Joey Agree - President and CEO Brian Dickman - CFO Ken Howe - Interim CFO.

Collin Mings - Raymond James Wilkes Graham - Compass Point Rob Stevenson - Janney.

Good morning ladies and gentlemen, and welcome to the Agree Reality Corporation's Second Quarter 2015 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the formal presentation the conference will be open for questions. As a reminder, this conference is being recorded.

It is now my pleasure to introduce Joey Agree, President and Chief Executive Officer of Agree Realty Corporation. Mr. Agree, you may begin..

development, and joint venture capital solutions. As we recently announced, we've closed on a parcel of land in Salem, Oregon that'll be the site of a new Cash & Carry Smart Foodservice store. The project is expected to be completed during the first quarter of 2016, and has a total cost of approximately $5.8 million.

Cash & Carry will operate under a 15-year net lease as part of a larger shopping center shadow anchored by Wal-Mart. This is our third project with our partner, Real Estate Affiliates, and we are pleased to get another exciting opportunity kicked off.

We also just recently announced a project in Springfield, Ohio, for the company we will be developing a Hobby Lobby store. This is our second such project with Hobby Lobby. Total costs are anticipated to be approximately $5 million, and we expect to complete the project by the second quarter of 2016.

The development is located in the fantastic trade area; once again, shadow anchored by a Wal-Mart Supercenter, in addition to a number of major retailers, including Home Depot, Lowe's, Meijer and Kohl's among others.

We are also very close to announcing additional development project with a leading convenient store operator, and expect to be in a position to provide further details in the next 45 days. The outlet development in our Capital Plaza shopping center continues to proceed on track.

We have executed a 20-year ground lease with an industry-leading fast food operator, who will build and construct their own restaurant. The tenant is currently in their permitting period, and the transaction is still subject to customary approvals.

At our North Lakeland Shopping Center, we are nearing executing of a lease with an industry-leading coffee retailer to construct a freestanding facility in a newly-created outlot.

While both of these opportunities are subject to customary diligence and closing conditions, we are excited about their prospects, and look forward to being able to discuss them in greater detail in the coming weeks. In total, our near-term development in JVCS pipeline is approximately $15 million, with anticipated returns of approximately 9%.

Turing to asset management, we were very active during the second quarter on both the disposition and leasing fronts. We sold three properties for gross proceeds of $8.2 million, including a Kmart-anchored shopping center in Marshall, Michigan, a former Border's store in Lawrence, Kansas, and an outlot to our Meijer store in Plainfield, Indiana.

We remain on track to achieve our previously stated goal to raise at least $25 million through dispositions this year via sales of both non-core community shopping centers and select net lease assets.

While we remain focused on scaling the portfolio, we are also continuously evaluating all of our real estate assets, and we'll consistently pursue the disposition of properties that do not meet our objectives. During the second quarter, we executed new leases or lease extensions on over a 106,000 square feet of existing space within the portfolio.

Most notable were J.C. Penney's five-year extension to October 2020 at Central Michigan Commons, as well as 10-year lease extensions to February 2028, and February, 2029, for Walgreens properties in Waterford, Michigan, and Grand Blanc, Michigan respectively.

The Walgreens extensions were made possible by the previous prepayment of a secure loan in January of 2015 that unencumbered the properties. We also completed a 10-year lease with Planet Fitness to occupy a previously vacant space at Central Michigan Commons. Lastly, we had an active quarter in the capital markets.

We executed on our first debt private placement transaction, and also put in place an at-the-market equity offering program. These are two additional sources of capital for the company that we now have in our tool belt [ph].

We certainly have a few objectives here; reduce our overall cost, and improve efficiency when raising capital, maintain our overall balance sheet strength while continuing to preserve asset level flexibility and long-term tenure.

As we begin the second half of 2015, we are excited about the potential for our platform to continue creating outstanding value for our shareholders. The market remains competitive. We are confident that our distinct approach to retail net lease real estate will continue to produce superior investment opportunities.

With a first-class portfolio and a clean balance sheet, we are well-positioned to take advantage of those opportunities as they arise. With that, I'll turn it over to Brian to discuss our financial results..

Thanks, Joey. Good morning, everyone. 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 announced yesterday, for the second quarter of 2015, we reported total rental revenue of $16.1 million, an increase of 35% over Q2 2014. FFO for the quarter was $11.1 million, an increase of 37%; and AFFO was $11 million, an increase of 33%, both over second quarter of 2014.

On a per share basis, FFO of $0.62 and was an increase of 14.8% over Q2 2014, and AFFO of $0.62 was an increase of 12.7%. It's prudent to note that our results there enhanced by carrying a larger-than-normal balance on our revolving credit facility throughout the quarter.

This was due to having committed financing in place related to our private placement of unsecured notes, and added approximately $0.02 to $0.025 per share to FFO and AFFO, as compared to having a more normalized capital structure with permanent debt in place and reduced usage of our revolver.

Adjusting for a more normalized capital structure would have still yielded FFO and AFFO per share growth of over 10%, and over 8% respectively, which we are very pleased with. G&A expenses were approximately 10.1% of total revenue for the quarter, as compared to 12.5% in Q2 2014.

