Agree Realty Corporation (ADC) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Agree Realty Corporation Fourth Quarter and Full Year 2015 Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Joey Agree, President and CEO. Please go ahead.

Thank you, Emily. Good morning everyone and thank you for joining us for Agree Realty's fourth quarter and full year 2015 earnings call. I am very pleased to have Matt Partridge, our new Chief Financial Officer joining me this morning. Today we believe we have the highest quality portfolio in the net lease sector. Unique among our peers, we are solely focused on retail net lease, which provides investors a pure play and what we believe is the best risk adjusted subsector in net leased real estate. As of December 31, 2015, our real estate portfolio consisted of 278 properties in 41 states. Our tenants operate in over 25 distinct retail sectors, and our portfolio continues to be effectively fully occupied and 99.5% occupancy, with the weighted average remaining lease term of 11.4 years. Our portfolio is comprised of strong underlying real estate, fungible boxes and fantastic credit, as investment grade retailers generated 51.9% of annualized rents across the entire portfolio. The quality of our portfolio, coupled with our focused and proven three-pronged growth strategy, as well as our industry leading and growth oriented balance sheet, position us very well for the future. Moving on to our results; capped by a strong fourth quarter 2015, was another record year for our company. We invested or committed a record $235 million to high quality retail net lease real estate, while maintaining our discipline and execution of our differentiated operating strategy. In doing so, we simultaneously completed the multiyear transformation of our portfolio, strengthened our robust balance sheet and drove significant per share earnings growth. In the fourth quarter, we invested $65.8 million in net lease retail properties. Our 14 acquired properties were purchased at a weighted average cap rate of 7.8%, with a weighted average remaining lease term of approximately 10.8 years. Over 50% of the annualized base rents from these acquisitions, is derived from tenants that have an investment grade credit ratings, including leading operators and e-commerce and recession resistant sectors, such as general merchandise, auto parts, auto service and deep discount. For the full year, we invested nearly $226 million into 74 retail properties located in 25 states. Our 2015 investments achieved a weighted average cap rate of 8% and a weighted average lease term of 12.2 years. The properties are net leased to 41 industry leading tenants, that operate across 19 different retail sectors, and 34% of the annualized base rent comes from tenants with investment grade credit ratings. Our acquisition methodology has been and continues to be a rigorous bottoms-up underwriting approach, with a focus on retail real estate fundamentals, combined with a top down focus on e-commerce and recession resistant sectors. Today, our industry leading portfolio represents a well-diversified mix of tenants, retail sectors and geography, and is 100% concentrated in retail. Moving on to the development front, where we continue to be the only REIT that specializes in retail net lease development. We had an active second half of the year and committed nearly $15 million to development in partner capital solutions projects throughout 2015. I am pleased to announce that we now have an agreement in place to develop Starbucks on the out lot that we retained upon the sale of our former shopping center in Lakeland, Florida. We expect construction to begin the second quarter of 2016. This will be the company's first Starbucks development. Additionally, we have executed 20 year ground lease with our first Chick-fil-A at a recently created out lot in Frankfurt, Kentucky. The project is under construction, we expect rent to commence by the third quarter of this year. Both the Chick-fil-A and the Starbucks projects are great example of our ability to creatively source embedded opportunities within our portfolio, and then execute on the development process, to bring the projects to fruition. We believe that this is the capability that is unique to our company in the net lease space, and we foresee additional opportunities arising in the future. In addition to our exciting new out lot projects, I am pleased to announce that our Cash and Carry project in Salem, Oregon, was completed in December of 2015, and our Hobby Lobby development in Springfield, Ohio, recently held its grand opening on February 22nd. Both projects, which represent approximately $11 million invested, were on budget and completed ahead of schedule. During the fourth quarter, we executed a 20 year ground lease with Wawa for the development of another convenience store with Fuel, in Orlando, Florida. The project has commenced construction is anticipated to be completed during the third quarter of this year. And finally, we are pleased to announce the initial project of our previously disclosed partnership with Meridian Restaurants, for the construction of a Burger King in Far West, Utah, which as we noted in yesterday's press release, is about to commence construction. We continue to make great strides in executing each of our three distinct external growth platforms. Our development partner Capital Solutions and acquisition platforms, each provide an opportunity, or in many cases opportunities, for us to partner with retailers in multiple points in their growth cycles. We believe these distinct capabilities will enable our company to be the partner of choice for many retailers. We are currently exploring opportunities, including partnerships, with established retailers in a number of sectors, that will leverage our platforms, and further demonstrate our distinctive proposition. We are excited for this momentum to continue, as progress through 2016, and I look forward to updating you as these opportunities progress. In addition to our active year on the acquisition front and the momentum of our development and partner capital solutions programs, our asset management team made great progress in the transformation of our portfolio. In 2015, we sold eight assets for total gross proceeds of $29 million, including the disposition of three shopping centers. These dispositions allowed us to eliminate exposure to legacy assets, recycle capital, and reinvest in the higher quality, more stable retail net lease assets. These dispositions represents the completion of the company transformation, and to the highest quality retail net lease portfolio in the industry. A little color on that transformation; since 2010, we have disposed off nearly $90 million in non-core assets, while simultaneously investing nearly $700 million in retail net lease properties. Our focus on aggressively diversifying our portfolio has resulted in a dynamic change in our asset base. In 2010, the NOI from our portfolio of 73 properties, was nearly 30% driven by shopping centers. That number has now been reduced to 2%, with only the highest quality assets remaining. Our top three tenant concentration in 2010 was 70%. Today, that number has been reduced to 25.6%, all three of which carry investment grade credit ratings. From a geographic perspective, our portfolio today is well represented in 41 states across the country. That is in stark contrast to the 16 states in 2010. And lastly, our portfolio in 2010 was heavily concentrated in just six retail sectors. Today, our tenants represent a broad cross section of over 25 retail sectors. Moving forward, we will continue to focus on actively managing our portfolio, including assessing dispositions, with the ultimate goal of reducing existing concentrations within our portfolio. We continue to believe there is unique value within our portfolio to our ground lease assets, where the company is the fee simple owner and ground lessor to leading national retailer, such as JP Morgan Chase, McDonalds, Aldi, PNC, Walmart, Loews, and Wawa. These assets are a direct result of our development capabilities, as we continue to execute on additional ground lease opportunities, such as our Orlando Wawa and our Chick-fil-A project. As of yearend 2015, 88% of our ground leases were with tenants that carried investment grade credit ratings. Nearly 8.8% of our rental revenues were derived from these ground leases, which presents a very compelling risk adjusted investments for our shareholders. As we look at our lease maturity schedule, we are in a fantastic position to maintaining strong occupancies throughout 2016. As of today, we have one lease set to expire in 2016, which represents only 0.3% of our existing annualized base rents. Lastly, I would like to thank our many loyal shareholders for their continued support. The company achieved a total return of 16% in 2015, through a combination of dividend growth and share price appreciation, which represents the highest total shareholder return in the retail net lease space. With that, I will turn it over to Matt, to discuss our fourth quarter and 2015 full year financial results.

