Joey Agree - President, CEO Ken Howe - Interim CFO.

Collin Mings - Raymond James Dan Donlan - Ladenburg Thalmann Wilkes Graham - Compass Point.

Good morning, and welcome to the Agree Reality Third Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. 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..

Good morning, everyone, and thank you for joining us for Agree Reality's third quarter 2015 earnings conference call. Joining me today is Ken Howe, our Interim Chief Financial Officer.

I'm very pleased to report our strong third quarter results and believe that our performance further establishes the unique capabilities of our retail net lease platform.

During the quarter, we continue to scale the company via our three external growth platforms demonstrated by a 33% increase in rental revenues while also remaining acutely focused on actively managed our existing portfolio, disposing of approximately $20 million of non-core assets.

The result was nearly a 11% FFO as well as 7% AFFO growth on a per share basis. At the end of the quarter, our real estate portfolio consisted of 263 properties located in 41 states and encompassing over 4.8 million square feet of gross leasable area.

As of September 30, the total portfolio had a weighted average remaining leased term of 11.8 years and investment grade retailers generated 52.6% of annualized based rent. Specifically, our net leased portfolio had a weighted average remaining lease term of 12 years, and investment grade retailers generated 53.2% of annualized rents.

At quarter end, the portfolio was effectively fully occupied at 99.5%. These metrics continue to reflect the high-quality nature of our portfolio and continue to be among the strongest of its peers. 9.9% of our portfolio was ground leased to industry leading retailers including Wawa, Lowe's, Chase, McDonald's and [Audi] [ph].

These ground leased assets are typically valued at minimum 75 basis points inside of comparative traditional turnkey lease. On the acquisition front, during the third quarter we invested approximately $37 million and remained disciplined and focused on our underwriting criteria.

We closed on 15 properties net leased to 9 diverse retail tenants operating in 6 e-commerce resistant sectors. These properties are located in 9 states, and are occupied by leading national and super-regional retailers including Bed Bath & Beyond, Michaels, Mattress Firm, AT&T and Maurices.

The weighted average cap rate on our third quarter acquisitions was 8.1%, and the weighted average lease term was 12.4 years. Those metrics are consistent with our historical acquisitions.

Year-to-date, we have acquired 59 properties for a total purchase price of approximately $160 million surpassing our previous record of $147 million acquired in 2014. These properties were acquired at a weighted average cap rate of just over 8%.

We remain on track to achieve our targeted 2015 acquisition volume of $175 million to $200 million, and are currently conducting diligence on a number of opportunities, including potential investments in the auto parts, apparel and home furnishing sectors among others.

On the development front subsequent to quarter-end, we announced the commencement of another Wawa convenient store with fuel in Orlando, Florida. The project is pre-leased under 20-year ground lease and is expected to be complete during the third quarter of 2016. Our Hobby Lobby project in Springfield, Ohio continues to progress as well.

We anticipate completion in rent commencement by the end of the second quarter of 2016. In Salem, Oregon our Cash & Carry joint venture capital solutions project remains on track to be complete during the first quarter of 2016. The company will own a 100% feesable interest in the project upon completion.

We also continue to make significant progress on the previously discussed projects at the recently created outlot in Lakeland, Florida as well as Capital Plaza in Frankfort, Kentucky. We look forward to discussing both projects in more detail in the near future. We were very active during the quarter on the disposition front.

We sold four properties for growth proceeds of $19.8 million including two non-core shopping centers in Big Rapid, Michigan as well as Lakeland, Florida.

Our shopping center portfolio now consist of three assets two of which we believe has significant embedded growth opportunities and have rental rates which are significantly below market as well as additional outlot creation opportunity.

Over the past 19 months, we have disposed a six shopping center assets and announced outlot creation at two additional assets. I'm extremely pleased with our asset management team led by Laith Hermiz, our Executive Vice President and the transformational efforts he has overseen.

Today our shopping center exposure represents only 2.7% of our annualized base rental income as opposed to nearly 30% in early 2010. As everyone saw in our press release, our material spending concentration is over 1.5% represent a list of the countries leading brick and mortar retailers.

