Agree Realty Corporation (ADC) Q4 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Agree Realty Corporation’s Fourth Quarter and Full Year 2016 Earnings Conference Call. All participants will be on 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, operator. Good morning everyone, and thank you for joining us for Agree Realty’s fourth quarter and full year 2016 earnings call. Joining me this morning is Matt Partridge, our Chief Financial Officer. 2016 was an exciting year for our company marked by strong execution of our operating strategy. Opportunistic investments, record capital markets activities and strategic portfolio management as a resulted and what we believe is a first in class portfolio and one of the strongest position balance sheets in the net lease sector. Investment activity for the year inclusive of acquisitions, development in Partner Capital Solutions projects completed or currently under construction totaled a record $334 million. Investment activity in the fourth quarter including properties acquired or development in Partner Capital Solutions project delivered totaled $66.4 million across 26 high quality retail net lease properties. Of these 26 investments, 22 properties were sourced through our acquisition platform, representing total acquisition volume for the quarter of $61.6 million. The properties were purchased at a weighted average cap rate of 7.8% with a weighted average remaining lease term of approximately 10.5 years. The acquired properties are located in 12 states in our net lease to 17 national and super-regional retailers. The acquired properties are lease to retailers operating in 11 diverse e-commerce and recession resistant sectors including the auto service, discount apparel, crafts and novelties, grocery, specialty retail, health and fitness and auto parts sectors. For the full year, we acquired 82 retail net lease properties for $295.8 million. The 2016 acquisitions which include an $80 million portfolio acquired during the second quarter are located in the 27 states in our net lease to 49 industry leading retailers that operate across 22 diverse sectors. These properties were acquired at a weighted average cap rate of 7.8% with the weighted average remaining lease term of approximately 10.7 years. As we consistently note in the past, our investment thesis is grounded and bottoms up underwriting of retail real estate fundamentals and a top-down focus on e-commerce and recession resistant retail sectors. We combined our underwriting philosophy with concerted effort to partner with retailers, who are succeeding with a brick and mortar presence, that’s service of the foundation to their 21 century omni-channel strategy. Moving on to our development in Partner Capital Solutions platforms, where we continue to be the only REIT to specializes in retail and net lease development, we completed or commenced 14 exciting projects in 2016. These projects represent capital deployed or in progress of approximately $38 million. During the fourth quarter, we completed and brought online four new projects, with aggregate costs of approximately $4.8 million. The projects have a weighted average remaining lease term of 16.4 years. These projects include the company’s first turnkey Starbucks development in Lakeland, Florida, and the company’s first Texas Roadhouse in Mount Pleasant, Michigan. Also during the quarter, we successfully completed the third and fourth Burger Kings in our ongoing joint venture with Meridian Restaurants. These projects located in Hamilton, Montana and West Fargo, North Dakota and project cost of approximately $1.5 million and $1.6 million respectively. Both properties are subject to a new 20 year net leases. For the full year, our development in Partner Capital Solutions platforms completed 10 projects for a number of industry leading retailers, including Chick-fil-A, Wawa, Hobby Lobby, Burger King, Texas Roadhouse and Starbucks. These projects represented total invested capital of approximately $16.3 million and had a weighted average remaining lease term of roughly 17.2 years. In addition to our completed 2016 development in Partner Capital Solutions projects, we continue to make considerable progress on a number of ongoing developments. Subsequent to quarter end, construction was completed on the Company’s first Partner Capital Solutions project with Camping World in Tyler, Texas. The project was finished on budget and ahead of schedule. Total project costs were approximately $7.5 million. Also ongoing of the Company’s first ground-up development of a new Camping World in Georgetown, Kentucky. Camping World is under a new 20 year net lease to occupy the premises and total project costs are estimated to be $8.5 million. Rent is anticipated to commence in the third quarter of 2017. Additionally, the Company’s fifth Burger King in our venture with Meridian continues to progress on schedule in Heber, Utah. Rent is anticipated commence later this quarter and total project costs for this project are approximately $1.7 million. Construction also continues on the redevelopment of our former Off Broadway Shoes location in Boynton Beach, Florida. Orchard Supply Hardware with a guarantee from the Lowe’s companies an A- rated company by S&P. Previously executed a 15 year net lease and rent is expected to commence in the third quarter of 2017. We are very excited to add the second Orchard Supply Hardware to our growing portfolio. We continue to focus on expanding our relationships with retailers with the goal of being a full service value creator across their real estate operations. Similar to our acquisition Partner Capital Solutions and development effort to date with Meridian Restaurants in Camping World, we anticipate being a physician to make additional announcements later this year. In addition to our net new activity via our three external growth platforms, our asset management team has been very active, consistently seeking to divest of lower tier assets and further diversify our portfolio. In 2016, we sold four Walgreens for aggregate growth proceeds of $29.7 million. The weighted average cap rate of these 2016 dispositions was 5.6%. Similar to 2016, we previously provided guidance of $20 million to $50 million of dispositions activity for 2017. Our portfolio management activity has driven a significant reduction in our Walgreens concentration. In just the last 12 months, we’ve reduced our Walgreens exposure by 560 basis points to 11.6% down from 17.2% at the beginning of 2016. We are confident that our Walgreens exposure will continue to decrease as we opportunistically dispose of additional assets and as our portfolio continues to expand. And we have set a goal to reduce our overall exposure to Walgreens to under 10% by year-end. While we laid concerted effort to reduce our exposure to Walgreens, we’ve also made strategic investments to increase our exposure to a number of terrific retailers. Lowe’s, Mister Car Wash, Tractor Supply and Hobby Lobby are all now top ten tenants for us. Each of these companies maintained strong brick and mortar operations that have demonstrated resiliency to e-commerce and our industry leaders in their respected retail sectors. As our tenant diversification has continued to improve like wise as our sector diversification. Over the past 12 months, we’ve reduced our pharmacy exposure by over 700 basis points, from 23% at the end of 2015 to just over 16% at the end of 2016. We are simultaneously meet investment to the auto service, auto parts, grocery, specialty retail, home improvement, discount apparel, and a craft and novelty sectors to further diversify the portfolio. From a geographic perspective, our diversification has also markedly improved. Most notably, our Michigan exposure has been reduced by over 450 basis points in the past year. With Michigan representing just 15.4% of in place rents down from roughly 20% at this time last year. Lastly, while we had expiring leases in the fourth quarter of 2016 and minimal lease roll over in 2017. Our asset management team as in proactive and addressing future lease maturities. I’m very pleased to report that over the past 60 days, we have executed new lease extensions on nine recently acquired properties lease to sector leading retailers extending the weighted average lease term of the property by approximately 8.4 years. These extensions or a product of our strong relationships with retailers many of which originate for our development routes and a represented the value created in many of our acquisition efforts. As of December 31, 2016, our portfolio which remains 100% concentrated in retail now consists of 366 properties in 43 states. Our tenants are comprised almost exclusively of national and super-regional retailers, operating in more than 25 distinct retail sectors with 46% of annualized based rents coming from tenants with investment grade credit rating. Nearly 8% of our portfolio continues to be ground lease to industry leading retailers, approximately 90% of this ground lease portfolio is investment grade, including Walmart, McDonalds, all the JP Morgan, Lowe’s, Chick-fil-A, and Wawa. These properties are very unique. And as a company owned fee simple interest in the underlying property, while our retail partners spend their own capital to construct the improvements in building. With that, I’d like to thank our many royal shareholders for their continued support and I’ll turn it over to Matt to discuss our fourth quarter and full year 2016 results. Matt?

