walgreens on the University of Michigan campus in Ann Arbor, both of which were delivered in the fourth quarter. As the only net leased REIT with this type of retail real estate expertise, we have a unique perspective as well as a competitive advantage when underwriting such investment opportunities.

As of December 31, 2013, the Company's portfolio had a weighted average of lease term of 11.7 years remaining, which increases to 13 years specifically for our net leased portfolio. Investment grade retailers generated 62% of annualized base rents across the portfolio, and 71% when looking only at the net leased properties. We believe these metrics are the strongest among our peer group and are representative of the high-caliber net leased portfolio that we have aggregated.

As we announced late last week, subsequent to the quarter end, we disposed of Ironwood Commons, an non-core shopping center asset anchored by Kmart and Miner's Super One Foods. This transaction reduced our Kmart exposure by approximately 13% and consistent with the strategy that we have been articulating, we will continue to look for opportunities to reduce this concentration further.

In general, we believe that our portfolio is in excellent condition and our balance sheet is geared toward additional growth. We currently have two properties under construction, a Wawa store in St. Petersburg, Florida, and our a joint venture project in New Lenox, Illinois, as well as a strong pipeline of acquisition and development opportunities. With that, I will turn the call over to Brian to discuss our financial results.

Thanks, Joey. Good morning, everybody. Let me start by saying how pleased I am to be here. I think Agree Realty has an extremely bright future, and I'm excited to be part of the team. I look forward to getting to know each of you on the call today.

With that, let's move onto the requisite disclaimers. First off, during this call the Company will make certain statements that may be considered forward-looking under federal securities laws. Our actual results may differ significantly from the matters discussed in any forward-looking statements.

In addition, please note that we will be discussing non-GAAP financial measures, including funds from operations, or FFO, and adjusted funds from operations, or AFFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the Company's earnings release issued yesterday which is available on our website at agreerealty.com.

As announced yesterday, total revenues for the fourth quarter increased by 26% over the comparable period in 2012. This is our sixth consecutive quarter announcing 20%-plus year-over-year revenue growth, and is a testament to the execution of our acquisition and development teams.

For the full year, total revenues in 2013 also increased by 26%, which follows the 14% increase in revenues we experienced in 2012 over 2011. For the fourth quarter, we reported FFO per share of $0.56 and AFFO of $0.57, which represent material increases over the $0.52 per share we recorded for both FFO and AFFO in the fourth quarter of 2012.

For the year, we reported FFO per share of $2.10 and AFFO of $2.13, as compared to $2.03 and $2.08 for FFO and AFFO, respectively, in 2012. The Company paid its 79th consecutive cash dividend for the fourth quarter and was $0.41 per share, or $1.64, on an annualized basis. Our payout ratio for the quarter was 73% of FFO and 72% of AFFO.

And while any changes in our dividend policy will be made by our Board, our payout ratio suggests that we have the capacity to potentially increase our dividend for the second year in a row. Moving onto the balance sheet, where the Company continues to be in a very strong position.

As a result of our $48.8 million equity offering in late November, our total debt to total market cap at the end of the year was approximately 26%, and debt to EBITDA was approximately 4 times. These metrics compared to our targeted leverage levels of 35% to 40% and 4.5 to 5 times, and applied balance sheet geared for growth, as Joey indicated earlier.

Our $85 million unsecured revolving credit facility had only $9 million outstanding at December 31, leaving $76 million of additional borrowing capacity. Interest covered is a robust 4 times, and our debt maturities are well staggered with only $17.8 million maturing in the next three years, including $9.2 million in 2014 and $8.6 million in 2016.

In closing, we believe the Company is well positioned and well capitalized to continue expanding and diversifying our portfolio. And our goal is to do so while delivering consistent results and maintaining a high-quality balance sheet. With that, I'd like to turn call back over to Joey.

Thank you for the update, Brian. We are extremely pleased to have you onboard. Before we open up for questions, I just like to expand upon Brian's last remark. We are clearly looking to grow the Company, but we're going to do so in a disciplined and sustainable way that includes improving portfolio quality, maintaining a strong balancing sheet, and focusing on accretive transactions.