Notably Kmart is no longer one of the -- one of the company's top 20 tenants. We recently increased our disposition guidance from $25 million to $40 million to $50 million for the year.

While we remain focused on scaling the portfolio, we are also continuously evaluating all of our real estate assets and will consistently pursue the disposition of assets that no longer meet our objectives.

From a lease maturity perspective, our portfolio is in great shape, we had one immaterial lease expiration remaining in 2015 and two only two leases are less than one half of 1% expiring in all of 2016. As we enter into the fourth quarter, we are very enthusiastic about the outlook for our company.

As Ken will discuss in further detail, our balance sheet is in fantastic position to continue to execute on our unique operating strategy. Net debt to EBITDA was at the bottom end of our range at 5x and net of cash we have near full capacity on our revolving credit facility.

For the first class portfolio and a clean balance sheet, we are very well-positioned to take advantage of opportunities as they arise. With that, I will turn it over to Ken 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 third quarter of 2015, we reported total rental revenue of $16.7 million, an increase of 32.8% over the third quarter of 2014. FFO for the quarter was $11.2 million, an increase of 35.1% over 2014; and AFFO was $11.1 million, an increase of 31.8%, over 2014.

On a per share basis, FFO of $0.61 was an increase of 10.9% over Q3 2014, and AFFO of $0.60 was an increase of 7.1% over Q3 of 2014. G&A expenses were approximately 9.9% of total revenue for the quarter, as compared to 12.7% in the third quarter of 2014.

For the full year 2015, we expect G&A as a percentage of total revenue to be under 10.5% and we anticipate G&A as a percentage of total revenues to be in the single-digits in 2016 representing over a 600 basis point improvement since 2011 as the company continues to benefit from operating leverage.

Moving on to the balance sheet, we remain in a favorable position as the company continues to maintain a strong credit profile. Total debt to total market capitalization at September 30, was 36.4%, net-debt to recurring EBITDA was 5x. These metrics are well within our targeted leverage levels.

Fixed charge coverage which includes principle amortization remained robust at 3.6x. We utilized the ATM program to raise approximately $25.5 million of gross equity proceeds during the quarter, as we list to optimize our efficiency when raising and employing capital.

From a liquidity standpoint, we had $123 million of capacity on our revolver as well as $21.4 million in cash on hand at the end of the quarter. The company has no debt maturing in 2015 and only $8.6 million coming due in 2016. The company paid 86 consecutive quarterly cash dividend since its IPO in 1994.

Our payout ratios for the quarter which were 76.2% and 77% of FFO and AFFO respectively are at the low end of our target range and imply very well covered dividend. With that, I will turn the call back to Joey..

Thank you, Ken. Overall, another terrific quarter. I think most significant is the remarkable transformation of our portfolio that is now effectively complete. Both the portfolio and the balance sheet are in excellent shape for the future. At this time, we would like to open it up for questions..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from RJ Milligan of Robert Baird. Please go ahead..

Hey, guys. Good morning. This is [indiscernible] on for RJ..

Good morning..

Just got a couple of questions here.

First one is, do you guys have an update on your CFO search and find a replacement for Brian?.

Our search continues. Now, we're methodically interviewing a number of candidates currently, our goal is to have somebody in place in that seat by the first quarter of 2016. And we think we are on track to do so..

Okay. Thanks. And then you guys issued a decent amount of equity through your ATM this quarter.

Can you talk us through how you thought about the amount you issued and how you got comfortable issuing at a discount NAV?.

Sure. I think when we look at our ATM, we think as Ken touched on, it's an efficient means for us to raise and capital to seek the match fund transactions and really tie together sources and uses. Uniquely in the third quarter everyone may noticed relative to our cash on hand at 9.30.

We had a high quality long-only investor who came under reserve enquiry basis which we transacted on it and that net trade is settled on 9.30. So, we are improving our shareholder base with long-only investors and we seek -- we're really seeking to maximize both the efficiency of our capital raising efforts as well as the deployment..

Okay.

And then acquisitions sort of a little bit this quarter, it's about $37 million, should we read anything into that or is that just a matter of timing?.

