Yahoo Finance Agree Realty Corporation (NYSE:ADC) Q4 2023 Earnings Call Transcript
Agree Realty Corporation (NYSE:ADC) Q4 2023 Earnings Call Transcript February 14, 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 Fourth Quarter 2023 Conference Call. [Operator Instructions] This event is being recorded today. I would now like to turn the conference over to Brian Hawthorne, Director of Corporate Finance. Please go ahead.
Brian Hawthorne: Thank you. Good morning, everyone and thank you for joining us for Agree Realty's fourth quarter 2023 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. 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 a discussion of various risks and uncertainties underlying our forward-looking statements.
In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO and adjusted funds from operations or AFFO and net debt to recurring EBITDA. Reconciliations of these 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: Thank you, Brian. Good morning and thank you all for joining us today. I'm pleased to report that 2023 was another strong year for our company. Looking back on the past year, we executed several strategic initiatives that positioned our company for continued success. In anticipation of capital markets volatility, we pre-equitized our balance sheet in the fourth quarter of 2022 with $560 million of forward equity raised at a net price of just over $67.50. While at the time, many thought our mindset was conservative, we were confident that while interest rates rose rapidly, cap rates would be slow to exhibit expansion in our large illiquid and fragmented space. We were determined to avoid deviating from our core strategy for providing debt financing, expanding into new verticals or going up the risk curve either via credit or tenant concentrations.
Instead, we continue to execute our disciplined and time-tested strategy of investing in the country's biggest and best retailers. Those that have the balance sheet to invest in price, labor and fulfillment while creating a unique value proposition for customers. While the performance of our stock has certainly been frustrating, we have not wavered. Management and our tremendous Board of Directors put their money where their mouths are with almost $12 million of insider purchases during 2023. Net lease is a long-term business. We believe in consistency, reliability and quality of cash flows will ultimately lead to outperformance. While we can't control macroeconomic volatility, we can execute with a mindset of value creation, not simply short-term earnings accretion.
The days of free money and ubiquitous capital were behind us which made a strong and strategic change in capital allocation philosophy. We have seen the result of investing at de-minimis spreads. It drives little to no AFFO per share growth. In this new economic paradigm, our focus is on achieving outsized investment spreads and the best risk-adjusted opportunities, not simply aggregating volume. We will not grow the denominator without driving meaningful AFFO per share growth, nor will we move up the risk curve to create short-term opportunities and growth. We are laser focused on allocating capital in a disciplined manner to drive growth that is sustainable. On last quarter's call, we outlined the do-nothing scenario in which we would drive over 3% AFFO per share growth in 2024 with conservative assumptions and the absence of external growth.
With over $235 million of forward equity raise at the end of the year and anticipated free cash flow of approximately $100 million, we have visibility beyond the do-nothing scenario. We can invest approximately $500 million this year on a leverage-neutral basis, excluding any disposition proceeds and without the need for any additional equity capital. Most importantly, we remain nimble and opportunistic ensuring we are well positioned to capitalize on the opportunities as we uncover them. With over $1 billion of total liquidity, including the outstanding forward equity raise in the fourth quarter, we have ample runway and complete optionality. In addition, we have no material debt maturities until 2028 and pro forma net debt to EBITDA stood at just 4.3x at year-end.
Our fortress balance sheet is paired with a best-in-class portfolio and our record investment-grade exposure of over 69% provides for highly durable cash flows in today's dynamic environment. The strength of our balance sheet and the quality of our portfolio are evidenced by the positive outlook that S&P placed on our BBB credit rating last week. We believe that our credit metrics are emblematic of a higher rated company and the positive outlook is another step in gaining recognition for the manner in which we operate our company and manage our balance sheet. Moving on to our standard update. This past quarter, we worked through significant market turbulence and ultimately invested nearly $200 million in 70 high-quality retail net lease properties across our 3 external growth platforms.
This included the acquisition of 50 properties for over $187 million. The properties acquired during the fourth quarter leased to leading operators in sectors, including home improvement, farm and roll supply, off-price, tire and auto service as well as convenience stores. As our fourth quarter activity demonstrated, we can continue to push cap rates higher, piercing 7% for the first time since 2019. The acquired properties had a weighted average cap rate of 7.2%, a 30 basis point expansion relative to the third quarter and 80 basis points higher than the prior year. The weighted average lease term was 10.1 years and approximately 71% of annualized base rents were derived from investment-grade retailers. We acquired 7 ground leases during the quarter, representing approximately $30 million or 14.8% of total acquisition volume for the quarter.
In 2023, we invested more than $1.3 billion and 319 retail net lease properties spanning 41 states. We continue to leverage all 3 external growth platforms to find compelling risk-adjusted opportunities. For the full year, nearly 74% of the annualized base rents acquired were from investment-grade retailers, while ground leases represented almost 9% of rents acquired. Notably, we increased sale-leaseback activity in 2023, partnering with leading operators in the farm and rural supply and convenience store sectors. Sale leasebacks represented 1/3 of our acquisition activity in 2023, compared to just over 10% in the year prior, further demonstrating our ability to be a full-service comprehensive real estate solution for our retail partners. Switching to our Development and DFP platforms.
