Good morning, ladies and gentlemen, and welcome to the Agree Realty Corporation’s First Quarter 2013 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the formal presentation, the conference will be open for questions. 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.
Welcome everyone, and thank you for joining us for Agree Realty Corporation’s first quarter earnings conference call. I am pleased to have Al Maximiuk, our Chief Financial Officer here with me this morning.
As everyone is aware the company is a fully integrated, self-administered and self-managed Real Estate Investment Trust focused on the acquisition and development of single-tenant properties leased to industry leading retailers throughout the Continental United States.
During this call, we will make certain statements that may be considered forward-looking under Federal Securities Laws. The company’s actual results may differ significantly from the matters discussed in any forward-looking statements.
Now let’s get started with our Real Estate operations for the first quarter. On the acquisition front, we closed on five properties during the quarter for an aggregate purchase price of approximately $50 million at a cap rate exceeding 8%. These properties are leased to five tenants located in four states representing five different retail sectors.
The single tenant properties acquired during the quarter are net leased to Dick’s Sporting Goods and PetSmart in St. Joseph, Missouri; Dollar General Market in Statham, Georgia; AutoZone in North Las Vegas, Nevada and Family Dollar in Memphis, Tennessee.
A little bit on the acquisition market in general. We continue to see a supply constrained market with significant demand for yield. I think it’s fair to say that cap rates today are at pre-recession levels and we will continue to be disciplined in our approach as our underwriting has a significant tilt towards the bottom of analysis.
For the remainder of the year, we currently have a number of opportunities coming through our pipeline that we remain excited about. During the quarter, our development activity remained robust. We have five projects underway. This includes our three previously announced Wawa projects in Florida; our Walgreens in Rancho Cordova, California as well as our campus flagship Walgreens in Ann Arbor, Michigan. These are all 20 and 25 year turnkey and ground leases.
Shortly after the end of the quarter, we announced our fourth Wawa development in St. Petersburg, Florida. During the quarter, we celebrated our first grand opening of Wawa for the store in Kissimmee, Florida as well as the recommencement of our first California ground-up Walgreens in Rancho Cordova. Total development costs for the two projects placed in service in April was approximately $8 million.
Looking forward, we expect to deliver the Wawa in Pinellas Park in the second quarter; the Wawa in Casselberry in the fourth quarter of this year and the Walgreens in Ann Arbor and the Wawa in St. Petersburg during the first half of 2014.
Moving on to disposition activity for the quarter, in January we announced the sale of our Walgreen in Ypsilanti, Michigan for approximately $5.6 million. We were pleased to achieve a low 6% cap rate on the sale. I think this transaction is evidence of the substantial demand for high quality single tenant net lease assets that we see today. We intend to continue to opportunistically monetize assets, recycle capital and seek to create additional diversity of tenant, sector and region.
Moving on to our current portfolio metrics; our occupancy at March 31, 2013 was approximately 97%. As of March 31st our portfolio consisted of a 113 properties. It spans 30 states and contains an aggregate of approximately 3.3 million square feet of gross lease-able area. This is comprised of 104 single tenant net leased properties as well as nine community shopping centers. The company has developed approximately half of these properties including 46 of a 104 single tenant properties and owned nine of the shopping centers.
As of March 31, approximately 97% of our annualized base rent was from national and regional tenants. Approximately 60% of our rental income is through [either] retailers that are investing great. We also have a number of unrated credits that we believe will qualify for [resting period] status if they chose to pursue a rating in the future. Portfolio wise, the weighted average base term remaining is 12 years. This increases over 13 years specifically for our single tenant and leased properties.
I think that about wraps up our real estate operations at this point. I would like to turn the call to Al Maximiuk, our Chief Financial Officer, who will provide a financial update. Al?
Thank you Joey, good morning everyone. I would like to provide a few highlights of the results of the quarter. Please note that we will be discussing non-GAAP financial measures including funds from operations and adjusted funds from operations. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the company’s earnings press release issued yesterday. This really is available on our website at agreerealty.com.
The company is pleased to announce that our revenues for the first quarter of 2013 increase 22% year-over-year from 8.4 million to 10.2 million. This strong increase in revenue is due to the success of the acquisition and development programs, while maintaining high occupancy levels. Funds from operations or FFO for the quarter increased by 16% to 6,383,000 from FFO of 5,507,000 for the first quarter of 2012. This equates to $0.49 per share compared with FFO of $0.50 a share a year ago. The decrease in FFO per share was primarily due to the impact of the increase in the weighted average shares outstanding as a result of the common share offerings in January 2012 and 2013.
Adjusted funds from operations or AFFO for the first quarter of 2013 was $0.49 per share compared with AFFO $0.51 for the first quarter of 2012. In the first quarter, the company paid a 76th consecutive cash dividends. We raised the dividend for the first quarter to $0.41 per share, an increase of 2.5% over the previous quarter. Both the current FFO payout ratio and the AFFO payout ratio are approximately 84%.
