Operator: Good morning, and welcome to the Agree Realty First Quarter 2023 Conference Call. All participants will be in a listen-only mode for the duration of the call. [Operator Instructions] Please also note, that this event is being recorded today. I would now like to turn the conference over to Brian Hawthorne, Director of Corporate Finance. Please go ahead, Brian.

Brian Hawthorne: Thank you. Good morning, everyone, and thank you for joining us for Agree Realty’s first quarter 2023 earnings call. Before turning the call over to Joey and Peter to discuss our results for the quarter, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities law. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons. Please see yesterday’s earnings release and our SEC filings, including our latest annual report on Form 10-K for a discussion of various risks and uncertainties underlying our forward-looking statements.

In addition, we discuss non-GAAP financial measures, including our core funds from operations or core FFO, adjusted funds from operations or AFFO, and net debt to recurring EBITDA. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release, website and SEC filings. I’ll now turn the call over to Joey.

Joey Agree: Thanks, Brian, and thank you all for joining us this morning. I’m extremely pleased to report that we’re off to a strong start in 2023. The lack of competition amongst both public and private buyers has provided us with greater access to attractive risk-adjusted opportunities than anticipated. As demonstrated by our first quarter investment activity and even more evident in our pipeline and seller fatigue that’s contributing to a narrowing bid-ask spread. We have seen a recent acceleration of cellular confitulation as the reality of a new pricing paradigm has begun to set in. Due to market forces, capitalized competition within our targeted sandbox is extremely limited. Our ability to quickly diligence and certainty to close our very attractive propositions for owners that have been on and off market with private purchasers.

Our pipeline over the last few weeks has been very dynamic with a wide spectrum of opportunities. In the last several days alone, we’ve executed letters of intent to acquire over $100 million in high-quality assets at attractive cap rates, diversified portfolios, sale leasebacks, distressed developers and early extensions among the approximately 100 properties that we currently have under control. Given our acquisition volume in the first quarter and increased visibility into our pipeline, we are raising our acquisition guidance from at least $1 billion to at least $1.2 billion acquired for the year. That said, the world remains quite volatile, and we will not waiver from our stringent underwriting criteria. The investments we have made in technology and our team have provided our company a distinct competitive advantage.

Both our analysts and rotation programs, led by our EVP of People and Culture, Nicole Widevine have given us a deep bench of multifaceted and talented future leaders. Similarly, our multiyear investments in information technology led by both ARC and our ERP system are continuing to bear fruit, enabling us to be nimbler and review, source and execute transactions more efficiently. Peter will speak to the G&A leverage we continue to gain in a few minutes. Our decision to pre-equitize our balance sheet in advance of this year has proven prudent and we remain in an extremely strong position. We ended the first quarter with approximately $1.2 billion of liquidity, significant outstanding forward equity and well below the low end of our target leverage range.

On earlier calls, I stressed that we would avoid moving up the risk curve or shifting our strategy. We have been very successful leveraging our relationships and core competencies to identify extremely high-quality opportunities and economic and geopolitical uncertainties remain. During the first quarter, we invested over $314 million in 95 high-quality retail net lease properties across our 3 external growth platforms. This includes the acquisition of 66 assets for approximately $302 million in the tire and auto service, home improvement, grocery, auto parts, Dollar Store and farm and rural supply sectors, among others. The weighted average cap rate of the acquisitions was 6.7%, a 30 basis point expansion relative to the fourth quarter and 50 basis points higher than the full year 2022.

75% of the acquisitions are leased to investment-grade retailers and our weighted average lease term of over 13 years was a 5-year high. We acquired 2 ground leases during the quarter, representing $19 million, approximately 7% of total acquisition volume for the quarter. The breadth and variety of transactions during the quarter demonstrates our unique value proposition and the strength of our industry-wide relationships. We executed several sale leasebacks with our retail partners, led by 2 transactions in the grocery space with national and super-regional operators, both of which carry investment-grade credit ratings. We also completed the acquisition of a diversified portfolio from an institutional seller, several blend-and-extend opportunities as well as a number of developer direct transactions.

Our long-term vision that of a full service real estate-focused net lease retail REIT and not simply a spread investor has accelerated due to the capital-constrained environment and our team’s hard work across multiple fronts. Moving on to our development in PCS platforms. We commenced 5 new projects with total anticipated cost of over $19 million. Construction continued during the quarter on 21 projects with an anticipated cost totaling nearly $86 million. The projects in Florida and California were wrapped up during the quarter for Gerber Cision [ph]. In the aggregate, we had 29 projects completed or under construction during the quarter with anticipated total cost of $115 million, inclusive of the $59 million of costs incurred as of March 31.