Thanks, Joey. Good morning everyone. Before I began, let me quickly run through 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, including percentage rents, for the fourth quarter of 2016 was $23.3 million, an increase of 37.3% over the fourth quarter of 2015. For the full year ended December 31, 2016, rental revenue of $84.2 million represented an increase of 30.7% over the full year 2015. The company strategic growth continues to drive down corporate operating leverage as we realize greater operating efficiencies to increase scale. G&A expenses were approximately 8.8% of total revenue for the year, which is year-over-year decrease of 120 basis points as compared to 10% in 2015, and a three year decrease of nearly 500 basis points when compared to 13.7% in 2013. Funds from operations for the fourth quarter was $16.6 million, representing an increase of 40.9% over the comparable period of 2015. FFO for the full year 2016 increased 34.3% to $59.2 million as compared to the full year 2015. On a per share basis, FFO increased to $0.64 per share, a 6.3% increase as compared to the fourth quarter of 2015. FFO per share for the full year 2016 was $2.54 per share an increase of 6.1% as compared to the full year 2015. Adjusted funds from operations for the fourth quarter was $16.2 million, representing an increase of 39.6% over the comparable period of 2015. AFFO for the full year 2016 increased 33.2% to $58.4 million as compared to the full year 2015. On a per share base, AFFO increase to $0.63 per share, a 5.3% increase as compared to the fourth quarter of 2015. AFFO per share for the full year 2016 was $2.51 per share an increase to 5.2% as compared to the full year 2015. Now turning to our capital markets activities were in October, we completed a follow-on offering of 2,087,500 shares of common stock, which included the underwriters’ full exercise and their option to purchase additional shares. After deducting the underwriting discount and offering expenses, total net proceeds from the common equity offering were approximately $95 million. This is in addition to the issuance of 183,602 shares of common stock throughout the market equity program, which resulted in net proceeds of approximately $8.8 million. On December 15, we closed on a new amend and restated senior unsecured credit facility, upsides in a total facility side to $350 million with an accordion option of the $500 million. The new facility is now comprised of $250 million unsecured revolving credit facility and $100 million of existing unsecured term loan. We extended the maturity date of the unsecured revolving credit facility of 2021 and extended the maturity date on the unsecured term loans of 2024 and also reduce the overall interest cost of our revolver. During 2016, the company raised $228 million in equity capital to the two previously mentioned follow-on offerings and our asset to market equity program allowing us to operate a historically low leverage levels. Also within the year, we amended or modified or originated nearly $500 million of debt capital through a number of strategic transactions in the bank debt and private placement markets. Looking at our balance sheet, we continue to maintain one of the most conservative credit profiles in the industry. As of December 31, 2016, total debt to enterprise value was approximately 24.9% and net debt to recurring EBITDA was approximately 4.5 times, well below the low end of our stated leverage range of five to six times. Our fixed charge coverage ratio, which includes principal amortization, was robust 3.9 times. These metrics combined with an undrawn $250 million revolving credit facility indicates significant liquidity for future growth. And finally, on January 3, the company paid a dividend of $0.495 per share to stockholders of record on December 23, 2016, which represents the 6.5% increase over the $0.465 per share quarterly dividend declared in the fourth quarter of 2015. The company has paid 91 consecutive cash dividend since its IPO in 1994. Our payout ratios for the quarter were 77% of FFO and 79% of AFFO, both of which were elevated quarter-over-quarter because of the increased share count from the October equity raise that’s still remain in the lower half of the company’s targeted ranges and reflected very well covered dividend. With that, I’d like to turn the call back over to Joey. Joey?

Thank you, Matt. 2016 represented another record year for our company. We enter 2017 with a fortified balance sheet in a focus and determination to build upon a fantastic year. At this time, we’ll open it up for question.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Ki Bin Kim with SunTrust. Please go ahead.

Thank you. Good morning every one.

Good morning.

Good morning. So can you just talk a little more about what you’re actually buying, what’s you actually bought during the quarter in terms of like location, asset quality, tenant mix, so you had better understanding of it.

Sure. So just a little cover – a little color on our fourth quarter acquisitions. We acquired a number of O’Reilly’s continue to invest in the auto parts sector. We’re big fan of O’Reilly business, we acquired a tire kingdom. Our first ever T.J. Maxx we acquired from an acquisition perspective in Aurora, Colorado. Michaels, Party City, Sherwin-Williams, PPG Paints, so we were really – again just continuation of the focus on recession resistant e-commerce, retailers really diversified throughout geographically throughout the country. That give you some color Ki Bin.

Yes, and given your – given that your average lease durations about 10 years. And if you always going every year, you’re fighting that battle to keep that number steady. Are these types of retailers – there’s a typical lease just 10 years, is that why when you sign these deals, it’s hard if you get 15 year deals.

