Agree Realty Corporation (NYSE:ADC) Q3 2023 Earnings Call Transcript October 25, 2023
Operator: Good morning, and welcome to the Agree Realty Third Quarter 2023 Conference Call. [Operator Instructions]. Please note, this event is being recorded. 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 Third 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.
A skyline view of a bustling city, representing the company’s presence in the real estate market. Editorial photo for a financial news article. 8k. –ar 16:9
In addition, we discuss non-GAAP financial measures, including 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.
Joel Agree: Thank you, Brian. Good morning, and thank you all for joining us today. I’m pleased to report another quarter of strong performance as we executed our operating strategy in a disciplined manner. We invested in high-quality opportunities across all 3 external growth platforms while increasing our investment-grade exposure to an all-time high of nearly 69%. Our record investment-grade exposure is emblematic of the strength of our portfolio, which will provide for more durable cash flows in today’s environment. Our portfolio is paired with a conservative balance sheet with 4.5x net debt to recurring EBITDA at quarter end and no material debt maturities until 2028. We continued to push cap rates higher during the quarter without sacrificing quality and maintaining our stringent underwriting criteria.
Within our targeted sandbox, there continues to be a lack of capitalized competition and our track record of execution makes us the buyer of choice in today’s market. We anticipate this dynamic will persist and consequently, cap rates will continue to move higher, albeit slowly and steadily given the large and fragmented nature of the net lease space. We are in an enviable position for the upcoming year. Our fortress balance sheet has no material debt maturity until 2028, avoiding refinancing headwinds. Simultaneously, our best-in-class portfolio with minimal lease maturities provide stable and growing cash flows. Even in the absence of external growth, this will enable us to deliver AFFO or true cash growth of over 3% next year on a per share basis.
Embedded in this base case is a conservative credit loss amount, inflationary growth in G&A of over 5%, and any outstanding borrowings on the revolver are assumed at the current forward SOFR curve. This base case AFFO growth combined with our current dividend yield, sets the stage for high single-digit returns in 2024, even in the absence of additional capital or external growth. As discussed on previous calls, we will continue to avoid going up the risk curve, investing capital only in the country’s leading operators with high-quality underlying real estate. While our relationships and acquisition funnel continue to provide a strong pipeline, we will remain disciplined capital allocators to ensure that our risk-adjusted spreads are appropriate and our cap rates are reflective of broader market conditions.
This past quarter, we invested approximately $411 million in 98 high-quality retail net lease properties, including the acquisition of 74 assets for $398 million. The properties acquired during the quarter are leased to leading operators in sectors including farm and rural supply, auto parts, tire and auto service, convenience stores, off-price retail, home improvement and warehouse clubs. We executed several sale-leaseback transactions this quarter with our retail partners, including best-in-class operators in the farm and rural supply and convenience store sectors. As mentioned on prior calls, sale-leaseback activity has increased for us this year. It is another example of our ability to be a full-service, comprehensive real estate solution for leading operators.
We acquired properties at a weighted average cap rate of 6.9%, a 10-basis point expansion relative to the second quarter and 70 basis points higher than full year 2022. The weighted average lease term was 11.5 years and approximately 73% of annualized base rents are derived from investment-grade retailers. We acquired 7 ground leases during the quarter, representing approximately $35 million or 8.2% of total acquisition volume for the quarter. Through the first 9 months of the year, we’ve invested more than $1 billion in 265 retail net lease properties spanning 38 states. Over 73% of the annualized base rent acquired is derived from leading investment-grade operators. These metrics demonstrate our continued focus on leveraging all 3 external growth platforms to execute on opportunities with best-in-class retailers.
Our development in DFP programs continue to see increased activity with a record of over $137 million of capital committed this year. Our team continues to uncover exciting opportunities, and our platform is uniquely situated to provide struggling merchant developers with the ability to lock in funding while providing us with the opportunity to drive superior risk-adjusted returns. We continue to have dialogue with many of our retail partners to find solutions that fit within their store growth strategies. We commenced 2 new development in DFP projects during the quarter with total anticipated costs of $11 million. Construction continued during the quarter on 14 projects with anticipated costs totaling approximately $56 million. Lastly, we wrapped up construction on 8 projects during this past quarter with total costs of approximately $41 million.
