Good morning, ladies and gentlemen, and welcome to the Agree Realty Corporation Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Rick Agree, Chief Executive Officer and Chairman of the Board of Agree Realty Corporation. Mr. Agree, you may begin.

Thank you, Emily. Welcome, everyone, and thank you for participating in Agree Realty Corporation's initial earnings conference call. I'm pleased to have here with me Joey Agree, our President and Chief Operating Officer; and Al Maximiuk, our Chief Financial Officer. Before we begin, during this call we will make certain statements that may be considered forward looking under federal securities law. The company's actual results may differ significantly from the matters discussed in any forward-looking statements. At this time, I'd like to turn the call over to Joey Agree, our President and Chief Operating Officer, to run us through our real estate operations.

Thank you, Rick. Good morning, everyone, and thank you for joining us. It gives me great pleasure to welcome everyone to Agree Realty's third quarter earnings call. As most of you are aware, the company is a fully integrated, self-administered and self-managed real estate investment trust focused on the acquisition and development of single tenant properties leased to industry-leading retailers throughout the continental United States. Over the past 3 years, Agree Realty has evolved from a focus solely on single tenant net lease development to an nationally recognized acquirer. It is these dual capabilities which differentiate the company in the net leased space. Over the next few moments, I'd like to take the opportunity to bring everyone up to date with our real estate activities of the past 3 years. Since the launch of our acquisition platform in April of 2010, we have acquired 33 single tenant net leased assets totaling $125 million. Of this $125 million, 97% or $121 million has been invested in assets leased in investment grade retailers. These assets are located in 20 states and in 12 different retail sectors. While launching and executing on our acquisition strategy, we have expanded our development pipeline working with investment grade tenants. Since 2009, we have completed 12 development projects. This includes 8 Walgreens located in 3 states, Michigan, Florida and California; a Chase Bank; and our first McDonald's restaurant in Southfield, Michigan. Both the Chase and the McDonald's were 20-year ground leases with a corporate credit. Additionally, we completed 2 redevelopment projects. We expanded and converted our former Circuit City box in Boynton Beach, Florida for Dick's Sporting Goods and completed the expansion of Miner's Super One Foods in Ironwood, Michigan. We continue to diversify our portfolio by tenant, sector and also geographically through the acquisition and development…

Thank you, Joey. Good morning, everyone. I would like to provide a few highlights of the results for the quarter. Please note that we will be discussing non-GAAP financial measures, including funds from operations and adjusted funds from operations. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the company's earnings press release issued yesterday. This release is available on our website at www.agreerealty.com. The company is pleased to announce that our revenues for the third quarter 2012 increased 20% year-over-year from $7.7 million to $9.3 million. This strong increase in revenues is due to the success of the acquisition and development program, while maintaining high occupancy levels. The company's revenues for the 9 months of 2012 increased 11% year-over-year from $23.9 million to $26.5 million. Funds from operations, or FFO, for the quarter likewise increased by over 10% to $6,052,000 from FFO as adjusted of $5,481,000 for third quarter of 2011. This equates to $0.52 per share compared with FFO as adjusted of $0.55 per share a year ago. The decrease in FFO per share was primarily due to the increase in the weighted average shares outstanding as a result of the common share offering in January 2012. Adjusted funds from operations, or AFFO, for the third quarter was $0.54 per share compared with AFFO as adjusted of $0.55 for the third quarter of 2011. For the 9 months, funds from operations were $17,283,000 compared to FFO as adjusted of $17,230,000 from the year prior. This equates to $1.51 per share for the 9 months of 2012 compared with FFO as adjusted of $1.72 per share for the prior year. Both FFO and FFO per share for the 9 months were impacted by the increase in the weighted average shares outstanding…

Thank you, Al. We are proud of the substantial progress we have achieved over the past 2 years, acquiring $125 million of high-quality net leased assets, growing our development pipeline and relationships with superior investment grade tenants, reducing our Kmart exposure by nearly 30%, diversifying our portfolio geographically across numerous sectors and tenants, all the while preserving the strength of our balance sheet. We continue to execute our strategic priorities of growth and diversification of our portfolio of industry-leading retailers and will remain focused on underlying real estate fundamentals and maintaining a strong, flexible balance sheet. These are the principles upon which the company was founded and they will continue to drive its growth. At this time, I'd like to open it up for questions.

