Agree Realty Corp (ADC) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Agree Realty Corporation's first-quarter 2014 earnings conference call. During today's presentation, all parties will be in a listen-only mode. (Operator Instructions). 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, Nikki. Good morning, everyone, and thank you for joining us for Agree Realty's first-quarter 2014 conference call. Joining me for today's call is Brian Dickman, our Chief Financial Officer.

The first quarter represented a strong start to the new year for the Company. Our operating results, including approximately 10% year-over-year AFFO growth, are reflective of the unique and accretive opportunities that our acquisition and development teams continue to execute.

These results were achieved while maintaining our best-in-class balance sheet, as well as a portfolio of high-quality real estate that is over 60% leased to investment-grade retailers. I am also very pleased that our Board of Directors voted to raise our dividend by nearly 5% while maintaining conservative FFO and AFFO payout ratios.

For the quarter, we acquired nine properties for $22 million at an average cap rate of approximately 8.4%. These assets are leased to 12 different tenants in eight e-commerce-resistant retail sectors, and are located in eight different states.

During the quarter we welcomed Sherwin-Williams, O'Reilly Auto Parts, David's Bridal, and Michaels Crafts to our portfolio. Additionally, we acquired our first freestanding Buffalo Wild Wings in Indianapolis, Indiana.

On the development front, we announced the commencement of another McDonald's in East Palatka, Florida; delivered our previously announced Wawa project in St. Petersburg, Florida; and, despite the Polar Vortex, continued to make progress on our joint venture in New Lenox, Illinois. The Wawa in St. Petersburg held its grand opening on April 24. And our New Lenox project, which is a three-tenant net leased asset to TJ Maxx, Ross Dress for Less, and Petco, is scheduled to be delivered in the fourth quarter of this year.

At the end of the quarter, our portfolio consisted of 139 properties, spread across 34 states, and encompassing approximately 3.8 million square feet of gross leasable area. The portfolio consists of 131 net leased assets, which generated over 86% of our annualized rent, with the remainder being derived from our eight remaining community shopping centers.

At quarter end, the portfolio was at 97% occupancy. As of March 31, the Company's portfolio had a weighted average remaining lease term of approximately 11.4 years, which increases to 12.7 years specifically for our net leased portfolio. Investment-grade retailers generated 61% of annualized rent across the portfolio, and 69% when looking only at the net leased properties. We believe these metrics continue to be the strongest among our peer group.

On the leasing and asset management front, we are very pleased to have announced the addition of Hobby lobby to Petoskey Town Center during the first quarter. Hobby lobby has signed a 10-year lease to replace the former Glen's Market. We anticipate rent to commence by early third quarter of this year. Additionally, Kmart exercised the five-year extension option to September of 2019 at our freestanding store in Oscoda, Michigan.

With that, I will turn it over to Brian to discuss our financial results. Brian?

Thanks, Joey. Good morning, everyone. In terms of the requisite disclaimers, please note that 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 statement.

In addition, 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, which was issued yesterday and is available on our website at agreerealty.com.

As announced yesterday, total rental revenue for the first quarter increased by 23% over the comparable period in 2013, while robust revenue growth continued to be driven by quality investments sourced by both our acquisition and development teams. For the first quarter, we reported FFO per share of $0.52, which represents an increase of 6.1% over Q1 2013; and AFFO per share of $0.54, which represents an increase of 10.2% over Q1 2013.

The Company paid a dividend of $0.43 per share for the first quarter, or $1.72 on an annualized basis. This was an increase of 4.9% over the previous year, and represents the Company's 80th consecutive cash dividend. Our payout ratios for the quarter were 83% of FFO, and 80% of AFFO.

