AGREE-REALTY Earningcall Transcript Of Q2 of 2024
Joel N. Agree -- President and Chief Executive Officer Thanks, Reuben, and thank you, all, for joining us this morning. I'm very pleased to report that we've had a strong first half of the year as our discipline has proven warranted. On our last call, I mentioned our improved visibility into the acquisition market, and I'm pleased to say that visibility turned into high-quality closed transactions and similar return profiles. Our team's efforts continue to produce unique and proprietary deal flow, and we continue to identify attractive investment opportunities across all three external growth platforms. As mentioned, our investment activity during the quarter was supported by capital market transactions that bolstered our fortress balance sheet with approximately $650 million of unsecured debt and equity capital. In addition, we received commitment to expand our revolving credit facility to $1.25 billion, which will provide us with pro forma total liquidity of $1.7 billion. This additional dry powder will enable us to execute our strategy for the remainder of the year and into 2025. At quarter end, pro forma for outstanding forward equity, our fortress balance sheet stand at 4.1 times net debt to recurring EBITDA, providing us with unparalleled optionality as we continue to execute on our pipeline. Given our investment activity of nearly $345 million during the first half of the year, our balance sheet, and liquidity position, we have continued to aggregate an incredibly high-quality and robust pipeline. I am pleased to announce we have increased our acquisition guidance to approximately $700 million from $600 million previously. With a rapidly changing environment, that number could Page 2 prove conservative. However, I think it is prudent due to the lack of current visibility into fourth quarter acquisition activity and the rapid change in our cost of capital. We will continue to be disciplined capital allocators and maintain our stringent underwriting standards. Given our liquidity profile, strong positioning of our balance sheet, and portfolio performance, we have raised AFFO per share guidance to a range of $4.11 to $4.14 for the year. At the midpoint, this represents a 4.4% year-over-year growth. Peter will provide more details of the inputs on these numbers momentarily. Turning to our three external growth platforms. During the second quarter, we invested approximately $203 million in 70 high-quality retail net lease properties across our three external growth platforms. This includes the acquisition of 47 assets for approximately $186 million. The properties acquired during the second quarter are leased to leading retailers operating sectors, including home improvement, off-price, auto parts, crafts and novelties, and grocery. Our completed transactions to date and current pipeline are emblematic of our dynamic approach to sourcing opportunities and include a variety of different transaction structures, sale leasebacks with relationship tenants, several unique blend and extends, shorter-term high-performing stores purchased at 50% of replacement cost, both new and repeat sellers, as well as distressed developers. We continue to be the first and last call in a highly fragmented and disjointed market. The acquired properties had a weighted average cap rate of 7.7%, a 90-basis-point increase year over year and a weighted-average lease term of over nine years. Investment-grade retailers accounted for nearly 60% of the annualized base rent acquired. Note that we are not including retailers, such as Hobby Lobby, in this investment-grade percentage and do not imply shadow ratings to non-rated companies. Through the first half of year, we've Page 3 invested $343 million across 102 retail net lease properties, spanning 37 states and 24 retail sectors. Approximately $309 million of our investment activities originated from our acquisition plan. During the quarter, we also commenced five development and DFP projects, representing committed capital of approximately $19 million, and completed four development in DFP projects with total costs of $15 million. In total, we have 25 projects, either completed or under construction, during the first half of the year, representing $101 million of committed capital, inclusive of the $66 million incurred through June 30. Our pipeline for both of these platforms continues to grow quite significantly, and we are excited to further discuss in upcoming calls. Similar to last quarter, we opportunistically dispose of assets at levels where we can redeploy proceeds and attractive spreads. During the quarter, we sold 10 properties for total gross proceeds of almost $37 million with a weighted average cap rate of 6.4%. These dispositions were opportunistic capital recycling of noncore assets, generally leased to sub-investment-grade or non-rated operators, including Mister Carwash and select Gerber Collision. Our decision to bolster our asset management capabilities, including executive additions and IT investments, was prudent. On the asset management front, we executed new leases, extensions, or options on approximately 300,000 square feet of gross leasable area during the quarter, including the Walmart Supercenter in Kimball, Tennessee. Additionally, during the quarter, we executed a ground lease with no anticipated tenant improvement allowance with a leading quick-service restaurant operator, which I articulately called one of the chicken guys on last quarter's call, for a portion of the former Bed Bath & Beyond parcel in Memphis, Tennessee. We are negotiating multiple letters of intent for the remaining parcels and will move to lease this quarter. As previously discussed, we anticipate recapturing over 150% of the former Bed Bath & Beyond rent, further highlighting our ability to identify and underwrite value-add real estate. As a Page 4 result of our asset management team's