For the full year 2015, we expect G&A as a percentage of total revenue to be less than 10.5%. In 2016, we anticipate G&A as a percentage of total revenue to be in the single-digits. This would represent a 600 basis improvement since 2011 as we continue to gain operating leverage as the company scales.

Moving on to the balance sheet, as Joey mentioned earlier, we are quite active in the capital markets this quarter, implementing a $100 million ATM program, and issuing $100 million of senior unsecured notes in a private placement transaction.

We utilized the ATM to raise approximately $13.9 million of gross equity proceeds during the quarter, and believe this program will be an effective complement to traditional follow-on equity offerings as well as targeted asset sales as we look to minimize our cost to capital.

The $100 million of senior unsecured notes were issued in two tranches, $50 million of 10-year notes at 4.16%, and $50 million of 12-year notes at 4.26%. We are very happy with this transaction, and think that the blended term of 11 years, and blended coupon of 4.21% represent attractive long-term debt capital.

The company continues to maintain a strong credit profile. Total debt to total market capitalization at June 30, was approximately 37.2%, and debt to recurring EBITDA was 5.4 times. These metrics are well within our targeted leverage levels. Fixed charge coverage, which includes principal amortization, remained robust at 3.9 times.

From a liquidity standpoint, we had $135 million of capacity on our revolver at the end of the quarter. The company has no debt maturing in 2015, and only $8.6 million coming due in 2016. Finally, as Joey mentioned earlier, our Board of Directors increased the dividend to $0.465 per share in the second quarter or $1.86 on an annualized basis.

This was the 85th consecutive cash dividend paid since our IPO in 1994. Our payout ratios for the quarter, which were 75% of both FFO and AFFO, are at the low-end of our target range and implies very well-covered dividend. With that, I would like to turn the call back to Joey..

Thank you, Brian. Again, I am extremely pleased with our performance for the quarter. We delivered record earnings growth while continuing to execute on unique real estate investment opportunities that complement our best-in-class net lease portfolio.

We remain focused on creating long-term value for our shareholders, to look forward to building on our success during the second half of the year. At this time, we would like to open it up for questions..

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Collin Mings from Raymond James. Please go ahead..

Hey, good morning guys..

Good morning..

Couple of questions, I think as far as first question for me is just on the guidance, really it sounds like it's unchanged in that 175-200 million range.

Should we interpret that, Joey, as you are seeing a slowdown in the back half of the year, or is it just you not having a lot of visibility, call it, beyond the next quarter or so?.

Good morning, Collin. That's a good question. I think it would be the latter. We really don't have visibility truly into the fourth quarter of this year. Most importantly, we are going to continue to stress quality over quality, continue to underwrite from a bottoms-up approach.

It's easy to acquire assets at the net lease space; it's more difficult to acquire assets that fit within the context of our portfolio. So we are going to continue to stress quality. We've acquired $126 million as released in the press release, and we are going to continue to maintain our investment parameters..

Okay.

And then I guess just along those lines, call it, the average cap rate for the quarter of 7.9%, just as [ph] we think about the back half for the year, should we think about that staying fairly consistent based on what you are seeing in the pipeline?.

Yes, I think the consistency is really a paramount for us. We have been consistent since we launched the platform, the acquisition platform in 2010, and we will maintain that consistency through the back half of the year..

Okay.

And switching gears, Joey, just comment a little bit on the CFO search is going, and just what maybe you are looking for, as you look through -- still kind of [indiscernible] for Brian?.

Sure. Look, we will undertake really an exhaustive and methodical search to find a successor to Brian, whose last day will be Tuesday of next week.

So Brian has done a fantastic job over the course of the last 18 months, and our goal is to find a successor that can continue to build upon everything that Brian and the team here has accomplished, and that continue to work with us to grow and evolve this company as we move forward..

Okay. And then I guess another one, Joey, just as you think about -- just curious to hear your thoughts as it relates to kind of dart [ph] and expecting, call it a 5.5 cap on some of the properties that's looking to sell.

What do you think that type of pricing or at least that type of expectation for pricing says about the acquisition market right now? Is that really just kind of being driven by demand from 1031 buyers or just trying to connect the dots between the cap rates that they're highlighting versus what you're transacting at?.

Yes, Collin, it's a great question. As I've commented previously before, we're probably -- and we take pride in that the worst indicator of the net lease market in the space. That said there is obviously a lot of capital in this space, a lot of capital that has return requirements that are obviously well below ours.

I would tell you that you really have to look at the price points of those assets to really determine who the buyer pool is. I would anticipate Darden's expectation of midsize in terms of cap rates. It is driven by private 1031 purchasers, inclusive of 1031 purchasers, and private capital.

I can't imagine any REIT [indiscernible] or institutional capital acquiring [indiscernible] assets at those cap rates..

Okay, now that's helpful.

And just got one last one from me, as far as just with the ATM in place now, how much equity you think you can raise in any given quarter, just in context of the liquidity of your stock?.