We have invested over $275 million in high-quality net leased assets since April of 2010, and we are poised to carry the momentum into 2014 and beyond. At this time, we would like to open it up for questions.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Our first question will come from R.J. Milligan of Raymond James & Associates.

Hello. Good morning, guys.

Good morning, R.J.

Joey, a pretty light, relatively light acquisition activity in the fourth quarter. You have already announced a decent amount of activity so far in the first quarter here. Curious if in the fourth quarter there is anything structural going on in terms of where the market is, where cap rates are, and then what you are seeing in the pipeline?

That's a good question, R.J.

I think the $4 million in acquisition activity in the fourth quarter, frankly, was probably just an aberration for us. We did a number of transactions that were either going through diligence or waiting on some condition to close that we anticipate as, frankly, as either closed in the first quarter or will close in the first quarter.

I don't think that's anything to use for our run rate on a go-forward basis. No structural changes there, just timing.

Okay. And then the pipeline going forward, you are still seeing a lot of product coming to market?

Yes.

Sort of sweet spot?

Well, I don't think anything has changed in terms of the supply coming on market. I think we continued to see a significant or a pent-up demand. We don't see a ton of new supply coming on market in terms of net new product.

Development activity is still historically light, but we are still able to find and source opportunities that both serve our portfolio from a diversification perspective and are accretive to our shareholders.

Okay. And question, this is probably both for, Joey, both you and Brian. Just curious the thought process in terms of the skills and expertise that Brian adds to the management team? And if this is a signal of any sort of new strategy for the Company or you guys are going to become more aggressive in certain areas?

Some comments on the hiring there? And maybe, Brian, your thoughts on where you would like to change the strategy or help complement the strategy?

Sure. I will take it from the top and then I will pass over to Brian. I think, first and foremost, as I mentioned in the prepared remarks, we are thrilled to have Brian onboard. We have been working with Brian in, obviously, a different capacity for upwards of three years prior to him starting here at the Company.

And I think is a combination of his financial expertise is institutional experience, really is his net leased knowledge and focus, and then his leadership and strategic mindset will be a huge addition. It's already a huge addition to the Company and really complements the existing accounting and finance team that we have in place here.

Yes, R.J., this is Brian.

I think really I am just looking to be additive here. I think if you look at what Joey and the rest of the team have accomplished over the last three years and what they've done with the portfolio, just want to continue that trend and do more of the same.

If there's any specifics at all, the benefit that I have had of being able to interact with management teams for the last nine years, I think has giving me some interesting insight and experience that I can contribute here. Some capital market knowledge. And then really just some strategic transactions that I've done from an M&A capacity as those opportunities are available to us, I think I can be helpful with those, as well. But no major change in strategy, I don't think.

Okay. And my last question before I get back in the queue here is, Joey, can you provide any numbers, maybe a cap rate on the Kmart disposition, or at least the thought process on why now is an appropriate time to dispose of that asset?

Sure.

We are really just continuing the trend that we started in 2012. We have now divested really a quarter of our shopping centers in Kmart in good assets, and we continued to divest of assets where we think it's an opportune time to monetize via a disposition where we don't see any strategic repositioning of the asset, either through existing boxes, redevelopment, or outline opportunities, which we think we will see in the near future.

I think this now gets us out of the UP in Michigan where we are not seeing any significant demographic growth or uptick. And frankly, we understand the residuals. All of the centers we developed somewhere between 20 and 30 years ago. We understand the residuals in the markets of these centers pretty well.

Again, to really continuing the trend that we started in 2012 with the divestment of Shawano, Plymouth, and also Charlevoix, Michigan, Charlevoix Commons. Now Ironwood Commons, we've divested of that asset. So, four of the weaker shopping centers in our portfolio. And with the intent to redeploy and the focus to redeploy those assets into net leased retail via acquisition and development.

All right, great. Thanks, guys.

Thanks, R.J.

(Operator Instructions)

Our next question will come from Wilkes Graham of Compass Point.

Hello. Good morning, Joey, and Brian, welcome to the Company. You guys had a great quarter. I think very productive. I was impressed with AFFO results given the capital raise.

Joey, I think we talk about this every quarter, but maybe just talk about how the environment looks for continued acquisitions relative to your ability to source new development deals?