efforts, our 2024 lease maturities now stand at just 0.1% of annualized base rents. Given the progress achieved year to date, our occupancy ticked up to a company record 99.8% at period end. We are now focused on any 2025 pending maturities. With that, I'll hand the call over to Peter, and then we can open it up for questions. Peter Coughenor -- Chief Financial Officer Thank you, Joey. Starting with the balance sheet. As Joey mentioned, we had a very active order in the capital markets, raising nearly $650 million of capital. In May, we completed a $450 million public bond offering comprised of 5.625% senior unsecured notes due in 2034. In connection with the offering, we terminated related swap agreements of $300 million, receiving over $4 million upon termination and reducing our effective interest rate. The offering further staggers our maturities and extends our weighted average debt maturity to approximately seven years, excluding the unsecured revolving credit facility. During the quarter, we sold over 3.2 million shares of forward equity via our ATM program, raising net proceeds of approximately $195 million. As of June 30, we had approximately 7.1 million shares remaining to be settled under existing forward sale agreements, which are anticipated to raise net proceeds of over $430 million upon settlement. Recently, we further strengthened our balance sheet with commitments to increase our revolving credit facility from $1 billion to $1.25 billion with strong support from our key banking partners. The facility includes an accordion option that will allow us to request additional lender commitments up to a total of $2 billion. The term of the facility will be extended to 2029, including extension options, and Page 5 our cost to borrow will be reduced by 5 basis points based on our anticipated credit ratings and leverage ratio at the time of closing. Our capital markets transactions provide us with more than $1.7 billion of total liquidity, pro forma for the closing of our expanded $1.25 billion revolving credit facility, the previously mentioned outstanding forward equity, and more than $24 million of cash on hand. As of quarter end, pro forma for the settlement of our outstanding forward equity, net debt to recurring EBITDA was approximately 4.1 times, which is down two times of a turn from last quarter. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was 4.9 times. 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 4.7 times. We had only $43 million of floating-rate exposure at quarter end via our revolver balance. And as a reminder, we have no material debt maturities until 2028. We are very well-positioned to execute on our pipeline and stay well within our stated leverage range without any additional capital. Moving to earnings. Core FFO for the second quarter was $1.03 per share, representing a 5.7% year-over-year increase. AFFO per share for the second quarter increased 6.4% year over year to $1.04. Our results for the quarter include the recognition of approximately $2 million of lease termination fees from a financial institution. The tenant agreed to pay 100% of the remaining base rent due for the primary term of both ground leases on termination. We've taken ownership of both buildings via the termination without any incremental investment due to ground lease structure. A letter of intent has already been executed on one of the properties and their significant interest in a second from national operators. We view this as a great outcome for the company and indicative of our focus on identifying and acquiring high-quality retail real estate with long-term demand Page 6 drivers. As Joey mentioned, we have increased our full-year 2024 AFFO per share guidance range to $4.11 to $4.14. The updated midpoint represents 4.4% growth, an increase of 20 basis points from our initial guide. There are parameters and several other inputs in our earnings release, including acquisition and disposition volume, general and administrative expenses, non-reimbursable real estate expenses, plus income tax and other tax expenses. As a reminder, treasury stock is included within our diluted share count prior to settlement if ADC stock trades above the net price of our outstanding forward equity offers. The aggregate dilutive impact related to these offerings was minimal in the second quarter. However, our updated guidance range contemplates more meaningful treasury stock method dilution in the second half of the year and assumes that our stock continues to trade near current levels. Under that scenario, again, assuming a stable stock price, we anticipate treasury stock method dilution will have an impact of roughly $0.01 on full-year 2024 AFFO per share. Our ability to drive consistent earnings growth continues to support a growing and well-covered dividend. In April, we increased our monthly cash dividend to $0.25 per share, representing a 1.2% month-over-month increase. We subsequently declared monthly cash dividends of $0.25 for each of May, June, and July. The monthly dividend represents an annualized dividend amount of $3 per share and is almost 3% higher than the annualized dividend from the comparable period last year. This growth comes as our AFFO payout ratio remains at 72% for the second consecutive quarter, enabling us to retain significant cash flow for reinvestment. As mentioned on prior calls, free cash flow after the dividend for 2024 is approximately $100 million on an annualized basis. To conclude, our well-positioned balance sheet affords us tremendous flexibility with pro forma net debt to EBITDA of 4.1 times and Page 7 roughly $1.7 billion of liquidity to fund our robust investment pipeline. With that, I'd like to turn the call back over to Joey. Joel N. Agree -- President and Chief Executive Officer Thank you, Peter. At this time, operator, we can open it up for questions. Questions & Answers: |
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