Moving to the balance sheet, in January 2013, the company completed an underwritten public offering of the total of 1,725,000 shares of common stock including the full exercise of the underwriters over-allotment option. The offering resulted in net proceeds of the company of approximately $45 million. Company’s balance sheet continues to be in a very strong position. At quarter-end, the company’s debt-to-enterprise value was approximately 23%. The portfolio currently has 62 unencumbered assets. The company’s interest coverage is healthy at 4.1 time and our debt-to-EBITDA ratio is at 4 times, approximately 24 million or 21% of total mortgage in [debtedness] is self amortizing, non-recourse loans that are tied to 13 Walgreens assets. These loans will be completely paid off between 2017 and 2026.
[Principal] amortization for the first quarter was $850,000. Principal is amortized as an average of $3.5 million to $3.6 million a year over the next period. In total approximately $30 million of amortizing debt will be paid down between 2013 and 2026. Between now and 2017, the company’s debt maturities are well [stated] with only $80 million in maturing in that timeframe. That concludes the highlights of the company’s financial and operating results for the first quarter of 2013.
I would like to turn the call back to Joey to bring to a close.
Thank you for the update Al. At this time I would like to open it up for questions.
We will now begin the question-and-answer session. (Operator Instructions) Our first question will come from Robert Milligan of Raymond James. Please go ahead, sir.
Robert Milligan - Raymond James
Joey, occupancy ticked down; I think a 100 bps in the quarter; what was driving that?
That was primarily due to the four Fashion Bug locations that were vacated in the shopping centers. We are currently working on a number of replacement opportunities and we hopefully leased assigned within the quarter (inaudible) couple of them.
Robert Milligan - Raymond James
Okay, are there any more vacancies or [spaces] like you back this quarter?
None that we are aware of; of the single tenant portfolio continues to perform and continues to be near 99% occupancy, and we have minimum roll over in the shopping center portfolio. We’ve addressed significant occupancies with the two Kmart options that were extended so far this year, so we’ve got a minimal roll over in 2013 remaining and we don't anticipate any significant occupancies going forward.
Robert Milligan - Raymond James
And turning into the Kmart extensions, can you give any more color on the discussions you had with them or did they just send in a letter and say we are extending, and any color you have on that?
Yeah, that's a great question RJ. I think in context of our overall ongoing discussion with Sears Holdings we talk about individual assets including the two assets for the extended options. So we are constantly in dialogue regarding any store performance or opportunities for either Sears or the company. Those two stores were extended by typical [option] notifications. We anticipated that those [options] would be extended. They are two of the lower paying stores in our portfolio and they are performing stores with strong underlying real estate. So we fully anticipated that Kmart would exercise those [options] then of course they did (inaudible).
Robert Milligan - Raymond James
Great, and my last question is so you sold Walgreens this quarter, obviously cap rates are trending lower, are you guys thinking about pruning anything else in the portfolio.
Yeah, we are always looking at both the shopping center portfolio as well as the net lease portfolio to recycle proceeds and divested assets that we've either deemed non-core or opportunistically divested assets such as the Walgreens in Ypsilanti. The Walgreens in Ypsilanti specifically had about 21 years of terms, I believe on it based term remaining. It was a 1031 purchaser, traded in the low-fixed cap rate range. We will be obviously another Walgreens in Washtenaw County that will be the Ann-Arbor campus flagship store as well as the Rancho Cordova California Walgreens with right commencement. So we were looking to divest eight Walgreens at the time and we thought that that was the opportunistic transaction for us. I wouldn’t rule out any [FP&L] divestments for the remainder of the year. If we can take advantage of cap rates and redeploy that capital on an accretive basis, we will look to do so and also to increase diversification by tenant sector as well as geographically.
Our next question will come from [Dan Donlan of Lautenberg Feldman]. Please go ahead.
Does the fashion bug, the tenants that you guys are talking to, would you expect to see roll ups on the rents there or what can you give us there.
I think it varies across the four stores, I think there will be opportunities for us to have roll ups on the rent. I think it will be immaterial if these aren't significant rental revenues we are looking at either with Fashion Bug or with replacement tenants. A majority of the Fashion Bug leases were on, essentially percent rent on a gross basis. So some of those rental rates were extremely low and we will see an uptick not only in rents but credit and term as well. So I think net-net we are looking at even or positive on those basis. Those leases were converted to percent rent, straight percent rent leases a number of years ago when Fashion Bug was struggling in those options in [due].
Okay, and then the additional disclosure that you provided in the press release on the shopping center is very helpful. I just want to make sure I understand what's in that base rent number. That would include all of the Kmart’s with the exception of the two free standing Kmart’s, is that correct.
That is correct, Dan.
Any idea if you could give us a ballpark number of what those two free standing Kmart’s are or how much they account for in rent.
That would be Grayling and Oscoda. Al do you have a number (inaudible).
Yeah I think that they are typical of all the Kmart, so I think that's pretty much if you, currently total Kmart revs that we're having divided by the number of Kmart’s which is nine, you get the number.
Perfect. I am just trying to bifurcate shopping center Kmart from each others that way, probably allocating a cap rate for each of those rental streams. And then Joey from kind of acquisitions going forward, you know obviously with your stock price increasing, you can probably -- you have a lower cost of capital, you know historically you have acquired assets around 8% caps or above, where are you looking or have your expectations come down a little bit or do you think you can play a little bit more now than you have historically or what's your viewpoint there?