Thanks Joey. Good morning everyone. I'd like to start by saying, how excited I am to be here. I think there is a tremendous opportunity to continue the success the company has experienced over the past few years, and I am thrilled to join Joey and the rest of the team. I look forward to getting to know each of you on the call today. With that, I will move on to the cautionary language. As a reminder, 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. In addition, we discuss non-GAAP financial measures, including funds from operations or FFO, and adjusted funds from operations or AFFO. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release. As we announced in yesterday's press release, total rental revenue for the fourth quarter of 2015 was $17 million, an increase of 26.2% over the fourth quarter of 2014. FFO For the quarter was $11.8 million, which was an increase of 30.3% over 2014, and AFF was $11.6 million, an increase of 27.5% over 2014. On a per share basis, FFO increased 5.7% over the fourth quarter of 2014 to $0.60 per share, and AFFO increased 3.4% over Q4 2014, also to $0.60 per share. For the full year ended December 31, 2015, rental revenue of $64.5 million, represents an increase of 30.1% over the full year of 2014. FFO of $44.1 million and AFFO of $43.9 million, increased by 32.2% and 29.2% respectively. 2015 FFO per share of $2.39 was an increase of 10% over the full year 2014, and AFFO per share of $2.38 increased by 7.5% over 2014. G&A expenses were approximately 9.4% of total revenue for the quarter as compared to 11.7% in the fourth quarter of 2014. For the full year of 2015, G&A as a percentage of total revenue was 10%, a 240 basis points decrease compared to 2014. We continue to anticipate G&A as a percentage of total revenues to be in the single digits in 2016, representing significant decreases in corporate operating leverage over the past few years. A trend that will carry forward, as we continue to execute in that scale. In December, the company completed a common equity offering of 1,725,000 shares for net proceeds of $53 million. This was in addition to the $0.5 million the company raised through its ATM program during the fourth quarter. Turning to our balance sheet, the company continues to maintain one of the more conservative balance sheets in the industry. Total debt to total enterprise value as of December 31, 2015, was approximately 30.9%, and net debt to recurring EBITDA was approximately 4.9 times. Our fixed charge coverage ratio, which includes principal amortization, increased 3.7 times. These metrics are in line with our targeted leverage and coverage levels, and reflect significant liquidity for future growth. The company only had $18 million outstanding on its $115 million revolving credit facility at year end and only $8.6 million of debt scheduled to mature in 2016. Finally, the company declared a dividend of $0.465 per share for the fourth quarter, or $1.86 per share on an annualized basis. This was the company's 87th consecutive cash dividend since its IPO, and the dividends declared in 2015 represent a 6% increase over 2014. Our payout ratios for the quarter, which was 77% of FFO and 78% of AFFO, are at the lower end of the company's targeted ranges, and looks like a very well covered dividend. In summary, this was another exciting year for the company. The team was able to execute another year of accretive growth, which was supported by a strong balance sheet and a portfolio that we believe is the best in the industry. With that, I'd like to turn the call back over to Joey.