[Operator Instructions] And our first question will come from R.J. Milligan of Raymond James Associates.

So you guys reduced your Kmart exposure by about 30% in the quarter, which is quite a bit of progress. I'm just curious, with the remaining Kmart exposure, how much more would you like to dispose of? And what's your strategy there?

R.J. it's Joey. I think on a going-forward basis, as we've really done over the past few years, is we'll continue to evaluate each individual asset and each individual shopping center, as well as the Kmart four-wall performance. I think, over the course of the next few years, you'll continue to see us exit the shopping center business and redeploy those proceeds into the development and acquisition of net leased retailers. As we've stated in the call, we've hit our disposition goals for the year. As you know, we've tranched out our Kmart-anchored assets into -- really into 3 categories. This year, we will focus on divesting of that bottom tranche. Those are assets which really are denoted by weak demographics, poor individual store sales, as well as low residuals that we believe are in the underlying real estate. So I think you'll continue to see us evaluate these assets and strategically divest them over the course of the few years -- over the course of the next few years.

But there's none that you're immediately looking to get rid of that are overly concerning?

Not immediately for the remainder of 2012. I think we've hit our goals. I think 2013, we will reevaluate those. And like I said, we'll continue to evaluate their performance, not only the Kmart performance, but the entire shopping center performance in real time.

Okay. And then turning to the sort of external growth side. You guys have had a lot of development announcements over the past couple of quarters. And I'm just curious, looking over the next 12 months, what are you seeing in the acquisition market? Is there a lot of opportunity? And sort of how would you look at your external growth over the next 12 months? Or is it 50-50 development acquisitions? Just trying to get a better understanding of where the external growth is going to come from.

Yes, I think that's a great question. Internally, we obviously, we can forecast our development pipeline. As you're aware, we don't announce projects until we pulled permits and have closed them on the underlying land. I think our development pipeline remains robust. Obviously, we continue to work with Wawa in Florida, as well as Walgreens and a number of other tenants that are existing in our portfolio, as well potentially new, and that extends from California down to Florida, up here to Michigan. So I think, on a going-forward basis in 2013, it's difficult to project. I think everyone's aware of the cap rate compression that we've seen out in the market. We see about 200 basis points of cap rate compression since we've launched our acquisition platform. We continue to source opportunities, both in the near term and for 2013 that we think provide additional diversification for our portfolio and hurdle our acquisition cap rate. But it's difficult to project going into 2013, what that pipeline will really look like. That can change on really on a moment's notice. Our acquisition committee meets twice a week and we're consistently looking at new opportunities. Ideally, I think our development pipeline will match -- will really match on pro rata basis, our 2012 pipeline. So this year, we've closed on $50 million of acquisitions thus far and we've got about approximately $20 million to $25 million in the ground already or will be in the ground with our announced projects. So I think that ratio would be ideal for us. I think we can continue to add significant value on the development front, and we can continue to source acquisitions hopefully for 2013 that will add value for our shareholders.

Our next question comes from Paul Adornato of BMO Capital Markets.

Looking at 2013 lease expirations, was wondering if you could talk about what your expectations are there. Do you expect to renew those tenants, to sell the properties? What should we expect?

2013, we have approximately 15 leases expiring for, call it, about $1 million. Two of those leases that are expiring are Kmart. These are low rent-paying Kmarts and performing stores in pretty strong or extremely strong locations. So we don't anticipate anything other than an exercise of an option there. The remainder of the expirations are really small tenants based in the Kmart-anchored centers. We don't have any rollover in the near term in the net leased portfolio. So we don't anticipate any significant vacancies than similar to this year where we had almost 100% renewal. We think we'll see that -- we'll see similar results in 2013.

Okay. And you talked about cap rate compression. And in the past, you've done some acquisitions of some, what I might call, acquisitions with hair on them, that is, not necessarily a plain vanilla deal. Was wondering, if given the cap rate compression, you might tend towards more of those value-add acquisitions.

