AGREE REALTY CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Market and Balance Sheet: The company had an active quarter in capital markets, raising forward equity and upsizing the revolving credit facility. S&P upgraded the credit rating to BBB+ due to the strength of the balance sheet. Liquidity is strong with ~$2 billion, providing runway for pipeline into 2025.
• Acquisitions and Investments: In the third quarter, $237 million was invested in retail net lease properties, including acquisitions of Walmart and Sam's Club stores. The development and developer funding platform had 8 projects started and 6 completed. Asset management included executing new leases/extensions on ~785,000 square feet of gross leaseable area.
• Portfolio and Credit: The portfolio spans over 2,270 properties with 99.6% occupancy and 67.5% investment-grade exposure. Year-to-date credit loss was ~30 basis points, with healthy recapture rates from Bed Bath and Beyond and Big Lots.

Segment Performance

• Acquisitions: In the third quarter, Agree Realty invested approximately $237 million in 93 high-quality retail net lease properties across three external growth platforms, including the acquisition of 66 assets for over $215 million. The acquired properties had a weighted average cap rate of 7.5%, a 60-basis point increase year-over-year, and a weighted average lease term of 9.8 years. Investment-grade retailers accounted for over 60% of the annualized base rent acquired. Through the first nine months of the year, nearly $580 million was invested across 176 retail net lease properties.
• Earnings: Core FFO for the third quarter was $1.01 per share, representing a 2.2% year-over-year increase. AFFO per share for the third quarter increased 2.8% year-over-year to $1.03. The full-year 2024 AFFO per share guidance range was raised to $4.12 to $4.14, representing approximately 4.6% year-over-year growth at the midpoint.
• Balance Sheet: The company raised nearly $470 million of forward equity and upsized its revolving credit facility to $1.25 billion. S&P upgraded its credit rating to BBB+, and net debt to recurring EBITDA stood at 3.6x at quarter-end with total liquidity approaching $2 billion.

Guidance

• Acquisition: Increased full-year acquisition guidance to approximately $850 million.
• AFFO: Raised the lower end of the 2024 AFFO per share guidance range to $4.12 to $4.14.
• Liquidity: Significant liquidity (~$2 billion) provides the company with runway to execute on its pipeline into 2025 without additional equity capital needs.

Risks

• Market Volatility: Fluctuations in cap rates and the 10-year treasury yield can impact acquisition pricing and portfolio performance.
• Credit Concerns: Potential credit issues in sectors like pharmacies, restaurants, and certain retailers, though the portfolio is balanced with healthy recapture rates from troubled tenants.
• Natural Disasters: Impact on Florida/California properties and considerations for insurance in areas prone to natural disasters.

Question and Answer

Q: Cap rate movement and Q4 outlook A: Joey mentioned Q4 will be the largest quarter for acquisitions, with cap rate compression on high-quality opportunities influenced by the 10-year treasury yield.

Q: Credit loss and sectors A: Year-to-date credit loss was ~30 basis points, slightly above average, but healthy recapture rates from Bed Bath and Beyond and Big Lots bode well for future earnings.

Q: Acquisition size and type A: Acquisitions include varied opportunities such as single credits, sale leasebacks, and one-off retailer opportunities.

Q: Theater sector A: There is no interest in the theater space, and there is no real market for movie theaters today; the company would dispose of theaters if there were buyers.