Good morning, and welcome to the Agree Realty’s Second Quarter 2018 Conference Call and Mid-Year Update. All participants will be in listen-only mode. [Operator Instructions] Also note this event is being recorded. I would now like to turn the conference over to Joey Agree, President and CEO. Please go ahead, Joey.

Thank you, operator. Good morning, everyone and thank you for joining us for Agree Realty's second quarter 2018 earnings call and mid -year update. Joining me this morning is Clay Thelen, our Chief Financial Officer. I am very pleased to report that we had another very strong quarter with our team executing across all aspects of our operating strategy. In addition to reporting on our second quarter performance, I look forward to providing a mid-year update and then lastly welcoming two fantastic additions to our Board of Directors. In conjunction with the call this morning, we've posted a few slides to our home page as well as sec.gov. Building upon momentum from the first quarter, we continue to strengthen and diversify our industry leading portfolio through strategic investment activity and proactive asset management. Investment capital deployed across our three external growth platforms in the quarter totaled more than $104 million among 29 high quality retail net lease properties. Of those 29 investments, 23 were stores through our acquisition platform representing total acquisition volume of approximately $102 million. The properties were acquired in weighted average cap rate of 7.2% and had a weighted average remaining lease term of 12.4 four years. Notably, more than 61 % of the annualized base rent acquired during the quarter is derived from tenants with an investment grade credit rating. The acquired properties are located in 16 states operating in 12 diverse sectors, including home improvement, health and fitness, convenience stores, auto parts and tire auto service. Notable retailers acquired during the quarter include Home Depot, LA Fitness, Best Buy, O'Reilly Auto Parts and National Tire & Battery. Through the first six months of the year, we've invested a record $207 million into more than 60 retail net leased properties geographically dispersed throughout 23 states. Of…

Thank you, Joey. Good morning, everyone. I'll begin by quickly running 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 discussed 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 announcement in yesterday's press release, total rental revenue including percentage rent for the second quarter of 2018 was $32.1 million, an increase of 27.7% over the second quarter of 2017. Year-to-date, total rental revenue also increased 27.7% over the comparable period in 2017 to $63.1 million. General and administrative expenses in the second quarter totaled approximately $3.2 million or 8.9% of total revenues. G&A expenses were elevated in the quarter primarily due to a one-time fee related to our receipt of an investment grade credit rating from Moody's Investors Service. We continue to anticipate G&A expenses will be approximately 8% of total revenues for the year. Similarly, income tax expense was elevated in the quarter to $216,000 reflecting incremental state and local taxes. We anticipate the income tax expense will total between $500,000 and $550, 000 for the year. Please note that prior 2018 income tax expense was reflected in general administrative expense and in 2018 and in 2018 we began disclosing the expense separately. Funds From Operations for the second quarter was $22.3 million, representing an increase of 24.3% over the comparable period of 2017. On a per share basis FFO increased to $0.71 per share, a 5.6% increase as compared to the second quarter…

Thank you, Clay. To wrap things up, I'm very pleased with our performance during the first six months of the year. We are in a tremendous position for the second half of the year and I look forward to updating you on our progress next quarter. At this time, operator, we will open it up for any questions.

[Operator Instructions] The first question comes from Rob Stevenson with Janney. Please go ahead.

Good morning, guys. Joey, can you talk a little bit about beyond the Kmart redevelopments that you talked about on the call here? How much is building in the development PCS pipeline beyond the five projects currently underway?

Good morning, Rob. Our pipeline continues to grow with both retailers that we have historical relationships with as well as some new retailers that we're working on everything from market research to site selection. So we anticipate Q3 having some new announcements and some new projects slated to commence during the quarter, but again our focus continues to be on leveraging all three of our external growth platforms with relationships across the spectrum.

Okay and then in the slide deck that you guys put out I mean the Walgreens is now down I think effectively down to 6.7, I think it was like seven or something like that during the quarter. Where --given the acquisition pipeline and the acquisition guidance, where is the sort of pro forma? What is that sort of assuming that you don't acquire any Walgreens throughout the rest of the year? Where does the Walgreens and the pharmacy concentration sort of end the year if you do that sort of incremental $150 million - $200 million of acquisitions outside of pharmacy?