So retailers vary with base terms across the board. Your typical O’Reilly transaction or auto zone transaction will be 20 year base term. A T.J. Maxx or Michaels, Party City, junior boxes will typically be 10 year base terms. We don’t look at the weighted average lease term honestly as the battle for us. We’re focused on the underlying real estate. We’re focused on retenanting and residual, marking in market rents. So what we’re cognizant of our weighted average lease term. We don’t necessarily view it as a battle.

Okay. And such another last thing you mentioned about lease spreads. Any thoughts on maybe reporting that spread going forward. And maybe any commentary on the lease spreads you achieved in 2016 and what you expect in 2017? I don’t know how much you acquiring, but…

That’s really the challenge, I mean we’re really talking about having four remaining leases in 2017, with your historic legacy leases are only maturity in 2016 at least renewal, which was significant was the Off Broadway Shoes in Boynton Beach, Florida, which we are currently expanding and re-developing for Lowe’s, Orchard Supply Hardware. So the lease renewals to date inclusive of 2017 where we have really four weeks renewals in a couple billboards located on those properties are de minimis. We’re already making significant progress on 2017 to 2018 and as you heard in the prepared remarks going forward in the future. But it – as that number becomes more material given renewals and spreads that something that will definitely consider.

Okay, thank you.

Thanks Ki Bin.

The next question comes from Collin Mings with Raymond James. Please go ahead.

Good morning, Joey. Good morning, Matt.

Good morning, Collin.

Good morning, Collin. How you doing?

Good. First question on me, just if you guys update us on the acquisition pipeline here entering 2017 and if you could see any change as for as asset pricing on the types of deal as you’re looking at.

So our acquisition pipeline remains strong. I’ll tell you that our pipeline across all three platform has some exciting and some unique opportunities, as we look forward to talking about those in future quarters this year. In terms of pricing we’re doing everything, we can to move pricing. I think cap rates, obviously, haven’t budged too much, I think you’ve heard from the predecessors and our peers on their calls. But we’re opportunistic. We like being the call of last resort, we like being the first call. We don’t like being the second through fourth call. So we’re working through our relationships we’re working on a number of opportunities where we think we can drive historically out of market cap rates or rates of return. And so we’ll see how cap rates trend really through 2017. But we haven’t seen any movement yet.

Okay, from a modeling purposes, we should still think about something in the high sevens may be low eight for acquisitions here and 2017.

Yes, I think will be in line with the course of the year with our historic acquisition opportunities. That said look the 10 year and the change in the10 year could drive cap rates incrementally higher through the year. They’re obviously – we believe there should be a correlation and we’re going to fight as hard as we can to push for it.

Okay. And then as far as just again time from a modeling perspective, as we think about the $20 million to $50 million as far as dispositions and guidance this year. Should we look at kind of mid five cap rate or exact maybe move up a little bit growth just to 2016?

I think from a modeling perspective going forward into 2017, we’re thinking between 5.5 and 6.5 is probably a good range. We’re going to be focus on similar disposition type activity that we were in 2016 and maybe making some opportunistic disposition on lower tier or lower quality assets in 2017 as well. We’ve obviously gone through the portfolio at targeted those assets for disposition, but we also feel the opportunistic – inbound opportunistic calls on dispositions as well.

Okay, that’s helpful. And then just as you think about the outlook for 2017 just an updated as far as your expectations for G&A. And then just along those lines touched on what if any changes there have been to infinitive structures this year as relates to the 8-K that you guys filed last week.

Yes, Collin from a run rate G&A perspective, we’ve obliviously make good headway and reducing operating leverage as I noted in the call. I think you can expect it to be plus or not minus $9 million for the year. We implemented a new incentive program for executive compensation over the past couple of weeks, which we think is a positive. And so, that will – that based on how we perform throughout the year.

Okay. And then just one last one for me, Joey, I just curious your thoughts on restaurant brands international acquisition of Popeyes due to the relationship of QSR space and then your relationship with Meridian.

Yes. 3G RBI is parent is a very well regarded sponsor. We’ve been down – a lot of time down in Miami specifically of Burger King’s headquarters, the work that they’ve done there is very impressive. We spent a less amount of time with Tim Hortons both from a corporate and a franchise perspective. I think they bring a very unique a dynamic approach, obviously, much has been written about 3G and how – and their corporate underlying corporate philosophies. They are operationally excellent. Obviously we don’t have any Popeyes in our portfolio today. But it could be an opportunity for us in the future nothing that were working on currently, obviously that’s brand new. In terms of our relationship with Meridian, our relationship with Meridian is great. Meridian is a fantastic operator of Burger Kings. We are excited for these new stores that we’ve worked hand-in-hand with Meridian to get open and to get performance under their both. These are obviously new prototype Burger Kings. We’re also working with other franchisees on similar as well as dissimilar programs. So again, our focus is leveraging our all three of our capabilities, acquisition, development and Partner Capital Solutions. Identifying the best franchisees and really – reading flat and then working with them and creating value through our business while they operate hopefully successful stores for year to come.

Thanks for the color guys. Thanks.

Thank you, Collin.

Next question comes from George Hoglund with Jefferies. Please go ahead.

Hey good morning, guys.

Good morning, George.

So two questions, I guess one, in terms of the development in Partner Capital Solutions there weren’t any starts in 4Q. Just wondering how the pipeline looks for that?

Well I wouldn’t read into any starts in Q4, traditionally winter weather isn’t the greatest time to start a development project just because of frost on the ground and applicable frost. I wouldn’t look into Q4 start simply, those will tick down. Our pipeline looks good. I am more excited about our shadow pipeline and Laith Hermiz, and Craig Willian, our COO and VP of Development respectively are working hard to continue building our pipeline, both existing tenants, as well as growing our pipeline with new and exciting tenants. So as I talked about in the prepared remarks again, leveraging our capabilities we think that there are some opportunities from a relationship perspective we know there are opportunities that we are working on today that we hope to be talked about it more specifics in the near future, where you’ll see again that dual approach potentially out of sale lease back basis or historic sale lease back partner getting new and exciting projects on the ground and expanding those relationships.

Okay thanks. And then on the nine lease extensions on the recently acquired properties, any color you can provide on either the new rental rate terms or the impact on yields?