Thank you, Matt. In closing, 2015 was a fantastic year for our company, with a conservative balance sheet of great team and a very high quality portfolio, we feel we are well positioned to continue to execute on our operating strategy, with a goal of providing outsized risk adjusted returns for our shareholders. In short, we expect 2016 to be another terrific year, as we capitalize on our momentum and continue to execute at a high level. At this time, we'd like to open it up for questions.

[Operator Instructions]. Our first question is from Rob Stevenson of Janney. Please go ahead.

Good morning guys. Joey, how are you thinking about your investment opportunities today? I mean, the stock is at an all-time high. Are you opportunity constrained, if you wanted to go out there today, and deploy $300 million or $400 million instead of the $170 million to $200 million in your sort of cap rate range, in your opportunity set?

Good morning Rob. Thanks for the question. I think most importantly, we want to maintain discipline in our investment parameters. Do I think we are opportunity constrained? No, not necessarily. But at the same time, our focus is really growing and scaling all three platforms simultaneously, acquisitions, development and our partner capital solutions program. So we think there are opportunities, discretely within each of those external growth platforms, as well as leveraging the three platforms to deploy multiple capabilities simultaneously. So we look forward to growing each external growth platform, and I don't think we are necessarily opportunity constrained, it's just a function of finding those opportunities and executing on them.

Okay. And then, you talked about, you got a couple of vacant sets in the portfolio, what are the plans for those? And then also, how are you thinking about 2016 dispositions?

In 2016 dispositions, well I touched on our prepared remarks, really will be a shift from previous years. So our focus in the last few years has been calling in and minimizing the shopping center portfolio, divesting off those assets, culminating in the three assets we disposed in 2015. Our plans for 2016, and really beyond, or really the focus on non-core underperforming assets, and most importantly, managing any existing concentrations that we have in our portfolio. We think there are opportunities to dispose off those assets, recycle that capital at attractive cap rates and redeploy it on an accretive basis. And most significantly there is our Walgreens exposure. Our focus in 2016 will be on divesting some of those assets opportunistically and redeploying that capital into high quality net lease real estate.

What are you guys thinking in terms of today, in terms of $30 million, $50 million of dispositions? Could it be more?

I don't think it will be at that upper end of that range. We'd like to see how that market materializes for us, as I think we discussed in the previous call. The challenge with that markets is typically driven by 10/31 purchasers and certainty of execution can be challenging. We are going to evaluate opportunities in that portfolio to divest off assets, like I mentioned. And I think, we will have a better sense of what we think the aggregate disposition volume will be probably in Q2.

Okay. And then lastly, in terms of the vacancy in the portfolio, is that stuff that you guys are thinking lease-up or is that disposition?