We had a record year with 37 projects either completed or under construction, representing approximately $150 million of committed capital. We're continuing to see increased activity across both platforms as we work with our retail partners to help them execute their store growth plans and provide struggling merchant developers with the ability to lock in funding for their pipeline. We commenced 4 new development and DFP projects during the fourth quarter with total anticipated cost of approximately $13 million. The new projects include a Burlington and HomeGoods in [indiscernible] Arizona and 2 Starbucks in Illinois. Construction continued during the quarter on 12 projects with anticipated costs totaling approximately $51 million. Lastly, we completed construction on 4 projects during the quarter with total costs of approximately $16 million.
We disposed 5 properties during 2023 for total gross proceeds of approximately $10 million, including 3 properties that were sold during the fourth quarter. The weighted average cap rate for dispositions in 2023 was 6.1%. I anticipate additional opportunistic dispositions in 2024 as we will seek to sell assets at attractive cap rates and redeploy that capital on an accretive basis. On the leasing front, we executed new leases, extensions or options on 425,000 square feet of gross leasable area during the fourth quarter. Including a T.J. Maxx in New Lenox, Illinois and a Walmart Supercenter in Hazard, Kentucky. For the full year 2023, we executed new leases, extensions or options on approximately 1.9 million square feet of GOA. We are in a great position for 2024 with only 28 leases or 110 basis points of annualized base rents maturing.
At year-end, our best-in-class portfolio spanned 2,135 properties across 49 states, including 224 ground leases representing 11.7% of total annualized base rents. Occupancy ticked up slightly to 99.8%. And again, our investment-grade exposure reached a record of over 69%. Lastly, I'd like to welcome [indiscernible] to our Board of Directors. LingLong was Rocket's first software engineer over 25 years ago and today serves as a Chief Leadership Adviser for Rocket Central where she is responsible for executive leadership development for the Rocket companies. Prior to that role, she served as Chief Information Officer of Rocket Mortgage, 1 of the nation's largest mortgage lenders for 10 years. LingLong has over 25 years of experience, technology and leadership and we're truly excited to add our expertise to our esteemed Board of Directors.
I'll now hand the call over to Peter and then we can open it up for questions.
Peter Coughenour: Thank you, Joey. Starting with earnings; core FFO per share was $0.99 for the fourth quarter and $3.93 per share for full year 2023, representing 3.4% and 1.6% year-over-year increases, respectively. AFFO per share was $1 for the fourth quarter and $3.95 for the full year, representing 5.2% and 3.1% year-over-year increases, respectively. As a reminder, treasury stock is included in our diluted share count prior to settlement if ADC stock trades above the deal price of our outstanding forward equity offerings. The aggregate dilutive impact related to these offerings was approximately $0.05 for the full year. Our consistent and reliable earnings growth continues to support a growing and well-covered dividend.
During the fourth quarter, we declared monthly cash dividends of $0.247 per share for October, November and December. On an annualized basis, the monthly dividends represent a 2.9% year-over-year increase. For the full year, the company declared dividends of approximately $2.92 per share, a 4.1% increase year-over-year and almost a 12% increase on a 2-year stack basis. Our payout ratios for the fourth quarter and full year remained at or below the low end of our targeted range of 75% to 85% of AFFO per share. Subsequent to year-end, we declared a monthly cash dividend of $0.247 per share for January and February 2024. The monthly dividends reflect an annualized dividend amount of over $2.96 per share or a 2.9% increase over the annualized dividend amount of $2.88 per share from the first quarter of 2023.
General and administrative expenses decreased quarter-over-quarter to 5.7% of revenue, adjusted for the noncash amortization of above and below market lease intangibles. For the year, G&A expense totaled $34.8 million or 6.1% of adjusted revenue. With our continued investments in systems, including ongoing enhancements to our proprietary ARC database, we anticipate that G&A expense will continue to scale as a percentage of adjusted revenue in 2024. We recorded $709,000 of income tax expense during the fourth quarter. This brings the total for the year to $2.9 million, near the midpoint of our guidance. Turning to our capital markets activities. We raised over $370 million of gross equity proceeds during the year via the forward component of our ATM program.
With more than $235 million of forward equity raised late in the fourth quarter, we anticipate putting in place a new ATM program in the coming weeks in normal course. We also demonstrated our ability to access attractive bank debt with a market-leading $350 million 5.5-year term loan at a fixed rate of 4.52% inclusive of prior hedging activity. The term loan received strong support from our key banking relationships and the 5.5-year term allowed us to extend the maturity into 2029. As Joey mentioned, our debt maturity schedule remains in an excellent position with no material maturities until 2028. Our capital markets activity further fortified our balance sheet and positioned us for continued growth in 2024. We ended the year with over $1 billion of total liquidity, including more than $235 million of outstanding forward equity, $773 million of availability on the revolver and approximately $15 million of cash on hand.
In addition, our revolving credit facility and term loan have accordion options, allowing us to request additional lender commitments of $750 million and $150 million, respectively. In addition to our strong liquidity position, free cash flow after the dividend is now approaching $100 million on an annualized basis. As of December 31, pro forma for the settlement of our outstanding forward equity, net debt to recurring EBITDA was approximately 4.3x. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was 4.7x. Our total debt to enterprise value was approximately 27%, while our fixed charge coverage ratio which includes principal amortization in the preferred dividend is in a very healthy position at 5x. With that, I'd like to turn the call back over to Joey.
Joey Agree: Thank you, Peter. To summarize, we are very well positioned to execute in 2024 to drive sustainable earnings and a growing and well-covered dividend. At this time, operator, let's open it up for questions.
Operator: [Operator Instructions] And our first question will come from Spencer Allaway of Green Street Advisors.
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