Yes. This is again an exciting opportunity for us. Those are all newly acquired properties, traditional blend and extends, which we’ve referenced historically the ability to recast 5.5 year leases out to 15 years fully new leases with the leading operator in the farm and rural supply. I think everybody see in that tenant jump up in our tenant roster. We’ve also done the same with the leading operator in the discount apparel space, which we are very excited about. So again the value creation leveraging our relationships with these retailers some of them which go back 10 years and 20 years some of them which are new, our teams done really a fantastic job identifying opportunities and then creating value. So again, we are not a financier in the net lease space, RMO or DNA is to create value across all three platforms and this is really a window into what we were able to accomplish here. The concessions I think you asked about in terms of gradine concessions were minimal really none. These are high performing stores some of which were targeted by a retail partners for us to acquire others which were opportunities we brought to that specific retailer and they were amendable to staying long-term.

Okay thanks, Joey.

Next question comes from David Corak with FBR Capital Markets. Please go ahead.

Hey good morning guys. How are you?

Good morning, David.

So most of my questions have been answered already, but just going back to the development pipeline, you’ve touched on this a little bit, but it seems like you’ve started off some of your relationships a lot of your relationships with your development partners with sale leaseback transactions and then you end up leveraging those in the development PCS kind of deals. Do you think there is an opportunity to take on that kind of similar route with recently added retailers or some of your existing tenants? And then in terms of yields, how those shaped up over the year and newer deals, I mean what kind of yields are you thinking about?

Sure. So the short answer is, yes. There are existing tenants, which we’ve either acquired on a leaseback on third party basis, which we are actively working on in our pipeline to put shovels in the ground, nothing to disclose as of to date. Yields for us have remained consistent on the development front with our historical yields. And so again, I hate to sound repetitive, but really leveraging one platform to create value with the other platform showing retailers a full service value solution that frankly nobody else in our space can present to them. We are not just an acquirer. We are a developer and we could also finance opportunities. So we’ve seen the Camping World relationship come to fruition with the Partner Capital Solutions and a development project currently in the ground in Georgetown, Kentucky. Everyone seen what we have done with Meridian and the sale leaseback at the end of 2014. And now are exciting platform with them, which continues to grow. So we think there are opportunities with those tenants we’re actively working on and then we hope to be able to talk about them in the quarters to come.

Great I appreciate the color guys.

Thanks.

The next question comes from Rob Stevenson with Janney. Please go ahead.

Hi, Good morning, guys. Joey, how should we be thinking about the Walgreens exposure and the potential for dispositions going forward? I mean, depending on how much you buy at what cap rates in 2017. You could legitimately be below 10% or so, especially if you wind up selling one or two locations. I mean, when you take a look at the portfolio today, I mean, how many of those left Walgreens in the portfolio, would you really want to sell it’s sort of market prices and sort of how are you thinking strategically about that as you go to lower that overtime?

Yes it’s a good question, Rob. I think the 10% number for us and that is pro forma for the Rite Aid acquisition at year end 2017. That is our target. We plan to execute to that target and will be both inclusive of dispositions and we’ve identified stores that are disposition candidates and our active in terms of that pipeline. Again predicting dispositions and timing and realization of those transactions become difficult, because we are typically selling those into the 1031 market. The appetite for those assets is robust. We will take advantage to both improve our Walgreens, as well as our sector diversification but also our geographic diversification and I think everybody here is a line to continue to execute similar to 2016. We’ve reduced – noted in the prepared remarks, we have reduced our Walgreens concentration or pharmacy concentration in our Michigan concentration markedly in 2016, our asset management team did a fantastic job there. And we expect the same results in 2017.

Okay. And then if I take a look at your retail sectors today, I mean, obviously pharmacy is the biggest, but it’s likely to come down over the next couple of years. When you look out, yield the board lookout a couple of years. What are the retail sector – in terms of percentage of annualized base rent going forward offset what pharmacy comes down and then anything else that winds up being diluted. So what are the big gainers, you think strategically over the next two to three years for the portfolio.

So Rob, we missed – you went out on us in the middle of that call I assume the question was on a forward-looking basis what do we intend to do in terms of sector diversification in those targets. Is that correct?

Well, if you take a look at your retail sectors today, what if we look out two or three years what has the biggest gain from what percentage they are annualized base rent today. In other words when you yield in the board lookout strategically over the next couple of years. What are the areas where you are likely to deploy the most capital going forward and whether, able to offset the decline in the exposure to pharmacy and maybe a couple of other sectors?

So, if you look at what we’ve done historically I think, you again we started with that e-commerce resistance mindset – in the recession resistant mindset, if you look at a historical transaction activity and the trends. I think those are the best indicator of future performance for us. So obviously you mentioned the reduction in pharmacy that will continue to come. In terms of sectors, which we are focused on and have been focused on, grocery, auto service, health and fitness, home improvement, craft and novelties, farm and rural supply, we’ve talked about that. Convenience store, auto parts, discount stores, home furnishings, entertainment retail, these are sectors that we feel confident and then we target the premier operators in those sectors across all three assets of our business. But I would tell you that are past performance again is the best indicator what we’re going to do in the future. We talked about. We give some color on the acquisition activity right there in Q4, those tenants in those sectors. We’re going to continue that trend and we firmly believe that we have – that we are on the right path and now we’ve got to execute to it.

Okay but if you think about the grocery stores or quick service restaurants at about 7%. I mean does that feel about right to you going forward. So that the exposure increases the overall enterprise increases or grocery stores or quick service restaurants going to 9% or 10%, does that bother you – from a diversification standpoint?

That doesn’t bother me from a sector diversification. The key is the operators that we are tries to. I think if you look at our grocery exposure today, it dominated by industry leaders and deep discount grocery space. And that’s really been our focus. So those are cash and carries, which are smart and finals [indiscernible] general market, Giant Eagle, HEB in Texas. Those are really Walmart neighborhood market, I mean, before – where we have a ground lease to Walmart. We are really focused on the industry leaders. We are not interested in second or third tier small regional operators were challenged in historically 2% business of groceries. So while we don’t have a problem increasing exposure specific to those two type – those two sectors that you identified. The key for us is really where that exposure lays in terms of tenant quality.

Okay. Thanks guys.

Thanks Rob.

The next question comes from Jason Belcher with Wells Fargo. Please go ahead.

Good morning guys.

Good morning.

Good morning.

Sorry, if I missed this earlier but what was the range of cap rates across the 22 properties you acquired in Q4?

