Agree Realty Corporation (NYSE:ADC) Q1 2024 Earnings Call Transcript April 24, 2024
Agree Realty Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the Agree Realty First Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Note that this event is being recorded. I’d 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 2024 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, including statements related to our 2024 guidance. 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 discussion of various risks and uncertainties underlying our forward-looking statements.
In addition, we discussed 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 our historical 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. We mentioned on our last call that we remain nimble and opportunistic, ensuring we are well-positioned to capitalize on opportunities as we uncover them. I am pleased to report that is precisely what we have done so far this year and what our organization is focused on every day. While the net lease transaction market continues to sort itself out, our team is doing a tremendous job leveraging our relationships and uncovering unique opportunities. We see little competition in the marketplace and are often the first and last call when a seller is prepared to transact. Though first quarter acquisition volume was light, we’ve seen an acceleration in the second quarter while achieving similar yields and continuing to focus on best-in-class retailers across the country.
This is being driven by the sheer effort of our team, our proprietary data environment, and the depth of our industry-wide relationships. Year-to-date, our origination team has made an average of approximately 420 outbound calls weekly to contacts within our vast database to mine for opportunities, which is up 20% year-over-year. Our conversion rate of deals approved by our investment committee to letters of intent signed is the highest in over two years at approximately 38%. Simultaneously, we have ramped up our efforts and leveraged our tenant relationships, exemplifying how we create proprietary deal flow and accretive off-market opportunities. We continue to work hand-in-hand with the country’s leading operators to drive efficiencies and reduce operating expenses.
Our portfolio remains extremely well-positioned with approximately 69% of rents derived from investment-grade retailers, a weighted average lease maturity of over eight years, and minimal lease term maturities. Similarly, our balance sheet is in excellent shape, with total liquidity over $920 million, more than $385 million of hedge capital, and no material debt maturities until 2028. This quarter marks the first time that we have introduced formal AFFO per share guidance. We believe it is important to demonstrate to shareholders that regardless of the environment, we can provide material earnings growth while adhering to our time-tested strategy. Our enhanced origination efforts, combined with our best-in-class portfolio and fortress balance sheet, give us confidence that we can achieve AFFO per share between $4.10 and $4.13 for the year.
This reflects 4.2% year-over-year growth at the midpoint, demonstrating our ability to provide consistent and reliable long-term earnings growth through different economic environments. We have conviction that we will be able to continue to deploy capital consistent with the spreads we have articulated and achieved year-to-date. At this time, we have visibility into over half of the approximately $600 million acquisition guide. With anticipated full-year disposition activity of $50 million to $100 million, roughly $237 million of outstanding forward equity, and free cash flow approaching $100 million on an annualized basis, we will be able to fund this activity on a largely leverage-neutral basis, ending the year well within our targeted leverage range.
Turning to our three external growth platforms, during the first quarter we invested $140 million in 50 high-quality retail net lease properties across all three platforms. The efforts I highlighted earlier enabled us to push cap rates significantly higher during the quarter, with the weighted average cap rate reaching 7.7%. This represents a 50-basis point increase quarter-over-quarter and a 100 basis point increase year-over-year. Investment-grade retailers accounted for 64% of the annualized base rents acquired. Our focus remains on achieving investment spreads of at least 100 basis points on the best risk-adjusted opportunities and not simply aggregating volume. During the quarter, we also commenced forward development and DFP projects with total anticipated costs of approximately $18 million.
In total, we had 20 projects completed or under construction during the quarter, with anticipated total costs of approximately $82 million, inclusive of the $48 million of costs incurred through March 31st. We mentioned the potential for more opportunistic dispositions on our last call, and that has come to fruition with six properties sold for growth proceeds of over $22 million during the quarter. The weighted average cap rate for the dispositions was approximately 6.2%, and less than a third of the rents were derived from investment-grade retailers. We will continue to sell assets at attractive yields and reinvest that capital at approximately 150 basis point spreads. Included in these sales were a select set of assets, including a Mr. Car Wash and Gerber Collision in Florida, which continues to see elevated 1031 activity relative to the overall market.