Yes. First, good morning, Wilkes. Always good to talk to you.

Building upon R.J.'s question in my previous answer, I think the acquisition environment is really still dictated by demand here. We are not seeing a significant amount of new supply come on the market. That said, we aren't market buyers, so we are constantly and consistently looking for opportunities via acquisitions, joint ventures, and development that, frankly, don't necessarily correlate to the market.

So a lot of the transactions you see us undertake, obviously, are not wisely marketed, but I will take a step further, we are able to create some type of value on a go-forward basis. So, I think the overall market, we are obviously aware there are significant numbers of well-capitalized buyers who are chasing assets, and we are just looking to selectively and decisively transact on assets that fit within the context of our portfolio and are accretive to our shareholders.

And then on the development side, does the environment, certainly the sourcing environment, seem as robust as it was a year ago?

Yes, I don't think we have seen any change in terms of really the demand on the development side. Now again, we are working with pretty specific and highly specified tenants on a turnkey and a ground lease basis. So I am not sure if they are representative of a broader market.

I think we see a number of retailers looking for net new sites. I think a lot of the backfill opportunities have been absorbed. Obviously, occupancies have picked up. But most tenants that we are doing business with on the development side are looking for prototypical stores, either on a ground lease or on a turnkey basis, and those highly specified criteria lend well to new development, either for net new or relocation opportunities.

Great. Thanks, Joey.

Thanks, Wilkes.

(Operator Instructions)

The next question will come from John Massocca of Ladenburg Thalmann.

Actually, it's Dan Dalin here with John. Good morning.

Joey, just a question on the dividend. How should we think about your payout on a going forward basis? Is there a range that we should start to -- that we should model in, in terms on a price to or just dividends to AFFO or something to that degree?

Yes, I will start and then Brian can pick it up if he wants to jump in, as well. I think historically we have guided payout ratios between 75% and 85%, really on both an FFO and an AFFO basis since they're so tight together. Obviously, Q4 we are at 72% on an FFO basis and 73% on an AFFO basis. The beginning of March at our Board meeting, the Board will obviously will look at our capital requirements on a go-forward basis, our payout ratio, and then make a determination for 2014.

Okay. And then in terms of what you are seeing in the marketplace, you guys have been a pretty substantial par of investment-grade rated tenants. Are you starting to see pricing there just a little too aggressive?

How should we think about this year in terms of what you may buy? Is it going to be the majority investment grade, or are you going to start to go down the credit curve potentially if you like the residual value of the properties?

That's a great question, Dan.

I think, first, just to take a snapshot again of our portfolio today, we are approximately 62% of investment grade, which I believe is the highest in the sector. The net leased portfolio loan has 12.7 years average remaining base term, so I think that our net leased portfolio is probably the strongest in the country.

And then if you look at the activity, both all of our investment activity for 2013, about 56% of our investment activity in terms of annualized base rents was investment grade. I think that there is a couple important pieces. I think that, one, gives us the flexibility. Not a change in strategy, but the flexibility to pursue either non-rated assets or tenants that do not have an investment-grade credit rating, on development as well as an acquisition basis.

And it gives us, really, the ability to look out via sector, and there are sectors where we don't have significant concentration and are underway and be able to strategically add through development joint venture, as well as acquisition, really, concentrations in those areas. So I don't think you'll see a wholesale change in our investment philosophy.

That said, we are able to capitalize on opportunities from balance sheet and portfolio perspective, whether they are investment grade or not investment grade, for simply potentially the reasons that you mentioned. We may like the residuals. We may like the operated.

There are a number of tenants, some of which are in our portfolio today, many of which we would like to add, that do not carry a credit rating, maybe large, privately held companies. So I think, most importantly to take away from this, is that we have the flexibility on a go-forward basis to really add concentration and put our focus in a broad array of tenants and, really, a broad range.

Okay. And then lastly on the joint venture Capital Solutions, it looks like you guys have announced the second project there, but it looks like there's three different tenants at that property. Could you maybe talk about how that came to fruition?

And I'm sorry if you mentioned this prior on the call, I got on late. But and then, if that particular developer you are working with, do they have all their potential sites in the works? Any detail there would be helpful?