The range really stems across the board for us. I think we don’t report on an individual asset basis, but our historical targets are in the mid to upper 7 on a cash basis and then kind of fall within the yields historically yields book to the quarter as well as the year.

Okay. And then from the dispositions front, how about the average remaining lease term on the Walgreens you sold and really just trying to get an idea for how liquid the Walgreens really is in the disposition net lease market [indiscernible] two to three years remaining on the lease pretty easily. Or can you give some color there?

Yes, sure. So Walgreens dispositions are typically driven by the 1031 market. Short-term Walgreens are difficult to finance for 1031 purchasers unless they are strong store sales or extremely underlying real estate. All the Walgreens that we disposed, we developed essentially in the mid-2000 typically those are to 20 or 25 year base terms. So you are looking at mid-teens typical on average anywhere between 13 and 16 years typically.

Great, thanks guys.

Thanks, Jason.

The next question comes from Craig Kucera with Wunderlich. Please go ahead.

Hey good morning guys. Matt

Good morning.

I wanted to start with a question for you. You guys have clearly worked your leverage down considerably, this year and are below your range. As you think forward are you still thinking five or six times make sense or do you think that ceiling has maybe dropped to maybe mid five or has anything changed in that regard from a philosophies perspective?

No for us five to six times we think is the ideal leverage range. We equitize the balance sheet going into the year, specifically because we saw risk on the horizon and we wanted to mitigate that risk. So today we don’t need to tap the equity market at all to execute on our business plan and stay within that five to six times.

And Craig let me add that we will opportunistically access the capital markets. We are not overly focused to be honest, on quarterly results. Our goal is to put this Company in a position with a fortified balance sheet on a go forward basis, minimize risk, drive per share growth and put the Company in a position to continue to execute on our operating strategy with the medium-term goal that we’ve laid out on previous calls. It was an opportunistic transaction in Q4 to hit the equity markets and it put us in the position in 2017 to execute on our strategy without having to go back to the equity markets and with the risk that we see, the macro risk as well as the global risk that we see out there today, we think it was a good decision to make.

Got it. And thinking about that in the past you guys have run up your credit line and then gone in and turned out some debt. How should we think about this year, and what kind of quotes are you guys adhering today on and may be some longer-term debt?

From a 30,000 foot perspective on our balance sheet, we will always – like most recent our peers utilize our newly expand credit facility for working capital across all three of our platforms. And then opportunistically tap the permanent debt typically on an unsecured long-term basis and the equity markets to find the right balance. I think that is the typical of any net lease REIT and most REITs in this space. So we have efficient access to all four quadrants of capital today given the size of the enterprise. And we will opportunistically execute and tap those markets to put ourselves in a position on a go forward basis. Anything you want to add there Matt.

Yeah Craig I would just say when you’re thinking about it from a modeling standpoint, I think the past couple of years the way the Company has executed is a fair approach to assume for how we’re going to execute going forward into 2017, which is exactly what Joey described.

Got it. One last one from me. You know the sports in sort of hunting and fishing category put under pressure, can you comment on your thoughts on Academy and kind of your growth in that segment. Is set still a segment that you want to grow or are you happy kind of where you are today?

We have three Academy Sports in our portfolio today. Those were all long-term acquisitions, were Partner Capital Solutions projects that we transacted on historically, obviously everyone is aware with of the reported challenges of Gander most recently a regional operator MC Sports filed for bankruptcy. I personally believe and we have anecdotal as well as direct evidence to support, the real challenges today in the overall sporting goods industry is in a lot of the apparel that they are selling as well. If you walk into a number of retailers today inclusive of Dick’s Sporting Goods you look to the left and you see an Under Armour section, you look to the right and you see a Nike section. Obviously the Under Armour is trying to reposition their branding strategy today Kevin Plank’s recent comments. You can buy Under Armour, you can buy Nike Direct in a Nike Store and you can buy it online, you can buy it at JCPenney, you can buy it at Kohl’s or T.J. Maxx. I think that’s the true challenge. We particularly like Academy Sports and were extremely fond of their business. One because they are a regional sporting good operator and we believe it’s much easier to merchandise a regional from a regional perspective. The sporting goods that people buy in California versus Texas and Michigan are vastly divergent. They are very well respected within this space by both their peers as well as those that cover the Company from a merchandising approach. I’ll tell you, we are not overly focused on the sporting good industry, you haven’t seen us add a sporting good operator really I think in about 24 months. That said if we find unique opportunities to add value at outsized returns and we like the underlying real estate, but we are by no means redlining. But I’ll tell you it is not a focus and I didn’t list it earlier in the sector that we are focused on a go forward basis.

Thank you.

Thanks Craig.

The next question comes from Dan Donlan with Ladenburg Thalmann. Please go ahead.

Thank you, and good morning.

Good morning.

So I just wanted to talk about your focus on internet resistant retailers. Just curious if you have any concern about Amazon entering the aftermarket auto parts space, you said you do like that space but just curious if you have any concern there and what’s your thought processes on them.

Sure, there was a recent paper, you may have read a white paper on Amazon relative to AutoZone, O’Reilly as well as Advance Auto Parts, price comparisons across the merchandising assortment. I think there is a lot of speculation and justified speculation on Amazon’s infringement into basically every retail sector today. They continue to disrupt and continue to innovate and I think anybody who is not – is wholly focused on only their defensive core from a retail perspective and that isn’t out there executing from offensive capabilities could be challenged by Amazon. We look at the auto-parts space, it’s really driven by two consumers, that’s the do-it-yourself customer as well as the commercial sales to traditional dealerships, body shops et cetera. We are very fond about AutoZone, as well as O’Reilly to a lesser degree Advance Auto Parts as they turnaround their business. These are well-regarded companies with very strong balance sheets loyal customers. And we continue to believe that there are shipping constraints both from a cost perspective but as well as a timing perspective for your do-it-yourself customer as well as commercial customers. And if you look forward with all the opportunities in the retail landscape I think auto parts probably won’t be Amazon’s number 1 priority. So there is something to the experience of walking into a brick-and-mortar store and talking to somebody, talking to a salesperson that is both knowledgeable and can walk you through the selection of merchandise and then to really have your hands on go specific auto parts on a timely basis. So we aren’t overly concerned. We think there is an experience to walking into an auto store, where auto parts store we’re focused on retailers that provide for that experience and we think it fits with our 30,000 foot perspective.