Yes. Well exclusive of any dispositions of any Walgreens or any additional pharmacies I would expect as we telegraph that Walgreens will have a five handle in front of it in terms of their exposure and our pharmacy exposure should be a sub 10 or sub 10% by year-end, both through disposition activity or additional disposition activity as well as just your denominator growth as we continue to bring new assets online.

And are you seeing any sort of difference in the demand for those assets as you go to sell Walgreens and any other pharmacy assets these days relative to what it was last year, a year before?

We're not -- just for some really some pricing color the Waterford Walgreens that we sold was effectively at a -6.3 cap that Walgreens had some 10 years left of term. It was a mediocre performer. The Walgreens post quarter close that we divested of in Delta Township was closer to a six cap at a couple more years of term on it. So we're not seeing any pricing discrepancy in terms of quarter-over-quarter.

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

Hey, good morning, Joey. Good morning, Clay. First question. Can you just elaborate a little bit more on the move of Best Buy to the top list of top tenants? Particularly, just given your focus on looking either reduce or avoid may be some categories that have been less resistant to e-commerce?

Yes, no, it's a good question and look I watched Best Buy for years is the Consumer Electronics space went through some obviously some dynamic changes, we watched Comp USA file for chapter 7 liquidation, likewise with Circuit City, HHA reg appeared and then disappeared via a chapter 7 liquidation as well. What Best Buy's management team has done a fantastic job with a number of initiatives that divided -- that frankly defied many expectations? You may have seen the Bloomberg article in the last couple days on their continued progress. They built out a true omni-channel platform. They leveraged their vendor relationships to create store within a store concepts, which have driven an incremental traffic. They built out the Geek Squad and the service orientation of their business. They've entered aggressively into the appliance space with the downfall of shares -- shares --market share. Their online growth continues while their same store sales were plus 7% last quarter. So I think that combined with their strong liquidity profile, their net debt to EBITDA just over 2x and balance sheets are critical in today's changing environment. We view them as an omni-channel leader today. We're excited to have them join our top tenant list. It took us a few years to watch them transform the business, and we're very pleased with where they are. I would note that did the major Best Buy acquisition that we made during the quarter was a fantastic piece of real estate. It's located in Hillsboro, Oregon just outside of Portland. It's a relocation store, highly profitable for them. It's immediately adjacent to top tenant, the top target excuse me in the market, and its three miles from Nikes global headquarters. I was at the site about six weeks ago and it's a fantastic piece of real estate. So Best Buy is the last man standing in the consumer electronics space, and we feel that they have dynamically transformed their business to be successful in an omni-channel world.

Appreciate all the color there, Joey. Maybe just following a bit on Rob's question just as far as dispositions clearly increased guidance for the remainder of the year. Can you maybe just give us for modeling purposes on a blended basis, how to think about the cap rate on dispositions here in the third quarter? And then as you look at additional dispositions, I mean, you've talked in the past about reducing restaurant exposure obviously, bringing down Walgreens and then you sold off the Shopko that you have exposure to. But maybe just any other buckets or sectors, tenants that you're looking to bring down exposure to as we go through the balance of the year?

No, I'll tell you Collin, it's really more the same. You'll continue to see us divest of franchise restaurant exposure simply because of the pricing that's out there that we're able to achieve sub six or six cap. Pharmacy exposure we'll continue to look at reducing specifically the Walgreens and redeploy their capital. You mentioned the Shopko that was the only Shopko in our portfolio. Obviously, higher yield sales, it was part of a portfolio acquisition cost call it four years ago approximately. We thought it was appropriate, doesn't fit within the quality of our portfolio to sell that asset. And so there are a couple different buckets there. The majority of the assets that we're disposing of is opportunistic dispositions, and then can recycle the capital on accretive basis into frankly higher quality assets that's our focus.

Okay, and then, just as far as kind of blended cap rate, any investment you can provide us on the back of the year, third quarter specifically?

I think mid 6s low 7 is on a GAAP basis is most likely on a cash basis mid 6s , low 6s depending on where some of these transactions play out. As we mentioned, we have $12 million negative held for sale at quarter end there at 6.30 to Shopko and the Walgreens. Obviously, we're in there and so we'll continue to opportunistically look to divest some of these assets.