Yes. It's really a matter of timing. Transactions aren't necessarily on the traditional calendar. I wouldn't read anything into that, obviously, through Q3, we closed $160 million. We are confident that we are on track for the -- to hit our target range of $175 million to $200 million for the year.

I wouldn't read anything into cap rates or the market from that, it's really just a timing of closing as well as transactions proceeding through diligence..

Okay.

And then the last question, can you guys disclose a pricing of your shopping center disposition in the quarter? And then, how do we think about that over in the next six months in terms of go forward dispositions?.

Sure. We sold six shopping centers in the past 19 months. We have been pretty consistent that we were selling assets from the bottom over the course of the last few years, assets where we weren't comfortable either with the store performance the credit or the residuals.

And the assets that you see disposed of in Q3 both Ferris Commons and Lakeland Plaza were upper single-digit cap rates as compared to the mid-upper teens we have historically disposed in 2013 and 2014.

So today, we're sitting with really 2.5 shopping centers remaining in the portfolio, Frankfort, Kentucky, we have Capital Plaza, we are currently adding the ground lease on the recently created outlot as well as our Central Commons in Mount Pleasant, Michigan.

Both of those assets are the highest quality shopping center assets we had in the portfolio. Frankly, with the most embedded value creation opportunities and we're going to be patient with those opportunities here.

Shopping centers are now down to approximately 2.6% of annualized base rents and we think -- really the two shopping centers we have remaining the portfolio has significant value..

All right. That's all my questions. Thanks guys..

Thank you..

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

Hey, good morning guys..

Good morning, Collin..

Just going to really ask about last question, I know it's early, but just as we start thinking about the 2016.

What do you think is reasonable in terms of disposition run rate as far as actual volume just given the progress you guys make here in 2015 got $40 million, $50 million of disposition this year? What do you think is a reasonable run rate as we think about 2016?.

That's a good question, Collin.

I think first it will depend on where are our dispositions closed for the quarter here and we've given the guidance were just pretty broad of $40 million to $50 million we've closed on not just north of $28 million in terms of dispositions -- I think the disposition activity going forward will most likely come from net lease assets as we look -- as we really look to optimize portfolio composition.

And then, the redeployment of that capital remaining of the fourth quarter and first quarter typically in 10.31 transactions we will file up..

Okay.

But, it will come down a little bit relative to this year in absolute volume terms?.

I will tell you we're consistently looking at the portfolio for opportunities. In terms of this year, we had almost $18 million, $19 million in shopping center dispositions Lakeland being the biggest piece of that just north of $13 million.

So I would tell you that I would anticipate a range that is lower, probably lower than the $40 million or $50 million but I still think it’s early for us. I mean a lot will be depending on what gets disposed for the remainder of this year..

Okay. That's fair enough. And then just going back to the deal environment, just again, I guess average cap rate kicked up just a little bit relative to the prior quarter, but again, still training pretty much around that 8% mark.

How do you think about just cap rates right now, has there been any change, does it sound like there has been much of a change as far as the pipeline based on the answer your last question, but just how do you think about cap rates right now? Any move?.

Yes. I said previously on earnings calls, we are not best bellwether for market cap rates, I'll tell you that. We remain consistent with that 8% target. We have not noticed any material deviations either up or down in cap rates over the past three quarters or so.

But -- but again, we aren’t the best market, really the market bellwether for those cap rates. Our platform is focused on creating and sourcing value and really finding those opportunistic transactions in a highly fragmented workspace.

So I would anticipate our cap rates remaining consistent, they've been consistent really since we've launched the acquisition platform in 2010 and we're looking forward, we're looking to continue to transact with similar quality real estate, similar lease term, similar credit structure and pricing on a go forward basis..

Okay.

And then just as it relates to opportunities out there, obviously, pretty successful this year with kind of opportunistic strategy as far as going after assets, but just have you looked anymore like a larger scale deals may be a little bit more of a transformative transaction out there and just maybe update us on if you're seeing any of those opportunities?.

Yes. We look at transactions that range from $1 million into the billions of dollars. Again, our focus is finding the transactions that complement our existing portfolio that surpass and clear our bottoms up underwriting approach and the size of those transactions varies across the -- really across the board.