The Company's balance sheet continued to be in a very strong position. Our total debt to total market capitalization at March 31 was approximately 26%, and debt to EBITDA was approximately 4.2 times. These metrics compare to our targeted leverage levels of 35% to 40%, and 4.5 to 5.5 times, respectively, and imply a balance sheet that continues to be geared for additional growth. Our $85 million unsecured revolving credit facility had only $16 million outstanding at March 31, leaving $69 million of additional borrowing capacity. Interest coverage was a robust 4 times, and our debt maturities continued to be well staggered, with only $17.8 million maturing in the next three years, including $9.2 million in June of this year and $8.6 million in 2016.

In general, we are pleased with the results for the first quarter, and remain well positioned to continue expanding our portfolio.

With that, I'll turn the call back to Joey.

Thank you for the update, Brian. In conclusion, it was another quarter of significant progress in the Company's operating strategy. We expanded and diversified our portfolio, delivered significant year-over-year earnings growth, and maintained our strong balance sheet. We look forward to continuing to execute on additional opportunities as the year progresses.

At this time, we would like to open it up for questions.

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

Joey, I was wondering if -- could you give a little bit of color on the Hobby Lobby lease signed? In your discussions with them, was there any concern about it being a Kmart-anchored center? And maybe any information or color as to where the rents were, relative to the previous tenant.

Sure. I assume you are talking about the Hobby Lobby in Petoskey, obviously?

Yes.

Hobby Lobby, which is currently under construction, is -- again, that is a 10-year lease to join the center. That's going in the former Glen's Market there. Hobby Lobby really didn't express any concern about co-tenancy -- co-tenancy with Kmart, specifically. Petoskey is a pretty good retail market. You've got synergy with a number of major big-box, as well as junior box users there. So they were eager to get that store moving and open. And they are on a schedule to get that open as soon as possible. So we are excited to have them to the center. It is obviously a great backfill for the former Glen's space.

Just for some color, between a Walmart Supercenter, as well as a Meyer in Petoskey, the grocery market was just oversaturated, and Glen's couldn't make it in competition to those two larger-format retailers. Just couldn't compete on price.

So Hobby Lobby will be joining the center. In terms of their rent versus Glen's, they are paying nominally more than Glen's on a rent-per-square foot basis -- same lease structure as Glen's, with minimal landlord investment there.

Great. My next question is on the freestanding Kmart. Is it something as simple as they just send you a letter and say, we are renewing? Is it a discussion? Is it a negotiation? Did they look for any rent concessions? Just curious how that process works.

That's just a notification of them exercising their option there. We have discussions with them, as always, but that was just a five-year contractual option that they exercised.

Okay. I guess my last question, and I'll yield the floor, is: it hasn't been that long since the last-quarter conference call. Just curious what you are seeing in terms of the acquisition markets -- whether or not you are seeing more or less product come into market.

It's a great question. We are seeing a material change, really, in supply. We still think that overall it's generally a supply-constrained market. Pricing has reached pre-recession levels, as I think everybody really has noticed now, and taken notice of. Again, our job is to continue to find value in that marketplace, and continue to create value on the development side as well as joint venture side; and then to find opportunities that fit within the context of our portfolio and are accretive opportunities for our shareholder. And I think at the investment levels that we're targeting, we are well suited to do so in this market.

Great. Thanks, you guys.

Paul Adornato, BMO Capital Markets.

Joey, I think you mentioned that 69% of the NOI from the net leased portfolio comes from investment-grade tenants. And so the question is, to follow on to the discussion about competition for acquisitions -- was wondering what the cap rate differential is between investment-grade and non-investment-grade tenants. And how do you think about that mix? Is 69% the right number? Would you go higher? Should you go a little bit lower, given where cap rates are? Maybe you could give us a little color there.

It's a great question, Paul. I think on an overall basis, at approximately 61%, our portfolio -- and that's overall; not exclusive to the net leased portfolio -- we believe it has the highest concentrations and exposure to investment-grade retailers in the sector. I think, in terms of pricing differential, that's a wide answer. We can go on for a pretty long period of time. We have seen cap rates compress truly across the board. And cap rates range -- for investment-grade credit, really range from, we'll call it 4.5 for the lower price points, ground leased assets -- typically 20-year terms, with bumps to McDonald's and Walgreens -- all the way up to, probably, let's call it, 6 3/4. They are not approaching 7 anymore.