Moving on to leasing. We executed new leases, extensions or options on over 655,000 square feet of gross leasable area during the third quarter. Notable new leases extensions or options included a 220,000-square foot Walmart in Wichita, Kansas; 130,000-square foot Lowe’s in North Providence, Rhode Island and a 40,000-square foot Marshalls & HomeGoods in Napa, California. Through the first 9 months of the year, we executed new leases, extensions or options on just over 1.4 million square feet of gross leasable area. We are in an excellent position for the remainder of the year with just 8 leases or 30 basis points of annualized base rents maturing. Our best-in-class portfolio now spans 2,084 properties across 49 states, including 217 ground leases representing 11.6% of total annualized base rents.
Occupancy for the quarter remained very strong at 99.7%, and again, our investment-grade exposure reached a record of approximately 69%. Before I turn the call over to Peter, I want to congratulate Nicole Witteveen on her promotion to Chief Operating Officer. Nicole has had tremendous accomplishments throughout her career at Agree and her operational prowess makes this promotion very well deserved. Craig Erlich has now stepped into the newly created role of Chief Growth Officer, where he will devote his full focus to our external growth platforms and tenant relations. Lastly, I’m extremely pleased to welcome Ed Eickhoff to our team as Executive Vice President of Asset Management. Ed has nearly 40 years of industry experience, and he will help optimize our asset management platforms.
I’ll hand the call over to Peter, and then we can open it up for questions.
Peter Coughenour: Thank you, Joey. Starting with earnings, core FFO per share for the third quarter of $0.99 was 2.1% higher than the same period last year. AFFO per share for the third quarter increased 4.2% year-over-year to $1. In the third quarter, we declared monthly cash dividends of $0.243 per share for July, August and September. This represents a 3.8% year-over-year increase. While raising our dividend twice over the past year, we maintained conservative payout ratios for the third quarter of 74% of core FFO per share and 73% of AFFO per share, respectively. Subsequent to quarter end, we again increased our monthly cash dividend to $0.247 per share for October. The monthly dividend reflects an annualized dividend amount of over $2.96 per share or a 2.9% increase over the annualized dividend amount of $2.88 per share from the fourth quarter of 2022.
General and administrative expenses totaled $8.8 million in the third quarter. G&A expense held steady quarter-over-quarter at 6.1% of revenue, adjusted for the noncash amortization of above and below market lease intangibles or 6.5% of unadjusted revenue. For the full year, we still expect G&A to decrease a minimum of 50 basis points to 6% of adjusted revenue or lower. Income tax expense was approximately $709,000 during the third quarter. For the full year, we continue to expect income tax expense to be between $2.5 million and $3.5 million. Moving to our capital markets activities. During the quarter, we sold more than 1.3 million shares of forward equity via our ATM program for net proceeds of approximately $87 million. Including the shares sold in the period, we settled almost 4.3 million shares of forward equity during the quarter at an average price of more than $68 per share, realizing net proceeds of approximately $290 million.
We further strengthened our balance sheet during the quarter and demonstrated our ability to access the bank debt market, closing on the previously announced $350 million 5.5-year term loan. Prior to closing the term loan, we entered into $350 million of forward starting swaps to fix SOFR over the 5.5-year period. Including the impact of the swaps, the interest rate on the term loan is fixed at 4.52%. The term loan was a market-leading financing with strong support from our key banking relationships and the 5.5-year term allowed us to extend the maturity into 2029. As Joey mentioned, our debt maturity schedule remains in excellent position with no material maturities until 2028. At quarter end, we had total liquidity of over $957 million, including $951 million of availability on our revolver and more than $6 million of cash on hand.
In addition, our revolving credit facility and term loan have accordion options, allowing us to request additional lender commitments of $750 million and $150 million, respectively. As of September 30, our net debt to recurring EBITDA was approximately 4.5x. Our total debt to enterprise value was approximately 28%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend, remained in a very healthy position at 5.1x. Lastly, I’m pleased to report that MSCI, a leading provider of ESG indices, upgraded our rating from B to BBB last week. This follows the recent upgrade of our GRESB Public Disclosure score from D to B as well as the gold level recognition from Green Lease Leaders that I discussed on last quarter’s call.
These achievements demonstrate the significant progress that we’ve made on our ESG objectives and are a testament to the efforts of our ESG Steering Committee and our outstanding team. With that, I’d like to turn the call back over to Joey.
Joel Agree: Thank you, Peter. To summarize, we are very well positioned to drive earnings growth and provide a consistent and well-covered growing dividend despite the turbulence we are seeing today in the markets. At this time, operator, we will open it up for questions.
See also 15 Highest Paying Countries for Psychologists and 20 States that Drink the Least Alcohol per Capita.
To continue reading the Q&A session, please click here.