I think our focus will probably be lease-up. We don't have many vacancies in the portfolio. We are 99.5% occupied, and so our focus really will be, dispositions will be on occupied assets in 2016.

Okay. Thanks guys.

Thanks Rob.

Our next question is from Collin Mings of Raymond James. Please go ahead.

Hey, good morning guys.

Good morning Collin.

First [indiscernible] just going back to Rob's question, just maybe talk a little bit more Joey, how you guys are thinking about the potential for a more transformative deal? Again, especially given some of your peers have talked about the potential pool of buyers for some of the larger deals out there, maybe a little bit shallower now than it was six, nine, 12 months ago?

We evaluate all opportunities that range from $1 million to a couple of billion dollars. That said, we are focused again, really maintaining our discipline. We aren't going to stretch for transformative opportunity or a larger portfolio opportunity, that doesn't meet our existing investment parameters. By nature, by definition, we truly are aggregators. We are aggregators on the acquisition front, on the development front, the average price point of our transactions is just a few million dollars. That being said, we will look at all opportunities. We take a hard look at opportunities that are all across the board. And if we find something that we think, is accretive, in terms of earnings accretive or NAV accretive to our overall portfolio, and it fits within context of the strategy that we have outlined. But we'd certainly take a look at it.

Okay. Joey, and just along those lines, maybe just update us too on how -- like on a pro forma basis, what would be the most [indiscernible] exposure, given kind of the concentration already in Walgreen's that you're trying to work down. Maybe what's the most exposure you would look for in any additional single tenant?

That's a good question Collin; as we look at our portfolio today, Walgreens is the outside concentration, and we are aware of that, cognizant of it, and focused on both growing the company and growing the denominator, and also being active asset managers, which is important to us in terms of evaluating potential disposition opportunities. We don't have a hardline. Again, this is a company that's growing its 30% topline clips over the last few years. So we don't necessarily have a hardline, and again, we want to be opportunistic when we look at opportunities. That said, the 5% range has historically been a benchmark for us. And so we have today, just Walgreens and Walmart just exceeded that by a few -- by not even a few 100 basis points. We don't anticipate them being above 5% for very long above that -- that's offline. And again, we are not going to look to increase exposure obviously to Walgreens. So we think we have some of the opportunities to divest some of these assets, at attractive cap rates and redeploy that capital into continued diversification within our portfolio.

Okay. Switching gears just to the capital market side of things; just as far as debt comps, I mean, I think the last debt private placement you guys did, 11 years, about 4.2%, just maybe in context of the dislocation in the credit markets to start the year, maybe just update us on your cost of debt. Would the opportunity still be there to do it at that private placement, and what type of costs or spreads would you be looking at right now?

Yeah Collin, this is Matt. Thanks for the question. The market has been pretty volatile of late. I think, that's in relation to the public market. I think, spreads have may be widened out a bit, but those, I think will come back in as it settles down. We are not actively in the market today, but I think, where we got our last deal done, is a good baseline, you see the market settle down.

Okay. So just in context of maybe the spreads of -- tenures come down a little bit, but the spreads have widened a little bit, kind of net-net, gets you back to about the same pricing?

Yeah, I think pricing is holing at all-in spreads, so as you see the 10-year fluctuate, I think the spread is going to offset that.

Okay. And then Matt while I have you, just as far as the ATM, just as you guys continue to grow the market cap, but just maybe update us on what you think would be reasonable to raise at any given quarter, through ATM issues, just given your flow?

Yeah. I mean, we will be opportunistic with it, but it's going to be match funding, and it's going to be in the context of a pipeline. So I am not going to give hard numbers in terms of guidance, [indiscernible] usage in any particular quarter, but it will be driven by the pipeline.

Okay. I mean, do you think it's fair -- recognize you want to give a hard number, is it fair to say, $10 million to $15 million in any given quarter, or that's maybe a little high, or just some ballpark there would be helpful?

Our leverage levels are at the low end of our range. So I think for us, we are going to evaluate debt-versus-equity with where the stock is trading, and based on that evaluation, and what the pipeline looks like, that will drive the ATM activity in any particular time.

Okay. And then just one last one for me, can we just touch on your view of the health of academy sports and DIX [ph] just given the bankruptcy of Sports Authority. Just your take on those retailers being -- on your tenant list, being towards the -- classically towards the higher end?