So there's approximately a 300 basis point band where you see investment-grade exposure, investment-grade cap rates, depending on multiple different factors: price point, lease structure. Obviously, real estate and regionality plays a piece into that; square footage of the boxes; fungibility of those boxes. So there's a number of factors that play into that. We have exposure across -- in the existing portfolio, across all of those tiers within that 300 basis point -- 200, really, basis point band.

I think in terms of pricing differential, we have seen that compress between investment-grade and non-investment-grade retailers. But we think there's minimally, round number, 100 basis points and upwards, really depending on credit use and sector, as well as lease term.

So our focus is maintaining a first-in-class portfolio. We believe we have room. And I think you have seen that in our acquisitions to date, to add non-investment-grade exposure. Really, sourcing opportunities that we believe are e-commerce-resistant, as well as recession resistant retailers; strong underlying real estate in stores that are well performing; that we understand not only the residual, but also the four-wall performance of that store.

So I know that's a long and circular answer, but I think it's a big topic. It's obviously the hot button within that lease. And it really gears toward our strategy on a go-forward basis.

Okay, great. And was wondering if you could just spend a minute talking about existing vacancies, and if there any known additional move-outs over the next couple of quarters?

Paul, this is Brian. In terms of existing vacancies, other than the Hobby Lobby that is backfilling the grocer that Joey spoke of -- that's about 42,000 square feet that is vacant as of this quarter, but spoken for -- it's really just some very small shop space at the shopping center. So nothing material there.

And in terms of go-forward, we have a handful of leases coming due later this year that we're in discussions. And those situations are fluid.

Okay. Just one more for the new guy. Brian, was wondering if you could maybe just tell us what attracted you to the Company? And what's your mandate over the next couple of quarters?

Good question, Paul. Appreciate that. Look forward to catching up with you more, going forward.

I spoke a little bit about it on the last call. But in simple terms, I think what you have here is a really interesting combination of a small cap company with a lot of attributes of almost a start-up type company, with the leadership that is here and the potential that we have to grow. And you combine that, though, with 20 years of a public company -- actually, the 20th anniversary was just about 10 days ago -- of a legacy, and a history, and a track record in the public markets, and 40 years in real estate. So that combination was very attractive to me. And I happened to have a lot of exposure to, and experience with, the net leased sector in my banking career. So it just seemed like a good fit.

And as far as mandate, it's really just to continue what Joey and the rest of the team here have accomplished over the last 12, 18 months; and really 3 1/2, 4 years since the acquisition platform and efforts to diversify and grow really kicked in in full strength. So look forward to continuing that progress as we go forward.

Okay, great. Thank you.

Wilkes Graham, Compass Point.

As R.J. said, it hasn't been that long since the last earnings call, so I don't think much has changed. But maybe just -- even though it's a little early, can you address any opportunities or challenges you see in the 400,000 square feet dev rolls next year? It looks like a number of them are Kmarts in the shopping centers. And I know you just re-signed a Kmart early, so is that something you are going to look to do, as well, with those? And are there any other interesting details from that roll in 2015?

It is early. We are obviously working through a number of those expirations or maturities currently, or will be in the future. A prime time to do so is at RECon, at the annual real estate convention in Las Vegas, to gain further clarity and insight. I'd tell you that a number of those -- the vast majority are -- frankly, even potentially all of those expirations are within the shopping center portfolio -- which we are, as stated, and has we have executed here historically -- we will continue to look for opportunities, either to divest or repositionings of those assets. And we hope to have some news on that, hopefully by Q3.

Okay. Thank you.

(Operator Instructions). As we are showing no further questions, I would like to turn the conference back over to Mr. Agree for any closing remarks.

All right. I think that about wraps it up. Thank you, everybody, for joining us, and we look forward to speaking with you again next quarter.

That does conclude our conference. Thank you for attending today's presentation. You may now disconnect your lines.