Okay. And just sticking with Amazon they have also announced that fully into groceries widely talked about. Do you see that as a potential candidate for your built to suit pipeline stuff, your joint capital solutions program, just kind of curious if you’ve had any discussions there?

Yes. It’s a great question I think Amazon’s disruption in the grocery space is a larger priority for them and is also a bigger concern for the overall sector. Amazon is currently testing and/or about to test a couple of freestanding grocery stores with approximately 15,000 square feet out there in the public realm today. We think that is a real threat to typically urban grocery. And our focus on deep discount grocery to traditionally is more suburban grocery. We would love Amazon. if anyone from Amazon is listening we would love to and we’d engage but we would love to be a part of that and we see the ability for net lease to continue to be an opportunistic vehicle for e-commerce, traditional e-commerce retailers to open freestanding stores. And just to touch on that quickly, we firmly believe that net lease is a important future in an omnichannel retail environment. Net lease allows for pickup windows. Net lease allows for quick delivery and access for commercial trucks. And if you’re going to have delivery in access of most retailers need with loading docks and if you are going to have a pickup window, which retailers are very focused inclusive of Amazon, Walmart and a number of other major national retailers you effectively need three sides of the building exposed. You can’t be inline in a shopping centre, enclosed in a mall, a net lease format allows for visibility, access, signage, pick up, delivery, parking, and all the fundamental real estate attributes that are required for an omnichannel retail strategy in the 21st century. And so we think net leases in the wheel house for the future of retail and we are excited about the opportunities that we are aware of today and the opportunities that could be presented in the future.

Okay I appreciate the thoughts. And then on the development pipeline could we possibly see some projects slip into the fourth quarter of 2017 or is it just – are we too far gone at this point in time of linked time of developments?

When you ask about slipping into the fourth quarter, it’s about unannounced projects –

Could we see, the last project you have, been delivered in the third quarter of 2017, I’m curious as it move out to the first quarter of 2017 could we still see some developments sneak into the fourth quarter of 2017 or is it kind of the lead time in terms of your development just not allow that to happen in that short period of window?

Well I think we have plenty of time throughout the course of 2017 to announce new projects over the second, third and fourth quarters. Are you focused on rent commencements or construction’s?

I was just saying, do you have enough time to still deliver stuff you haven’t announced anything being delivered for the fourth quarter but do you still have enough time to announce something that would be delivered in the fourth quarter of 2017 or is everything going to outfall into kind of 2018 that is my question?

Yeah my apologies. Our traditional approach has been to not announce a project until it is effectively shovel-ready and what we’ve commenced and mobilized our general contractors commenced and mobilized on site. We’ve got a number of projects that we will hopefully announce yet this year that would be delivered before or during the fourth quarter of this year.

Okay. That is helpful. And then just last one for Matt, given your need for cash this year, you talked about using debt, do you think you can stay within your five to six net debt to EBITDA parameters and not have to issue any equity this year given what your needs are in the development side and acquisitions?

Yes. I think as I said earlier the five to six time leverage rates that we want to operate in, we can operate within that range executing on our business strategy for the year without having to raise any more equity. But as Joey said we’ll always be opportunity with capital markets activity and we will look to execute throughout the year.

Okay. Thank you.

Thanks Dan.

The next question comes from R.J. Milligan with Baird. Please go ahead.

Hey guys. Do you guys, obviously have one of the highest percentages of investment-grade tenants within the net lease space with the reduction of Walgreens as we look into next year how much do you expect that percentage to decline and how important is that to you in terms of credit versus as you look to under write real estate.

Good morning, RJ. We look at tenant credit and we’re cognizant of tenant credit we have historically had a very high percentage of investment-grade credit obviously in the portfolio. Disposing of Walgreens is obviously if we redeploy into an unrated or some investment-grade retailers then that negative, that said the Walgreens acquisition of Rite Aid will be in that positive, we’ve talked about it on prior calls credit or investment, obtaining an investment-grade credit ratings by no means is to be all and all, I mean, Hobby Lobby is the ninth largest tenant in our portfolio. It is a huge company privately held with zero debt. Tractor Supply again is an unrated top operator in the farm and rural supply category for us. 2.3% of rents at 2016 doesn’t have a credit rating because they effectively have no debt except some short-term obligations but is a fantastic aberration. So we are cognizant of credit. We are cognizant of lease term as we discussed, but at the same time we aren’t going to allow 3,000 foot metrics to drive our fundamental real estate decisions across all three platforms.

RJ I would also add that when you look at the shift within the portfolio and the IG credit amount coming down, that’s being shifted into non-rated credit. It is not being shifted into some investment grade so to Joey’s point about Hobby Lobby and Tractor Supply we are making discrete investments in the companies that are choosing not to have a rating.

Right

Hobby Lobby and Tractor Supply everybody can see our tenants its approaching 5% aggregate between the two. If you add that to our investment-grade exposure you are effectively where we were in 2015 or 2014 and then if you truly layer in our ground lease portfolio, which I would tell you is a margin of safety beyond just an investment-grade credit rating, plus the portfolio is 100% retail there is no office, there is no industrial, or other exposure, we are confident that this is a best-in-class portfolio, anyway you look at it.

Okay. Thanks and then as you think about may be over the past few quarters as you look at underwriting, recession resistant, and e-commerce resistant categories or retailers, are there any specific categories or deals that you can think of over the past couple of quarters that you guys have passed on and may be the price was right, but given that underwriting standard if anything what you guys have passed on?

We have some things on a weekly basis. Our investment committee meets twice a week. We pass on a lot more than we acquire by. Our acquisition team will be the first to remind us of that. The number of transactions that we have passed on and typically the driver everyone here is very cognizant of our approach to value accretion and yield. But the driver of – a number of those opportunities that we passed upon, I don’t want to call out any retailers out here today, but the drivers, they don’t fit our 30,000 foot approach to e-commerce and recession resistance. Everybody here is focused on high quality real estates. I’ll tell you also but that perspective continues to change. By no means are we fix, we continue to learn more and I think the marketplace continues to learn more. The equity markets in terms of retailers are forward-looking and looking at the threat of Amazon and e-commerce. We look at it as – also as I mentioned earlier, as an opportunity to engage with new retailers who may be were historically brick and – historically didn’t have brick and mortar operations, but are coming into the space. So it’s an approach that consistently changes. We are open to learning and we challenge ourselves to continue to identify where the market – we think the market is going in the future.