Sure. So the second project that we announced in New Lenox, Illinois, that was actually a prior seller, or a previous seller, that we transacted with twice in prior years. We acquired the L.A. Fitness in Lake Zurich, Illinois, as well as the Aldi in New Lenox, Illinois from that seller.

We are currently under construction in New Lenox on that asset, as you mentioned, it's a Menards and Walmart super anchor center, sorry, a Menards and Super Walmart anchored power center. The seller developed the remainder of the center and, frankly, he wanted the opportunity to take his capital and most likely pursue other opportunities. It was a historical partner of ours.

This is the third time we have transacted, and we hope to continue to be able to execute on transactions with him, either acquisition opportunities or join venture opportunities in the future. Most importantly, I think it is the type of partner that our JVCS platform is geared toward: repeat developers that have relationships with industry-leading retailers that can really leverage our balance sheet, as well as our expertise and experience to bring the pipelines to fruition.

Okay. And then just lastly, if I may, I noticed one of the tenants or business segments that you are not really exposed to is casual dining. Can you maybe talk about any type of expansion plans there, or is that just a sector that you want to stay away from?

Great question, Dan.

I will take it even wider than just casual dining. We are underweight in the restaurant entire sector, frankly, whether it's casual dining, quick service restaurants, or fast theaters.

Obviously, we have done some development work for Walgreens. We participated in the sale leaseback of the Applebee's portfolio at the end of 2012. And I think you'll see us increase exposure in hopefully all three of those subsectors of the restaurant space.

And we are working actively to do so, both on a development basis, as well as an acquisition basis, and we have targeted industry-leading tenants that could be larger franchisees, as well as corporate that we think are both -- that are recession resistant, and think are concepts that are here to stay, all of which everybody on this call is most likely familiar with.

Okay. Thank you very much.

Great. Thanks, Dan.

Our next question will come from Craig Kucera of Wunderlich Securities.

Hello, good morning, guys. And welcome aboard, Brian.

Thanks, Craig.

Good morning.

You bet. With demand for retail remaining soft, and there's not a lot of supply so it gives you certainly an opportunity to develop, but it is pushing downward pressure on cap rates within the space. Does it make you look differently at shopping centers as a component of your business, or should we think about you guys moving further and further into the net leased space on retail?

Let me start that question by really backtracking to Dan's earlier question. The cap rate compression that we've seen in the investment grade, really the investment-grade tenants with significant term, either on a ground lease or a turnkey basis, is really phenomenal. We are seeing a number of our tenants in the portfolio continue to trade with size in front in terms of cap rates or really up to the low 6s, and a select few in the 4 range.

We are not seeing cap rate expansion, and the demand is pretty fantastic still with the lack of supply. That bodes well, obviously, for any of these for our portfolio, but allows us the ability to continue to focus on non-investment grade tenants, or typical strategic transactions we've been entering with tenants historically. Those cap rate levels do not impact our overview of the shopping center business.

We are focused here at Agree on net leased retail via an acquisition, development, and joint venture platform, and that is our highly specific and highly specified focus. And I don't see that changing anywhere in the near future.

Got it.

And so, if you are seeing those kind of cap rates pushing down into the, as you said, high 4s and somewhere in the 5s, clearly, developing is a much more attractive from a cost of capital standpoint. What do you think stimulates that?

It sounded like you said restaurants, but do you see any other opportunities with the retailers you speak to, to maybe amp up where they are seeing demand, or maybe even seeing some redevelopment demand where you may at a parking lot or something like that?

Yes, we are constantly in conversations and active dialogue with really a couple dozen retailers across really a broad variety of sectors about their new storing strategies, about sites, and regarding specific opportunities. So we anticipate on being able to announce a couple new retailers for our portfolios pretty shortly here on the development side of the business. And we'll continue to be focused on looking at to expand both by broadening our relationships to new tenants, and deepening our relationships to existing tenants.

Okay. Thanks, guys.

Thank you.

And in showing no additional questions in the queue, we will conclude the question-and-answer session. I would like to turn the conference back over to Mr. Joey Agree for his closing remarks.

Well, that about wraps it up. Again, I'd like to thank everybody for joining us. We look forward to speaking to everybody next quarter, and have a great one. Thank you.

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