On the leasing front, we executed new leases, extensions or options on approximately 510,000 square feet of gross leasable area during the first quarter. Notable extension options or new leases included 2 Sam’s clubs located in Lansing, Michigan and Brooklyn, Ohio. We are in a very strong position for the remainder of the year with just 16 leases or 80 basis points of annualized base rents maturing. At quarter end, our growing retail portfolio surpassed 1,900 properties across all 48 continental in the United States, including 208 ground leases representing over 12% of total annualized base rents. Occupancy remained very strong at 99.7%, and our investment-grade exposure stood at 68%. Our portfolio continues to be the preeminent retail portfolio in the country and remains extremely well positioned to withstand any macroeconomic headwinds.

With that, I’ll hand the call over to Peter, and then we can open up for questions.

Peter Coughenour: Thank you, Joey. Starting with earnings; core FFO for the first quarter was $0.98 per share, representing a 0.6% year-over-year increase. AFFO per share for the first quarter increased 1.5% year-over-year to $0.98. We received over $1.2 million of percentage rent during the quarter which contributed more than $0.01 of earnings to core FFO and AFFO per share, respectively. This should largely dissipate for the remainder of the year as most tenants are obligated to pay during the first quarter. As a reminder, treasury stock is included in our diluted share count prior to settlement if ADC stock trades above the deal price of our outstanding forward equity offerings. The aggregate dilutive impact related to these offerings was $0.05 in the first quarter.

Our consistent and reliable earnings growth continues to support a growing and well-covered dividend. During the first quarter, we declared monthly cash dividends of $0.24 per common share for each of January, February and March. On an annualized basis, the monthly dividends represent a 5.7% increase over the annualized dividend from the first quarter of 2022. At 73%, our payout ratio for the first quarter was below the low end of our targeted range of 75% to 85% of AFFO per share. Subsequent to quarter end, we announced a monthly dividend of $0.243 per share for April. The monthly dividend equates to an annualized dividend of nearly $2.92 per share which represents a 3.8% year-over-year increase and a 2-year stack increase of 11.7%. General and administrative expenses totaled $8.8 million in the first quarter.

G&A expense was 6.5% of revenue adjusted for the noncash amortization of above and below market lease intangibles or 7% of unadjusted revenue. For the full year, we expect G&A to decline a minimum of 50 basis points as a percentage of adjusted revenue as our IT investments that Joey referenced earlier and process improvements have enabled us to scale very efficiently. This would represent a 2-year stack decrease of at least 100 basis points. Total income tax expense for the first quarter was approximately $783,000. For the full year 2023, we expect income tax expense to be between $3 million and $4 million. Moving on to our capital markets activities. We settled approximately 2.9 million shares of outstanding forward equity during the first quarter, realizing net proceeds of $195 million.

At quarter end, we still had approximately 5.3 million shares remaining to be settled under existing forward sale agreements which are anticipated to raise net proceeds of $362 million upon settlement. As of March 31, our net debt to recurring EBITDA was approximately 3.7x pro forma for the settlement of our outstanding forward equity. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was approximately 4.5x. Total debt to enterprise value at quarter end was approximately 24%, while our fixed charge coverage ratio which includes principal amortization in the preferred dividend remained at a very healthy level of 5.1x. We ended the quarter with total liquidity of $1.2 billion, including approximately $804 million of availability on the revolver, $362 million of outstanding forward equity and $13 million of cash-on-hand.

In summary, we continue to maintain a fortress-like balance sheet that affords us tremendous flexibility to take advantage of the lack of competition in the market and execute on high-quality opportunities. With that, I’d like to turn the call back over to Joey.

Joey Agree: Thank you, Peter. At this time, operator, we’ll open it up for questions.

Operator: [Operator Instructions] At this time, we will take our first question which will come from Josh Dennerlein with Bank of America.

Operator: Our next question will come from Eric Wolfe with Citi.

Operator: Our next question will come from Rob Stevenson with Janie.

Operator: And our next question will come from Handel St. Juste with Mizuho.

Operator: And our next question will come from Linda Tsai with Jefferies.

Operator: And our next question here will come from Brad Heffern with RBC Capital Markets.

Operator: Our next question will come from Wes Golladay with Baird.

Operator: Our next question will come from Ki Bin Kim with Truist.

Operator: Our next question will come from Ronald Kamdem with Morgan Stanley.

Operator: [Operator Instructions] Our next question here will come from Tayo Okusanya with Credit Suisse.

Operator: And that concludes our question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.

Joey Agree: Well, thank you, everybody, for joining us today. And we look forward to seeing you at the upcoming conferences, and we appreciate everybody’s time.

Operator: Thank you very much for attending today’s presentation. You may now disconnect your lines.

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AGREE REALTY CORP

Q1 2023

Earnings Transcript

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