On the asset management front, we executed new leases, extensions, or options on approximately 405,000 square feet of gross leasable area during the quarter. Notable extensions or options included a Best Buy in Danvers, Massachusetts, a Hobby Lobby in Port Arthur, Texas, and a Walmart Supercenter in Maynard, Arkansas. Two leases were executed with new tenants during the quarter. A former Rite Aid in North Cape May, New Jersey, was leased to Presidio Medical Care, and a former Big Lots in Jackson, Mississippi, will be home to an O’Reilly Auto Parts Hub store. We achieved favorable releasing spreads averaging 111% for both locations, and are also the beneficiary of significant credit upgrades with long-term leases containing considerable escalations.
Our remaining lease expirations for the year are de minimis, with only 12 leases or 40 basis points of annualized base rents maturing. Additionally, we are very pleased with the progress on the only former remaining Bed Bath & Beyond of the three that were in our portfolio. We intend to demolish the existing box and are currently negotiating leases and finalizing letters of intent with multiple retailers to ground lease to be created pad sites. While I should have more detailed information to share next quarter, I will say that we anticipate a very significant lift relative to the former Bed Bath & Beyond rent, which I believe will further highlight our real estate underwriting. Given the questions that we’ve received, I wanted to address the recently announced Dollar Tree and Family Dollar store closures.
These stores they do plan to close have a weighted average lease term of seven. Any of our stores that have less than three will continue to pay all rents and nets and represent only 30 basis points of our total portfolio base rent. We have already received interest in several of our retail partners to backfill half of the locations that are closing. Lastly, with a best-in-class team and a proprietary technology platform, we see a significant opportunity to continue to drive earnings growth. Our model is built for all markets. We are uncovering opportunities across all three platforms and are pleased that we can deliver AFFO per share growth of over 4% at the midpoint. Combined with a growing dividend that yields over 5%, the country’s leading retail portfolio, and a fortress balance sheet, we believe we offer a very compelling value proposition in the current environment.
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 $1.01 per share, representing a 3.5% year-over-year increase. AFFO per share for the first quarter increased 4.6% year-over-year to 1.03% year-over-year increase. AFFO per share for the first quarter increased 4.6% year-over-year to $1.03. We received approximately $1.4 million of percentage rent during the quarter, which contributed more than a penny of earnings to core FFO and AFFO per share, respectively. Tenants typically pay percentage rent during the first quarter of each year. As Joey mentioned, we have introduced AFFO per share guidance for full year 2024 of $4.10 to $4.13, representing 4.2% growth at the midpoint. We provide guidance on several other inputs in our earnings release, including acquisition and disposition volume, general and administrative expenses, non-reimbursable real estate expenses, and income and other tax expenses.
Our guidance further demonstrates our ability to drive consistent earnings growth, which supports a growing and well-covered dividend. During the first quarter, we declared monthly cash dividends of $0.247 per common share for each of January, February, and March. On an annualized basis, the monthly dividend is very well covered with a payout percent increase over the annual AFFO per share for the first quarter. Subsequent to quarter end, we announced a monthly cash dividend of $0.25 per common share for April. The monthly dividend equates to an annualized dividend of $3 per share and also represents a 2.9% year-over-year increase. Moving to the balance sheet, we remain in excellent position with over $920 million of total liquidity at quarter end.
Including roughly $237 million of outstanding forward equity, $670 million of availability on the revolver, and more than $15 million of cash on hand. We have also entered into $150 million of forward starting swaps, effectively fixing the base rate for a contemplated 10-year unsecured debt issuance at just under 4%. Combined with our outstanding forward equity, this provides us with over $385 million of hedge capital to fund this year’s investment activity. Our revolving credit facility and term loan also have accordion options, allowing us to request additional lenders commitment in this year’s investment activity. Our revolving credit facility and term loan also have accordion options, allowing us to request additional lender commitments of $750 million and $150 million, respectively.
Further bolstering our liquidity position is free cash flow after the dividend, approaching $100 million on an annualized basis and $50 million to $100 million of anticipated disposition proceeds. As of the end of the quarter, pro forma for the settlement of our outstanding forward equity, net debt to recurring EBITDA was approximately 4.3x, which is flat quarter-over-quarter. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was 4.8x. Our total debt to enterprise value was approximately 30%, while our fixed charge coverage ratio, which includes principal amortization and the preferred dividend, is very healthy at 4.9x. 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.
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