AGREE REALTY CORP Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Strategic Discipline: Maintained strategic discipline through 2024, focusing on strong retailers with superior risk-adjusted returns and resisting external growth temptations.
• Balance Sheet Strength: Ended 2024 with over $2 billion of liquidity, including $920 million of outstanding forward equity, no material debt maturities until 2028, and leverage at 3.3 times pro forma net debt to recurring EBITDA.
• 2025 Guidance: Anticipates investing $1.1-$1.3 billion in 2025 across all three external growth platforms and has AFFO per share guidance of $4.26 to $4.30 for 2025, representing ~3.5% year-over-year growth at the midpoint.
• Platform Performance: Enhanced relationships with core retailers, strong fourth quarter acquisitions, record development year, and strong asset management with significant lease activity.

Segment Performance

• Acquisition Platform: In 2024, $867 million of activities originated from acquisitions, completed at a weighted average cap rate of 7.5% with a weighted average lease term of 10.4 years, and roughly two-thirds of rents from investment-grade retailers. For the fourth quarter, $371 million was invested in 127 properties, including 98 assets over $341 million, with a weighted average cap rate of 7.3%, weighted average lease term of 12.3 years, 10.5% of annualized base rents from ground leased assets, and over 73% from investment-grade retailers.
• Development and DFP Platforms: 2024 was a record year with 41 projects, representing approximately $180 million of committed capital. In the fourth quarter, 8 new development and DFP projects with total anticipated costs of ~$45 million were commenced, 14 projects with ~$67 million in anticipated costs were under construction, and 9 projects with total costs of $31 million were completed.
• Asset Management: Over 530,000 square feet of gross leasable area was involved in new leases, extensions, or options in the fourth quarter, and ~2 million square feet for the full year. The portfolio included 2,370 properties, 229 ground leases (nearly 11% of annualized base rents), 68.2% investment-grade exposure, and 99.6% occupancy.

Guidance

• AFFO Per Share: Guidance for 2025 is $4.26 to $4.30 per share, representing approximately 3.5% year-over-year growth at the midpoint.
• Investment: Confident in investing $1.1 to $1.3 billion in 2025 across external growth platforms, with a strong start to 2025.
• Balance Sheet: Over $2 billion liquidity, no material debt maturities until 2028, and net debt to recurring EBITDA at 3.3 times pro forma.

Risks

• Market Volatility: Navigating a volatile higher interest rate environment, which underscores the importance of disciplined capital allocation and raising.
• Credit Risks: Potential credit issues with tenants like Big Lots, Party City, etc., and an allowance for other potential credit issues in the 2025 guidance.
• Tariffs: Impact of tariffs on tenants and consumers, affecting various retail categories and ultimately flowing down to the consumer.

Question and Answer

Q: Ki Bin Kim at Truist Securities asked about ground lease renewals and forward equity.

A: Joey Agree responded that there's significant mark-to-market upside in ground leases, and forward equity is balanced based on sources and uses, with no significant cash drag today.

Q: Smedes Rose at Citigroup asked about acquisition cap rates and regulatory banks.

A: Joey Agree stated that seller expectations on pricing haven't reset due to volatility, and no regulatory issues seen affecting banks' competitiveness.

Q: Ronald Kamdem at Morgan Stanley asked about investment-grade exposure and transaction volume.

A: Joey Agree said investment-grade exposure is a proxy for investment strategy, and first quarter is locked and loaded with focus on second quarter sourcing.

Q: Michael Goldsmith at UBS asked about auto parts thesis and transaction cadence.

A: Joey Agree explained the auto parts thesis based on car age and real estate marketability, and transaction cadence is volatile with focus on visibility into Q1.

Q: Rob Stevenson at Jenny Capital asked about lots and sale-leaseback market.

A: Joey Agree provided updates on lot bankruptcies and sale-leaseback activity, with ongoing discussions and expected activity.

Q: Spencer Glimcher at Green Street asked about labor shortages and development.

A: Joey Agree said labor shortages haven't been a factor yet, with challenges being constructability and construction costs.

Q: John Kilichowski at Wells Fargo asked about bad debt and dispositions.

A: Peter Coughenour and Joey Agree discussed credit loss assumptions and disposition focus on non-core assets.

Q: Linda Tsai at Jefferies asked about rent coverages and credit ratings.

A: Joey Agree discussed rent coverage challenges in certain sectors and credit rating upgrade due to balance sheet strength.

Q: Wes Golladay at Baird asked about sandbox evolution and G&A.

A: Joey Agree and Peter Coughenour talked about sandbox evolution and G&A trends, including non-cash G&A factors.

Q: Eric Borden at BMO Capital Markets asked about lease expirations and capital allocation.

A: Joey Agree and Peter Coughenour mentioned no material lease move-outs and focus on liquidity for capital allocation.

Q: Richard Milligan at Barclays asked about DFP growth and 2026 outlook.

A: Joey Agree discussed DFP gating factors and no expectation of a do-nothing scenario in 2026.

Q: Haendel St. Juste at Mizuho asked about credit reserve and tariffs.

A: Joey Agree provided details on credit reserve exposure and impact of tariffs on tenants.

Q: Omo Kayo (Sam on for Kyle) asked about credit reserve and retail categories.

A: Joey Agree discussed credit reserve exposure and focus on best retailers in recession-resistant categories