Okay. Thanks. That’s helpful. And then in 2016, obviously you guys got a large portfolio acquisition $80 million which helped them boost overall total acquisitions. Curious if any movements and the tenure has shaken up or shaken loose, additional portfolio opportunities that you guys are looking at for 2017?

It was – that transaction in 2016 was a fantastic transaction. Obviously, it increased our volume outside of our guidance in 2016, hence the raise in guidance. We are always looking at portfolios where we see a number of opportunities, that portfolio was very unique because of the California exposure and the relationships with the tenants that we had specifically in that portfolio. We are always looking at opportunities with the investment community today, I am sure there will be more interesting opportunities hopefully to look at. In terms of our guidance for this year of $200 million to $225 million, if you look – million portfolio that we acquired last year, we effectively end up at the midpoint of the guidance that we have given. It’s still early in the year. We are pleased with our pipeline to-date, and we are going to be continually focused to find the best opportunities available to us.

Thanks guys.

Thanks.

Thank you, RJ.

The next question comes from Nick Joseph with Citi. Please go ahead.

Hey, it’s Michael Bilerman here with Nick. Good morning.

Good morning, Michael

So, Joey, you have obviously made a big improvement on the company over the last four years to five years and transforming its portfolio perspective, balance sheet perspective, tenant perspective. As we approach proxy season, I’m curious if you’ll now take the next step and sort of bringing corporate governance into the 21st century, removing the staggered Board, continuing to replace Board Members and the tenure year that’s well over 15 years or 20 years with new members. And sort of where is the mindset today at the Board level to do that? You’ve had companies like Vornado destagger as well, it sort of sticks out relative to the broader end of industry. So can you talk a little bit about proxy season and what’s going to happen?

Certainly. And first, I thank you for the compliments. I’ll tell you when I came to the Company and I took the helm of the Company. I won’t take credit for the balance sheet. This Company has always had a conservative mindset. I think my father drilled it into my head about conservatism and balance sheet, and the trials and tribulations people who have had with leverage since I was in kindergarten. And so I was taught and inherited that disciplined mentality to a balance sheet. So I want to make sure credit is given where credit is due there. From a corporate governance perspective we’ve taken a number of critical steps to improve our corporate governance and the Board. And I don’t want to speak on behalf of all Board Members, but as one of them, the Board is kind of constantly focused on improving this Company. We have added three really fantastic Board Members in the past few years, John Rakolta, Merrie Frankel, and Jerry Rossi are the highest quality addition to provide significant amount of value to the Company and we are very thankful and grateful for their participation as a Director of this Company. Last year in the proxy we committed to implement of formal executive compensation plan. This year it has been adopted this week and you can see the filing. So, I’ll tell you, we are consistently and we are committed to improving really everything we do including corporate governance. I will be honest with you, I would be reticent to tell the Board Members that they have been here too long or they are too old to serve on our Board given the nature and quality of their participation. That said, I take the opportunity to thank Gene Silverman, who is stepping down from our Board for Merrie Frankel to effectively take his seat. We’re talking about people that have been road through the transformation of this Company, they were supportive, and directive, and instructive in that transformation. And we wouldn’t want to do anything to diminish their contribution. But corporate governance is something that we are focused on. We’ve made some market improvements and we will continue to make those improvements.

I guess why have a staggered Board and another company McNally put an age limit in as well recently on their Board. You’re one of the oldest boards of north of 70 years. It just appears and I’m not diminishing the fact you have three new Board Members in the last five years, six years. Having a staggered Board really goes against proper corporate governance and not having a certain age limit to rotate that, even with the staggered Board seems to go against what institutional shareholders want.

I can tell you really some of the history, personally I think an age limit, I’m not sure if I would personally be in favor of a hard gap for age. I would hate – I really just don’t care for the approach that somebody is too old to contribute, especially today with the life expectancies. I know people that are working well into their 70s, that are highly successful. I’d tell you, as an age limit personally can rub me the wrong way. Maybe it’s because I am a young CEO and I like the wisdom and experience of those people bring. That said specific to the age limit. In terms of the staggered Board, that’s historically a place to allow for the transformation of this Company that the EU correctly brought up. Without potential – without those attributes, they’ve enabled the transformation of this portfolio, the growth of this portfolio, the transformation of the Company. And I would tell you I’ve somewhat potentially contributed to shareholder activism whether it’s warranted or unwarranted that has led to returns that are on top of the net lease space over the short-term, median-turn as well as five-year returns. That said, Michael, I don’t want to say that we are not focused on continuing to improve corporate governance because we are and we are taking those steps. This is a small company. There is 26 full-time employees, we are focused on a lot of stuff, but the Board is in discussion and it’s something that we’ll continue to discuss and continue to improve.

Okay. Just two other ones; in terms of I think another – one of pieces providing guidance and while there’s probably a handful of companies that don’t provide strict sort of FFO guidance, I’m curious now that you have reached a certain size, a little bit more mature, you’re in one of the most stable businesses being net leased. Why not provide all the variable to guidance and come down to an annual number? You said you’re not focused on quarterly numbers, it doesn’t mean you can’t provide an FFO range I assume. What’s holding you back now of not providing that?

Got it. So it’s really one thing that has held us back from providing that guidance. And I think for most analysts and investors in this Company with the stability of cash flow like you mentioned driving to a number isn’t overly challenging. I tell you today, I don’t believe the company is necessarily large enough to provide for that guidance. I mean, we are focused on the retail, real estate, net lease business. We’re not a financier, we’re not an aggregator. The most important thing from my perspective is that we are never engaging in investment activity to meet any levels of guidance. We are opportunistic. Both on the front end as well as the backend of transactions. And I want my team here to be focused on finding the best opportunities and negotiating to the best of their strengths, not viewing this is an institutional buy side or development side mentality, but to be focused on retail real estate fundamentals in finding the best deals in the market. We are out there really looking – I wouldn’t in call it needle and haystack where needle in a hay bale. And I want to focus from an entrepreneurial perspective, as part of our DNA and our core values. I want to focus on the best deals and if that is $150 million in deals in a year or $500 million in deals in a year, the biggest driver to our earnings to FFO and AFFO is timing of those transactions coming online and volume but also when we raise any type of capital whether it is equity or debt and there is significant variability because of those factors. And so that’s historically been my concern on a company with the $1.65 billion enterprise value. Frankly, I’m not a certain that we are large enough to maintain that DNA, but to be able to provide useful guidance to the street.