That's a great question. I think a component of the $50 million that we've closed thus far this year, probably about 1/4 of it has some cleanup element to it that we've cleaned up during the diligence period prior to close. We are really sourcing acquisitions from all different areas. We're sourcing acquisitions through traditional investment sale networks. We're sourcing them through third-party consultants, general contractors. We've closed on a number of acquisitions that were directly developers this year, either on a forward commitment basis or during -- or a quick due diligence period. So going forward, for the remainder of 2012 and the remainder of 2013, I think we'll see really a similar breakdown of that. I think the market is aware that we have the capabilities and the expertise, as well as the tenant relationships to continue to execute on opportunities that we have, so-called, hair on them. But that will not be -- that hasn't been and won't be the majority of the acquisitions for us. I think the majority of the acquisitions for us really come through: one, the relationships with retailers that we have; two, the relationships with developers that we have; and three, the broad spectrum of third-party relationships, which spans a few thousand brokers, both leasing investment sale brokers, consultants, engineers, architects, general contractors. That really makes up the vast majority of the acquisitions that we've closed and that we foresee closing for the remainder of 2012 and 2013.

[Operator Instructions] And our next question will come from Wilkes Graham of Compass Point.

R.J. and Paul asked most of my questions. I'll just ask another question on the acquisition side. You talked about how there's been cap rate compression over the past couple of years. Can you talk about maybe where cap rates are relative to your internal hurdle rates? And if cap rates were to compress further in 2013, would you be willing to, perhaps, for example, dip below 8 cap rates on acquisitions to drive volume? Or would you be comfortable staying on the sidelines and focusing more on development?

Well, I think in terms of where cap rates today generally are versus our hurdle rates, they're significantly below our hurdle rates across the market. We pride ourselves on really being able to drive the value that really Paul's question spoke to. So whether it's driving value with deals with hair on them or direct to developers, we aren't buying widely marketed deals. We don't get involved in the auction-like environment for net leased assets. That's not our business historically, that's not our business today and you won't see us entering into that business going forward in 2013. In terms of our hurdles for 2013, I think we'll have to take a deep look at the market. I don't think you'll ever see us wholly stand down from the acquisition -- from our acquisition platform because we're consistently seeing opportunities that aren't market correlated. But if cap rates continue to compress and we'll take a look at our cost of capital and if we don't think it makes sense, I think, generally, is it feasible that we would back off on the acquisition front? It's feasible. I'd like to think that our creativity, our hard work and our ingenuity and the talent of the employees that we have here will continue to drive opportunities that we'll be able to capitalize on on a going-forward business. That said, we're also working with retailers on blend-and-extend opportunities, early options. So I think those aspects will continue to bear fruit. Quantifying it into the aggregate for 2013 is obviously difficult today. We don't have a crystal ball. But I'd think the uniqueness of our organization and our talent and our skill sets and our relationships will continue to drive opportunities.

Our next question is a follow-up from R.J. Milligan of Raymond James.

Just one more quick question on the dividend. Given the low payout ratio that you guys have, just how you think about it going forward and how the board thinks about the dividend and any potential possibility for an increase?

I won't speak on behalf of the entire board. But I think, one, we look at the dividend as a function, obviously, of AFFO, but truly as a function of CAD as well. Our dividend will continue to be well covered from a cash perspective. We have a -- since we have a significant amount of debt amortization, Al spoke to approximately $3.4 million a year or approximately 30% -- $0.30 a share, looking at it from a CAD prospective, it's probably the best way to look at it. Today, our payout ratio as a function of FFO, AFFO as well as CAD are at conservative levels as you mentioned. These ratios will continue to compress as our acquisitions and developments for 2012 come online for a full year in 2013. And I firmly and the management team here firmly believes that as long as we continue to create significant shareholder value from the ground up on our development front, as long as we continue to achieve spreads that we are executing on the acquisition front, combined with effective asset management and high occupancy levels, we will continue to be able to drive growth in AFFO and CAD. And the board will have something to review based upon our historic operating results. So I think the board will continue to evaluate that going into 2013 and for 2013, and they'll make the appropriate decision for the company and for its shareholders.

[Operator Instructions] At this time, I'm showing no questions.

Okay. Thank you, everybody. That wraps it up. Again, I'd like to thank you for joining us on our first conference call, and we look forward to speaking with all of you again during next quarter. Thanks, again. Have a good day.

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