Sure. I wouldn't extrapolate anything from the Sports Authority bankruptcy. I think academy sports, we believe, is the premier operator in this space, with DIX [ph] being obviously a close national second. Sports authority has had difficulties for a number of years, and so I would be careful not to extrapolate anything beyond -- in terms of the overall sporting goods sector there.

All right. Thanks guys. I will turn it over.

Thanks Collin.

Our next question is from RJ Milligan of Baird. Please go ahead.

Good morning guys. Joey, can you tell me about the development platform as well as the joint venture capital solutions platform? They tend to be relatively small dollars compared to the acquisition growth? And so I am curious, how big do you want to grow both of those other platforms? Is that something that you are looking to grow, and just more thoughts on that?

That's a great question RJ. And just for clarification purposes, we recently renamed our joint venture capital solutions PRO platform, the partner capital solutions. Specifically, just because we had some confusion, really from an investor perspective, whether those assets were truly in joint ventures or off balance sheet. Our partner capital solutions is really an inorganic development pipeline, which materializes in transactions, materializing in two ways. First, we will buy a transaction, which we will call effectively readymade or prepackaged, where we will purchase the transaction and oversee the development -- land development and then vertical construction on ourselves. And then secondly, as we did in Salem, Oregon, we will fund a developers transaction, close on the land, and then through a withdrawal process, fund their construction of the asset, with an offset at closing. And so just for everybody's clarification, we renamed the program, and the goal of the program is the same as our development in acquisition. Its 100% fee simple ownership of net lease retail assets on balance sheet. Directly to your question RJ, our goal is to really scale the partner capital solutions and development platform, to $50 million to $100 million a year in the intermediate term. We'd like to say, that's a two to four year goal for us. We think the opportunities are there, both from an organic development perspective, but also, working with private developers across this country, to execute on their pipelines. That being said, these platforms don't operate totally in distinct silos. Our focus, and we talked about it in the prepared remarks, is leveraging the capabilities of two or more platforms simultaneously, with a retail partner or with a developer. For instance, we have trade of actions, where we are working the developer and on the partner side, where we will also buy -- we will also purchase assets upon completion on the acquisition side. So and the same can be materialized with retailers, where we are organically developing with retailers, but also looking at sale leaseback transactions with retailers at the same time. So we like to leverage each platform, at the same time, we have distinct goals for the amount of dollar volumes, as we mentioned, that those platforms can originate.

Okay, thanks. And you just highlighted the fact that you signed or renewed a lease with JC Penney. I was wondering if there was any color behind those discussions. What is probably one of the last JC Penney lists you guys have in your portfolio, given the retail shopping center exposure?

Yeah, that's the only JC Penney in our portfolio. There was no discussion behind it, there was just JC Penney exercising an option in Mt. Pleasant, Michigan.

Okay. I guess my last question is for Matt. Welcome aboard, and curious what probably your touch and gos are as a CFO looking into 2016?

Thanks RJ. First and foremost, I think investor outreach is a big priority for me. It’s a tremendous story that we have here and getting it out to the retail and institutional investment community is a big focus of mine. Beyond that, it's integrating into the team. Obviously capital allocation is a big piece of the story in the net lease space, so I obviously have a hand in that. So those are two of the areas that I am probably primarily focused on in the near term.

Great. Thanks guys.

Thanks RJ.

Our next question is from Dan Donlan of Ladenburg Thalmann. Please go ahead.

Thank you and good morning.

Good morning.

Good morning. Joey, just wanted to go back to Collin's question on portfolio deals; if you think that a portfolio fits your investment criteria and everything else, but maybe it's 25, 30, 40 basis points kind of on a cap rate basis below, where you have been acquiring in a one-off. Is that's something that would be still be attractive, just given the type of scale that you could get with that type of portfolio, or are you still trying to narrow in on kind of high 7s, 8% CapEx range on acquisitions?