Most importantly we're going to remain -- and we're going to remain disciplined and seek to have the highest quality net leased portfolio in the space with any transactions that we undertake..

Okay.

Joey, is there anyway to may be think about how aggressive you might want to get with just like a single sale lease back opportunity, is there a way to frame that for us at all?.

Yes, I think the best way to think about it really is for any pro forma material concentrations at any single sale lease back opportunity with a single tenant obviously would create. We really have a soft line of that 5% threshold in terms of cut-in concentration.

We've done obviously a ton of work in terms of diversifying this portfolio as I mentioned in the prepared remarks we think that transformation is effectively complete.

So today the only tenant that as a material spending concentration above 5% is Walgreens and for us to surpass that 5% line again that's a soft line for us to surpass that 5% line we would have to think long and hard..

Okay.

And then just really one last one from me here, just as you think about your cost at that right now Joey, I think the last deal you did cost like 42 -- for like 11 years, just how is your cost to debt moved where you think it is right now if you were to go back to the market on the debt side?.

Yes. I think the short answer is effectively it hasn't moved to 10 year with that -- effectively the same rate as when we transacting on the debt private replacement. We did the that transaction we did $50 million in 10 year paper at 416 and $50 million in 12 year paper at 426 getting to that 421 that you mentioned.

We're pretty confident that we could transact in the similar market with similar term at those rates..

All right. Thanks Joey..

Thanks Collin..

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

Thank you. Joey just going back to disposition guidance I think you had about $10 million to $20 million less this year within your guidance. And we're just kind of curious what your tap-in expectations were there is not that you're not going to be selling any of the assets anytime soon.

So we're just curious that we should start seeing dispositions cap rate sit down a little bit kind of where you think that range is, is it kind of 7% to 8% range on a GAAP basis? So what should we be looking to model in our [indiscernible]?.

Yes. Outside of an unanticipated shopping center disposition, I would anticipate that those transactions in the disposition pipeline would transact at roughly 6.5% cap rate..

Okay.

And then as far as the pipeline looks out into next year, you talked about you've been pretty consistent with the 8% but is there anything you think that's on the horizon that would cause you to potentially change your thought process or is there anything else that in the marketplace that's influencing cap rates one way or the other that we should be cognizant of?.

No. We don't see any market conditions that have been the causes to change our underwriting criteria. We don't have anything in the pipeline today that's going to be a deviation from our underwriting criteria.

Consistency again, I think we've demonstrated that's in 2010 and we're confident that we can continue to deploy capital on high quality net lease retail opportunities at these rates..

Okay.

And then, as it pertains to the joint venture development solutions program, you've seen to have done a lot of Hobby Lobbies, but there hasn't been as much as with some of the other or some other retailers, how is that progressing and do you, you kind of moving away from Hobby Lobby and may be some other retailers?.

Hey, just for clarification, the Hobby Lobby project in Springfield, Ohio that's currently under construction was not part of our joint venture capital solutions program. That's obviously, that is a organic development project for Hobby Lobby and -- for Hobby Lobby so that was not a joint venture project.

However, we have done a joint venture project historically for Hobby Lobby. So the Cash & Carry project in Salem, Oregon, again is with a VP partner that is a joint venture capital solutions project or the same -- the second Cash & Carry that we've undertaken with that partner and we have a long relationship with.

Our goal for the joint venture project is really to secure a handful of developers let's call a three to five developers who are bringing to market three to five projects per year at an average price point -- let's use $4 million, market conditions aside that's our -- that is our medium term goal.

It is really to leverage our balance sheet, our asset to capital, our cost to capital, our development expertise and our tenant relationships as well as our partner's ability to source and secure opportunities and we see that program materializing to that level in the medium term.

So we’re focused on it, obviously, the merchant build environment that we have out there today within a low cap rate environment is an obstacle to really seeing this project this -- this platform to fruition.

But again, that's our goal, it's really to secure a handful of critical partners, three to five critical partners that can leverage those things that we bring at the table here..

That's all, understood. Thanks Joey..

Thanks Dan..