Right. Yes. There is handful come which is exclude capital markets and acquisitions, dispositions from your guidance. Last question, this is as you think about you talked a lot about e-commerce resilient, but you also missing recession resilient. There is an element that in a recession e-commerce resilient businesses may not do as well right, because as people tighten up their belt. They may not go experience things. They may not go and do that. So sort of view those a little bit, they are not mutually exclusive in that way. So sort of talk a little bit about that than the other aspect is your portfolio is not solely focused on all exponential type activities and experiences. There is a lot of stuff to still as the threat of e-commerce in your portfolio. And I guess how far would you go in terms of ski hills or theaters or golf, I mean, I can agree the gents at carwashes, the auto service, all that has an experience and a person having to go consume their activity. You have a lot of exposure, a majority of your exposure which is still brick-and-mortar retail at the end of the day that at some point could get this intermediated by e-commerce.

It’s a great question. And I personally spend a lot of time thinking and working directly on it. In terms of ski hills, what was the other? Golf courses…

Golf theaters, and then I mean if you really wanted to go purely that way you certainly…

Yes. Never happening. Not our – I’ll tell you not our core competency. Not what this company is focused on today or in my future. We have acquired our 1st couple of movie theaters. We talked about I believe on the last earnings call that movie theaters we think there is a place in a minority position in a net lease portfolio. We will not become the movie theater rate. We won’t be acquiring golf or ski hills, because we don’t believe it’s in our core competency, we’re able to drive to a residual value in underlying real estate. Frankly it’s not our core competency, we’ll evaluate the residual value in that underlying real estate. Your question is a great one. How do you mold the future of retail with the future of the economy which will have its ups and downs and it’s cyclical as well as a structural basis. We think we’ve done a very good job targeting the retailers in these spaces that are the leaders in the spaces. It used to be retailers could have three in a category, today that’s very challenging given the Internet and Amazon. We didn’t have any sports authorities, we didn’t have any Logan’s or MC sports or family Christian stores for retailers that have filed. We don’t have any HH Gregg’s, we don’t have any Ganders. And so I think we’ve done a pretty good job. That said we have to focus on industry leaders in spaces that we believe have an experience to the shopping component. That can be from Apple to Costco to TJ Maxx who we have great affinity for in the middle of those. And there are number of those brick-and-mortar retailers which we are highly focused on. That experience as I touched on earlier can be shopping an auto parts store and talking to a service working at auto part store understanding how a part works in contacts of the – somebody’s automobile. And so with a number of factors is not a binary approach by any means. Retailers changing and we think we are at the front of the net lease space in the retail space to understand how retail is changing and we are committed to continuously self evaluate it in the future. Does that make sense?

Yes, great. Thank you.

Thank you, Michael.

The next question is a follow-up from Ki Bin Kim with SunTrust. Please go ahead.

Thanks. After I decided, but I want to say thanks for changing the conversational structure. I can tell is one of the things that we highlighted, there is on many negatives, but that’s probably one of the areas that can use improvement, so thanks for that. So can I ask a question about any purchase options in your leases? Overall in your portfolio how many leases have purchase options for the tenants?

I believe it is one.

Okay. That’s good to know.

Yes. Typically there are tenants I wanted to expand – their tenants that have right of 1st refusal’s. In terms of an option to purchase of [indiscernible]

Okay. And I know you don’t get much unit level coverage information from your tenants given that you don’t use master leases that often. But with that said like approximately from that new deals you’re doing, are you getting unit level coverage data.

So just a little overall context for the portfolio, we have 130 properties that report sales. We have 60 talked about third of the portfolio that report sales. We have 60 properties, 60 properties which the tenants report financials again the vast majority of our tenants are publicly traded. So you can see the financials online. And in terms of the union level coverage – our union level coverage for the tenants that report – that we receive reporting for the last year was 3.1 times. Again we’re not a financier. We acquire and develop and purchase space in a part of capital solutions program typically with national and super regional retailers that don’t report. That said the minority of the portfolio reports and we are very satisfied with how they are performing to date.

Okay. And I think often use term in the sector is that companies are leveraging their tenant relationships to obtain deals are supposedly off market. But maybe you can give us a little more insight under the hood and talk about how you’re doing maybe versus competitors and how often are you in actual dialogue with your tenant base.

Yes. So I think – its actually – its a very good question Ki Bin. So I tell you that how we talk about leveraging relationships with tenants is very divergent from our peers talking about leveraging relationships, with their tenants or the repeat business that we here our peers talk about. I would tell you the sale leaseback we’re talking about sophisticated multimillion dollar transactions, which typically banks are involved. The leveraging relationships to achieve out of market cap rates until leaseback is probably a minority outcome. When we talk about leveraging relationships with tenants we’re talking about doing a sale-leaseback with the tenant or developing for tenants, building out that relationship and then expanding that relationship to one of our other 3 primary or few external growth platforms. And then I will revert back to Meridian. Meridian was a sale leaseback in – and the end of 2014. I believe it was in December 2014. It was a sale leaseback at the time, I wouldn’t say that we’re the only person and look at the sale leaseback, when we part as look at it. But we are the only party in the net lease space traded or non-traded that can be a development in a partner capital solution partner for that retailer on a go forward basis because of the unique capabilities that we have in our development track record. Similar with Camping World, the partner of capital solutions project in Tyler, Texas, we are the only net lease read that could be in the ground, developing ground up in Georgetown, Kentucky for Camping World. And so when we talk about leveraging relationships, we’re talking about leveraging relationships to expand our capabilities with that tenant and its come up with different transactional structures in our 3 external growth platforms. Not necessarily to do the next deal with them in the same platform. Does that make sense?

Yes. Thank you. That’s helpful.

Thanks, Ki Bin.

This concludes our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.

Thank you. And with that, we would like to thank everyone for joining us here today. And we look forward to seeking we report our first quarter results. Thank you very much.

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