It’s a hypothetical and it’s a good question. I think pricing is obviously an important aspect to any portfolio transaction or any transaction that we undertake. Obviously, we have some high hurdles on a on-off basis, which I think is fair to assume, would also apply to a portfolio transaction. That said, we are a bottoms-up underwriter, in a sense, that we are looking at underlying real estate values. We are marking the market for rents. We are looking at the fungibility of the boxes, traffic patterns, demographic patterns, and if we see something in a portfolio, that we think has fundamental real estate value with credit and term tied to it, and frankly, -- as you mentioned, fits within the context of our existing portfolio. We will look at pricing, and we will -- can I say we will be aggressive on pricing? Absolutely not. We are not going to be the highest bidder at any auction. But pricing is an important component obviously, and it's something that we take into account, when we look at any transaction. It's difficult in a hypothetical. It's difficult without understanding lease structure and composition of a hypothetical portfolio. But look, we will look at transactions, as I mentioned, from $1 million to a couple of billion dollars. Our goal in the long term is scaling this company, to what we believe, our ideal operating size is, $2.5 billion to $3.5 billion. We crossed the $1 billion enterprise mark in the fourth quarter. We tripled the size of the organization in the last few years and transformed the portfolio. We are confident, very confident that we are going to do that again, and whether we do that over the next few years, continuing the regularly aggregating through acquisition development and partner capital solutions, where we found something that was transformative, we are going to evaluate all of them, with the same lengths [ph] and the same approach.

Okay. That's helpful. And maybe just kind of talking about cap rates going forward. The cost of capital has really come down to a good level here. Are you going to be, maybe bidding on assets that maybe your cost of capital is preventing you from buying, or are still sticking to kind of an 8% hurdle rate on future acquisitions?

We don't typically -- we aren't entering bids and auctions on assets, that's first and foremost, that's not our business. We are cognizant of our cost of capital, we are cognizant of the decrease in our cost of capital, with the stock performance over the last 15 or so months. That being said, we have been pretty consistent, not only through our execution, but also, how we have articulated our strategy, that we are value creators across all aspects of our business, and for us to simply enter into auction or be competitive in terms of our large cat [ph] peers entering into large leaseback transactions. The portfolio, that's just not our DNA. It doesn't stick within the core values of the organization, it doesn't surpass or muster weigh in our underwriting criteria. So we have always said, as when we do and we are confident that we will. When we do benefit from a decreased cost of capital, and we are benefitting from that today, relative to where we were 18 months ago and two years ago, we think our spreads will widen out in terms of our investment activity. So we are not going to remake our investment parameters. What we look -- it gives us the ability of something that's potentially on the margin, to execute. But we are not going to remake the DNA of this company or change our underlying investment parameters.

Okay, that's comforting to hear. As far as the lease roll goes, we haven't heard anything this year, and it's still kind of de minims in the following two years. Was just kind of curious, how much of that is from the three shopping centers that you guys still own?

How much of the lease?

Yeah. The near term lease roll, let's say the lease roll over the next three years? I mean, is that -- is it 50% shopping centers/ I mean, what percentage is from the shopping center portfolio in the next, call it, two-three years?

So we effectively have 2.5 shopping centers remaining in the portfolio. We are currently adding -- in the process of adding out lots to those shopping centers. So the near term lease roll on those shopping centers, there is some near term lease rolls. Really small tenant and lease roll in those shopping centers. We have a K-Mart expiration in 2018, I believe, in Kentucky. We'd love to get those assets back frankly. We think they are significantly below market. The two shopping center based K-Marts that we have in the portfolio, are paying effectively $2 a square foot, one on a net basis, one on a growth basis. The net basis, if you work that down to a triple net leases, effectively paying $35,000 a year on a 86,000 square foot box, has an out lot opportunity at the parking lot. So we would love to get those assets back, in the intermediate term there. In 2017, we have an opportunity in Boynton Beach, Florida, where we have a former sublease from Borders, which is leased to Off Broadway Shoes, a regional operate -- they have no options left in 2017. There is a potential expansion area adjacent to the store, we could have a great embedded opportunity there as well. So as we mentioned, the lease roll this year, we have one lease rolling this year, we are pretty confident that tenant is going to exercise an option. And then 2017 and 2018, we are talking about 1.7 million and 1.5 million, with about -- probably a quarter of that rolling in the shopping center portfolio.

Okay. Appreciate the color. And then last question for Matt, and Matt, welcome to the existing world, that is net lease. Just kind of curious, the property taxes seem to spike up quarter-over-quarter and was just curious, if there is anything one-time-ish in that, or is that kind of a good run rate for us going forward?

Yeah, good question. I don't think there is anything significant that's one time. Obviously, the property tax is a good reset in the summer. So part of that is just the resetting of the rates. So I think that's probably a little high for the run-rate, but it's not going to come down materially.