That's a great question. I think obviously the ATM is still new for us. I think we're going to use the ATM selectively. We're going to use it obviously to reduce our overall cost of capital, our cost of equity capital and also to improve the timing and efficiency of raising capital. We are really, by definition, an aggregator of assets.

And to be able to raise capital more contemporaneously with the deployment of that capital, obviously, provides some efficiency. I think it will remain to be seen how effective the ATM is. We're going to be selective. We're going to keep it in line with our -- when we do deploy the ATM we will keep it in line with trading volume on any given day..

Okay.

Well, I guess maybe thinking about that, so in context I think it was 14 million or so or just shy of 14 million in the second quarter, should we be thinking about calling that 10 to maybe 20 million in any sort of quarter?.

Yes. Look, I think the lower end of that is reasonable. Again, I think we're going to continue to learn how effective that platform and that tool can be. Most importantly, we put it in our tool belt during the quarter. As you mentioned, we're able to raise a little over $14 million.

I think the effectiveness of it we'd have to look forward in to the crystal ball. We don't really control that. We don't really control both sides of that equation. But I think the lower end; the $10 million range at the ATM probably makes sense..

Okay, thanks Joey, and good luck, Brian, in your position..

Thanks, Collin..

Thanks, Collin..

Our next question comes from Wilkes Graham from Compass Point. Please go ahead..

Hi, good morning, Joey and Brian, and Brian, good luck at [indiscernible]..

Thanks, Wilkes..

Good morning, Wilkes..

Good morning.

I think Collin asked most of my questions, but I think the only real question I have is, do you think that, at least in the near term, you can find your acquisition strategy with the asset sales and with the ATM, as opposed to outright common equity raises, given, as you said, you don't have control over the stock price; just curious how far you can take your acquisition strategy in the future with those tools or perhaps with other tools such as other private raises..

That's a great question. There's multiple -- obviously, multiple inputs to that equation. The amount of proceeds that we raise from dispositions, we'd given guidance for the 25 million this year. We've already transacted or disposed of over $9 million. So I think that will be a significant factor.

And then on the flipside, and I'll put the ETM aside, is with the pipeline materializes like really put Q4 of this year. We have some visibility into the remainder of the Q3 pipeline. But Q4 is off in the distance still. So I think it is feasible for us to raise those proceeds, both via the ATM as well as the disposition activity.

It would also - it will be highly depended upon also acquisition activity on the other side..

Great, thank you..

Thanks, Wilkes..

[Operator instructions] Our next question comes from Rob Stevenson from Janney. Please go ahead..

Hi, good morning guys.

Joey, when you think about all of the sort of developments and the potential developments that you talked about earlier, what's the overall capital commitment at the sort of high end that you think about over the next six to nine months on the development side, both between the joint venture and the straight ADC development?.

Right. Good morning, Robert. We talked previously and we discussed in this call about the $15 million near-term development pipeline. We've obviously recently released the Hobby Lobby as the Cash & Carry, given a little bit more color on to outlot developments at North Lakeland and Capital Plaza.

I'd tell you that number looking out six to nine months has obviously included that $15 million, and then it will be outside from there. I tell you that in our shadow pipeline are some exciting opportunities with existing retailers, as well as new potential entrance to our portfolio. And we will see -- we don't control the entitlement pace.

We don't control the pace in which tenants approve projects. But there's exciting opportunities that we hope to get announced in 2015, if not early in 2016..

And I mean does that bring you more into the sort of $45 million-$50 million range, or is it significantly smaller than that if some of those things were to hit? But I'm trying to think about what the upward sort of, and are the development -– of development pipeline an aggregate could wind up being for you guys if everything starts to hit?.

Well, I think that would be a high number in terms of the short-term. If we look out medium and long-term, our goal is to continue to grow in the scale of three of our external growth platform.

So acquisitions, development as well as joint venture capital solutions, we think we have the ability over the medium-term to materially scale the latter two there. So we've grown the acquisition platform to the guidance of a $175 million to $200 million this year.

Our goal is also is to continue to scale organic development as well as joint venture capital solutions. And the team here, the development team is working diligently to do so.

They are in conversations with some new and exciting tenants as well as the existing tenants, how quickly we're able to scale that will be frankly project and relationship specific..

Okay.

And then just lastly, I mean when you think about the balance sheet today, is it pristine shape, I mean what's the sort of level without corresponding equity of additional debt issuance that you guys would feel comfortable with in the near-term?.

Yes. From a debt to recurring EBITDA perspective, we've always said that our target really is five to six times or right in the middle of 5.4 times at quarter end. Excuse me. So we're right in the middle of that targeted range. We feel good about where we are. We don't have any preferred in the capitals tax or coverage is very strong across the board.

So we're right in the middle of that target range. Right now obviously we will have some acquisition activity and the capital deployed via the joint venture as well as development platform, and then hopefully some dispositions as well as the funding source..

Okay, thanks guys..

Thank you..

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Agree for any closing remarks..

Well, thank you, that about wraps it up again. I would like to thank everybody for joining us, and we look forward to speaking with you upon our third quarter results. Thanks, everybody..

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