Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Agree Realty Corp (ADC, Financial) reported a strong first half of 2024, with disciplined investment strategies leading to high-quality closed transactions.
- The company bolstered its balance sheet with approximately $650 million of unsecured debt and equity capital, and expanded its revolving credit facility to $1.25 billion, providing total liquidity of $1.7 billion.
- Increased acquisition guidance to approximately $700 million from $600 million, reflecting confidence in the investment pipeline.
- Achieved a record occupancy rate of 99.8% at the end of the period, with significant progress in lease renewals and extensions.
- Core FFO for the second quarter was $1.3 per share, representing a 5.7% year-over-year increase, and AFFO per share increased 6.4% year-over-year to $1.4.
Negative Points
- The company noted the pressure on the low-end consumer, which could impact certain retail sectors like Dollar General.
- Despite strong performance, there is a lack of visibility into fourth-quarter acquisition activity due to the rapidly changing cost of capital.
- The company experienced approximately 25 basis points of credit loss year-to-date, with a full-year assumption of 50 basis points in guidance.
- There is ongoing competition in the market, particularly from regional buyers for high-quality retail properties.
- The company remains cautious about predicting cap rate trends due to the volatile macroeconomic and geopolitical environment.
Q & A Highlights
Q: Congrats on the quarter and raising the guidance. Maybe just starting with acquisition, the guidance implies an acceleration in the second half of the year. Can you give some comments on what you're seeing in the pipeline and sort of cap rate return?
A: Sure. Good morning, Ron. We started sourcing for Q4 yesterday and Q3 sourcing stopped SEC yesterday as well. Given the 70 days average letter of intent execution to close, let's call -- give it another couple of weeks to negotiate a letter of intent. There's the basic transaction timeline for you. We don't see any material macro changes yet on the cap rate horizon. But with an improved cost of capital, we certainly can lean into transactions that are high-quality and additive to the portfolio.
Q: Just on the cap rate, any cap rate trending commentary? Is it flat, getting better?
A: For Q3, I would anticipate a similar cap rate to Q2, that pipeline has effectively built subject to diligence and closing already. Q4, we're going to see what's out there. We started yesterday.
Q: Maybe can you comment on just the bad debt assumptions if any change to the watch list that. Have you sort of seen any sign that the low-end consumer may be under pressure? Is that -- are you hearing anything from sort of tenants on that front?
A: The low-end consumer has been under pressure. We really look at the consumer in three tranches, 50,000 median household income, 100,000 and over 150,000. The low-end consumer continues to struggle, you see it in the restaurant trends, you see in the Dollar General trends. But the middle of the road there, the $100,000 median household income. It's fairly strong but we're seeing the trade down effect there. From a credit loss perspective, we're still assuming approximately 50 basis points of credit loss in our guidance range. Year to date, we've experienced roughly 25 basis points of credit loss.
Q: I just wanted to ask a little bit more about the acceleration in the pipeline you said and not a lot of change on the macro front. Is it really driven by what you described, I think last quarter is kind of the 3D and then very sort of active or proactive outbound calling on your part?
A: We see some stabilization, obviously in the 10-year treasury, which seems to be range-bound that could change tomorrow, but that stabilization does help the liquidity in the market and sellers' willingness to transact. Our transaction volume would pick up in Q2 because transactions for Q1 going back to the timeline are generally sourced during Q4 when we saw the roller coaster of the treasury peaking at 5%. That stabilization pulls through generally to the next quarter.
Q: You issued on the ATM during the quarter at prices about 10% lower. So where the stock is now. How are you thinking about potentially continuing to issue shares here, just as you maybe gear up for 2025?
A: Our balance sheet's in a great position of pro forma 4.1 times levered, obviously, with pro forma $1.7 billion in liquidity, executing on the $450 million unsecured bond offering with no material debt maturities. This balance sheet is a fortress, we'll look to how we deploy in terms of your prior question in terms of uses, if we see the need for incremental capital will certainly look at the alternative options here.
Q: I just wanted to ask specifically about the competition in the market now with the also increased acquisition and what you're seeing?
A: No real material changes in competition in the market. The 1031 buyers are generally sidelined. The levered individual purchasers are generally sidelined. We've seen the CMBS market come back to a degree with lower LTVs. Institutional competition in our space remains extremely muted given the price point nature of our transactions. We're really focused on those $4 million to $5 million transaction, close relationship transactions where we can create value. And so competition is extremely limited.
Q: When you look at like CVS versus Walgreens and you're making a bet on one and obviously trimming exposure to the other. What are the nuances of one store versus the other that gives you confidence in that model and that brand?
A: We've talked extensively over the years and there's a slide in the deck about our frankly, our dissatisfaction with Walgreens business model in performance. What we're looking for in a 21st century suburban pharmacy is a high performing store that's generally doing over $12 million, $13 million with limited competition. A ground lease for a basis that makes sense in the 21st century omnichannel world. The only pharmacy we're interested in is CVS. I think CVS exposure is most likely peaked here, but we're looking for unique transactions that are prototypical suburban pharmacy.
Q: C-stores are becoming obviously a greater emphasis of the portfolio. Is there -- obviously, it seems to be there's still a lot of competition for those types of assets. So is it kind of through developer relationships, corporate -- how are you getting success in growing that business?
A: All three platforms. We are very active on the development front specifically with the C-stores, large format C stores as well as the developer funding platform. Third, I would tell you acquisitions just due to the cap rates. The interesting thing about the C-store white paper is people's perception of an understanding of the large format C-store space is generally based on where they're located regionally. As C-stores, these regional operators, Wawa, Sheetz, QuikTrip, expand across the country, what they're learning and what consumers are becoming accustomed to, is the C-store becoming a quick service restaurant.
Q: How high are you willing to take your exposure to C-stores? Could they be eventually become a top one or two sector for you and does this change your view on your current exposure to your QSR portfolio?
A: C-stores are number four or approximately 8% of the overall portfolio. We don't have a C store tenant in our top 15. There is lots of room for us to continue to add C-store. Just taking them from, let's call it, the 8% to 10% of our overall portfolio from a sector perspective would be a very significant jump in the underlying portfolio and denominator continues to grow. In terms of QSR, it's very negligible in our portfolio. We quickly divested of the Burger Kings and the other things in the 1031 markets from private equity entered and purchasers were paying five caps for them.
Q: As it relates to the '24 and 2025 lease expirations. How are your conversations with tenants for the '25? Are
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