That’s a great question, Dan. I think first off our acquisitions year-to-date have not deviated from that historical benchmark. Of that benchmark, we really look at it on a blended basis, not on a particular asset. As I mentioned during the prepared remarks, cap rates continue to either remain flat or compressed differentiating between really region factor and tenant. You know we will look opportunistically acquire things, higher yield assets to be 8% while maintaining credits and turn. At the same time, we’ve got some opportunities in our pipeline that we think we will be able to execute on it during the second and third quarters here that are pretty unique. There are some value-add components to those opportunities as well as some relationships driven opportunities that we look forward to executing on.
Our cost of capital has decreased whether or not the material decrease or not. It is really up for debate. We think we can deviate and lower our threshold, continue to maintain spreads. At the time as I mentioned in our remarks, we truly have a bottom-up approach, so we are looking at residual values on real estate. And you and I have discussed it at different times. We are looking at residual values on real estate, we are looking at run rates, we are looking at demographic trends and we are looking at structures and uses of building to really understand what will make sense from a residual perspective.
So those two competing forces we blend them together and hopefully find the right solution, but as I said we’ve got some opportunities in the pipeline that will be unique in the portfolio and we look forward to executing on.
Okay. And then just one last question if you can disclose this, looking at your major tenants Walgreens, Kmart, CVS, CVS 6%, what are your next two largest tenants if you can give that or if you would rather talk about another time that’s fine, I was just kind of curious who they were?
At this point, there are no other tenants in excess of 5%. At this point, we are not disclosing them, but we will consider them in future if diversification occurs.
(Operator Instructions) The next question will come from Wilkes Graham of Compass Point Research & Trading. Please go ahead.
Wilkes Graham - Compass Point Research & Trading
Just quick question on the development side. As you are talking Wawa, can you just remind us what kind of yields you are saying on those developments and have those cap rates are compressed, have those yields come down at all on pro forma development yields with Wawa? And then potentially if you are talking any other part there is about developments down the road, are they sort of underwritten yields that you are looking at, where they were a year ago?
Very good question Wilkes, from a tenant specific standpoint I can't comment on yields. We are subject to confidentiality in terms of those development relationships. What I can tell you on a blended basis is we have not deviated from our historical hurdle while it’s great to see cap rates continue to compress in terms of valuation, in terms of NAV.
We think we are really projecting forward in the development pipeline, so these are two-year average projects. We can't predict cap rate on a 24 or 30 months basis on a forward basis. So we’ve continued to maintain our discipline and keep those spreads in tact. We are continuing to seek yields that are 9-plus on the development front, we are often getting double digits on the development front and it’s on a year one basis.
In terms of tenants resistant, there is really two types of relationships we have with tenants, one is more of an up and open book format where we will submit on a return on cost and that will be per tenant -- by per tenants [dictated] return on cost, but we also want to take a number of developments who are not submitting the budget and frankly we are having a tenant on rental number and it’s a negotiation from there.
So there is really two types of projects in the development pipeline. That said, we are still hitting our historical hurdles. We are still selected by the project that we undertake, but I think hopefully in the not so distant future we will have some new tenants as well as existing projects or existing tenants to the portfolio and even potentially from different geographies.
Wilkes Graham - Compass Point Research & Trading
Okay, that's helpful. Maybe another way to ask or maybe a slightly different question is, it’s probably harder to find acquisition opportunities out there you know to hit your hurdles than it was a year or two ago. Is it anymore difficult now given the people that you are talking to, to find those development properties or opportunities?
Your first statement is that on acquisition opportunities unless you are willing to pay market rates and we simply aren't a market buyer had become highly competitive. You know as I said, we've got a number of opportunities, we've got $50 million in the first quarter, we've got a number of opportunities coming forward. On the development front, again it’s a rollover, so we have probably the cheapest cost of capital of any [P&L] developer in the country. That is due to our publicly created nature, our access to capital as well as superior other net lease developers. So we have a unique advantage in the development space versus our competitors and peers.
We've seen a number of tenants looking for projects, looking for net new stores, continuing to relocate either poor performing or high performing stores throughout the country and we continue to try to take advantage of those opportunities, add numbers that work for us and work for the company and work for shareholders. So I think it’s while yields have compressed and while there is some tenant resistance on the development front due to our relationships and our pipeline, we are able to maintain appropriate spreads and hit our hurdles. And it’s also important to remember that projects that we are announcing today that means we are essentially breaking grounds simultaneously, you know those projects were tenant approved probably 24 to 30 months ago. So you know when we take a project (inaudible) today for a retailer, those are typically groundbreakings, 2014 or early 2015.
(Operator Instructions) I'm showing no additional questions in the queue. This will conclude our question-and-answer session. I would like to turn the conference back to Mr. Joey Agree for any closing remarks.
I would like to thank everybody for taking the time and joining us this morning and we look forward to speaking with everybody again next quarter. Thanks.
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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