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

Hey, good morning Joey. Just really one question from me, I think its probably a follow-up some of the other's, you've done a great job tearing down the portfolio and getting rid of some of the lower credit tenants like the Kmarts and improving your all credit quality.

I look at most of your dispositions today as being a part of that effort, so as you look going into 2016, how do you, what are your priorities for the portfolio and the balance sheet going forward between acquisition dispositions and developments? And would you, how close are you to or how much do you think about selling off some of your higher quality assets and take advantage of cap rates in the market?.

Let's start with the last question. We anticipated again outside works -- and frankly an unplanned shopping center disposition in 2015 for the remainder of our -- sorry, disposition.

For the remainder of our dispositions in the near-term to be what we call non-core net leased assets and those will be notable names in our tender roster either store performance or residual that we're not comfortable with or something that may forces us to look at the asset potentially even pricing and opportunistic -- an opportunistic pricing.

So, I think in terms of dispositions, we're going to remain active asset managers true to our real estate roots and focused on those qualities and we're to our acquisition platform.

Our priorities going into 2016 frankly are to continue to build upon our three external growth platforms, acquisition, development, as well as our joint venture capital solutions program.

And really to build and scale those platforms and to continue to be able to enter a net lease retail transaction anywhere along the life cycle of that transaction from site selection with our retail partners all the way through acquisition from a third-party around a sale leased back basis.

And those capabilities and those qualities are very unique in our space. They speak to our real estate roots. And they speak to the relationships that we have across the board with retailers, brokers, developers and the likes. So I think, you're going to see more of the same from this company.

I think if you look at this quarter in a point in time, what we are really most pleased with, if you look at our portfolio today, we're sitting here with a portfolio as nearly 53% investment grade. We've obviously actively managed the portfolio selling six shopping centers in the last 19 months.

We have invested over the course of the last few years over $600 million into specifically retail net lease. And we've created value and source value that is atypical of what we see in the marketplace. And that's the DNA of this organization and that does the core value of this organization.

And we're confident that we can continue to grow and build upon the platforms that we have already established..

And just one follow-up, as you tap into your network of sources, it is -- if you compare this to maybe a year ago or earlier this year, is it any harder to source the types of acquisitions that fits your underwritings criteria and the same on the development side.

Are the opportunities sort of -- is it getting hard to find those opportunities or is it the same and as we expect to see the same level of growth going forward?.

I think from an obligation perspective, we've seen the number -- $2 trillion space. I will tell you the transactions at any point in time can materialize; we haven't found it more difficult to source transactions sectors and become more competitive.

We don't anticipate the fast food sector transact -- us transacting in the fast food sector similar to quick service restaurants similar to how we did at year-end 2014 because frankly cap rates and rent of sales ratios, we think have gotten out of whack and the transactions that we see.

So, I will tell you that we see sectors trend, but overall, it is such a highly fragmented large phase and the team here is doing such a great job of building a relationships and sourcing opportunities that we don't see any material deviations today or on the horizon. Again, we're really sourcing and targeting a needle in a hay stack here.

We're targeting a couple of 100 million dollars of the top end of our range in a space that sees multiple billions of dollars transact on an annual basis. So we don't see any change there.

In terms of development, development world is dominated by merchant builders, private developers who are capably constructing and developing assets for retailers and then putting them on the market and selling them 10.31 to private purchasers.

We've been very clear that we're not going to undertake a two to three year development process for returns that are substandard. Our development returns are superior to the market.

They are superior overall to our other investment dollars that we put to work and we're going to remain stringent and diligent in terms of how we deploy those dollars and the high quality opportunities.

That can change, that is built upon relationships and the team here is focused on working with existing tenants in our portfolio as well as new tenants unsourcing those opportunities. But overall, we think we're able to the three platform -- continue to deploy north of $200 million on an accretive basis that's hit our underwriting criteria..

Thanks Joey. I appreciate it..

Thanks Wilkes..

[Operator Instructions] Seeing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks..

All right, well, that about wraps it up again, I'd like to thanks everybody for joining us today and we look forward to speaking with you in 2016. Thank you..

This concludes our conference. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day..