Okay. Thanks. Have a good weekend.

Thank you. You too.

[Operator Instructions]. And our next question is from Craig Kucera of Wunderlich. Please go ahead.

Hey good morning guys.

Good morning.

Had a question on the acquisitions you did here in the fourth quarter. I think your cap rate was maybe 20 to 30 basis points, instead of what you have been doing for most of the year. Was that a function of where the market went, or was that sort of mix related towards more investment grade? Could you give us some more color on kind of what you are seeing?

Yeah I wouldn't read into it too much. We are 18, 19 basis points effectively off where we were, in the prior quarter. For the year, we were still at that 8%. It's really a function of just a couple of transactions that we have in there, opportunities that we saw in the market that we took advantage of. I wouldn't read into that on a run-rate basis on a go forward. We made some fantastic acquisitions during the fourth quarter, it was a testament to our team, uncovering opportunities that we think are great fits within our portfolio. Some of the tenants, Mattress Firm, Verizon Wireless, Advanced Auto Parts, we obviously acquired Walmart in the fourth quarter. DSW, which was the first DSW in our portfolio. So some great opportunities in there. Some opportunities we were able to negotiate early exercise of options, or 'blended' extend opportunities and some off market opportunities, where we really uncovered some value. So I wouldn't read into that too much.

Okay. As you look at the leverage -- aggregate, over the past several years. The company's overall leverage has increased, and I would like to put that into context of Matt's comments about being at the lower end of the leverage. Matt, how are you thinking about where kind of the band is, early spectrum of where leverage should be for Agree going forward?

I think, off-hand, I think it's probably somewhere five and six times, net debt-to-EBITDA. Keeping in mind, we don't have any preferred equity. So in the context of a peer group, that's still relatively levered, when you factor in the preferred. Well I think, from a capital allocation standpoint, we are going to probably take a conservative approach to the balance sheet, as we have stated and as you guys would expect.

And most importantly, we are going to operate with investment grade mindset. Obviously, we don't have investment grade credit rating today. But our balance sheet is going to continue to enable our growth. It's going to be a growth oriented balance sheet. It's going to facilitate and enable us to execute on opportunities and transactions that we uncover, and it's going to maintain that investment grade mindset, that one day we will pursue a rating, and we will pay [ph] investment grade credit rating, and we will continue to pursue unsecured financing to keep us in a position to obtain that rating down the road.

Got it. And going through your debt, your interest expense was up a bit higher than where it had trended, and what we are looking for. Is there any color or one time interest expense this quarter?

I think it's just a fact of timing related to drop down on the facility, and then obviously that was paid off with the equity offering in December.

Got it. One last one, as you look forward to your shopping center exposure, you mentioned that you have had about 2% left. Is that still a priority to sell that? It sounds like those are assets that you are pretty happy with. Are you still trying to become a pure player or are you just happy keeping that?

No. We are really talking about two shopping centers out of 280 plus assets. Today, at 2% of rental revenues, that number will continue to decrease. Frankly, we think, there are some fantastic opportunities embedded within that -- in those two assets, a couple of which we are executing on out lots right now. One, the Chick-fil-A ground lease that we talked about. We retained the Starbucks out lot in Lakeland, we disposed off that portfolio. So we think there is some embedded value opportunities, not only in the out lots, but as I touched on, these are two K-Mart anchored shopping centers that are paying $2 per square foot, one on a gross basis and one on a net basis. And out lot opportunities, as well as returning opportunities in those boxes, we think are very strong. So if the right offer or the right opportunities with those assets came along, we would definitely look at it. But in the meanwhile, we retain and continue, obviously to have the development capabilities, the retenanting and the asset management capabilities, to create some significant value there. And we have got interested parties in those assets, that we were able to uncover that value. So not a priority for us in 2015. Our priority is continuing to create value in those two assets, and our focus will be on net lease assets.

Got it. Thanks a lot guys.

Thank you.

[Operator Instructions]. Showing no additional questions, this concludes our question-and-answer session. I'd like to turn the conference back over to Joey Agree for any closing remarks.

Well great, thank you. And with that, I would like to thank everybody for joining us and we look forward to speaking to you, when we report our first quarter results. Thank you everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.