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

Thanks. Joey, you've been on another run rate of about a $100 million of acquisitions per quarter. Is that the right run rate going forward or is there anything about the pipeline that would indicate that the quarterly volume will either accelerate or slow from here?

Yes. Look, it's -- $100 million a quarter for Q1 and Q1 is was really dead on. I would be hesitant there is cyclicality, there are seasonal changes. The team done a fantastic job sourcing opportunities. They seemed to come in waves. There's really no rhyme or reason for it. What we found here is the key is that we get ahead of the following quarter and so when we're 60 days out our average transaction takes 71 days from LOI execution to close. When we get to 60-70 days out from quarter end, we shift our focus. So what we've got a growing and dynamic and talented team here. We're still learning frankly about the capabilities, but we're very pleased with where we are mid-year. And we have visibility into that $350 million $400 million or else we wouldn't put it out there for anybody.

Thanks. Then you added the two people to the board, so that brings it up to 10. Is this a permanent expansion or do you expect the number to go back down at some point?

Yes. I know it's a good question. First off, we're really excited as I mentioned in our prepared remarks to have Craig and Greg both on board. They're both great leaders of their respective organizations. This is a transitionary period for us. We will --we anticipate going back down to eight possibly nine board members, but we thought it was appropriate for them to a no pun intended to maintain their security clearances and have a transitionary period as we on board them, and they can learn from the experiences of the board members that we'll be stepping off in the future.

Would you at that point it's like doorman finally de-stagger, the board by consistent with the majority of all the reads out?

Good morning, Michael. How are you?

Fantastic.

Look, I would say the Board continues to take appropriate steps at a consistent pace to improve all aspects of the company. So last year, we created a defined compensation plan with short and long term incentives for the named executive officers. To date, this year we've added two board members. We terminated rights agreement this quarter as well. So I think you can expect us to continue look at the board, to continue to look at any and all ways to improve the organization and including potentially de-staggering the board would, they feel the appropriate time is.

Why would there be hesitation when the vast majority of REITs and corporate America have de-staggered boards? Like why is there any hesitation whatsoever to not improve corporate governance especially with your corporate governance course?

I don't think there's any hesitation to improve corporate governance, and I think we --I think the board has taken a number of proactive steps inclusive of these two new board members in terms of governance and age and board tenure. I think there are multiple perspectives of staggered boards, there are merits and considerations to those staggered boards. This is a dynamically growing company with a lot of moving pieces, obviously, a lot of top-line activity. We're growing by nearly 30% a year. And I think the board wants to take, I'll speak on behalf the entire board wants to take a measured and appropriate look at all aspects of corporate governance and not necessarily be reactionary, but do things --at what they feel is the right time right.

Right. I mean as much as you're growing you are in business that's net lease, you're not offering any assets, and it's not an extraordinarily complicated structure, right? You have to raise capital and put capital out. I don't see what that has to do with having annual elections for your Board of Directors providing shareholders the ability to express their views on an annual basis? It just seems strange that you're one of very few companies that still are holding on to a relic in corporate governance.

Well, look, I think our business model I agree is an overly complicated, but at the same term it's a long-term business model. Our weighted average lease term of over 10 years; the nature of how we look at real estate, the nature of how we look at portfolio construction, and frankly our place in the net lease and overall retail universe has a long-term perspective. And so I think there are there are merits to de-staggering a board in annual elections. There are also considerations. And the last thing we want to do is encourage a short-term mentality. And I think that's a consideration, I think we want to have a mentality that's appropriate for the duration of our leases for the holding period of our assets. And so again I think there are merits and considerations of it. And I think the board has done and the company has done a fantastic job continuing to transform itself as a high-growth organization albeit maybe in a simplistic business.

I would agree with you if it was split 50:50 with companies out in corporate America, but what you find specifically even when looking at the REIT, the vast majority 95% of the companies have de-staggered boards. So you are unfortunately the minority not in the majority, and there's a lot of companies that have much more complicated businesses that are much larger in size that have a lot more going on that have de- staggered boards. S I'll leave it there, but I don't think those are rationale relative to the vast majority of companies you're competing with for investor capital. You want to remove any potential overhang or for someone to want to buy your shares and that is typically an impediment to some investors.

I think there are merits everything you're saying, Michael. I would encourage people to look at our short, our medium and our long -term returns. I don't believe it's sort of -- if necessarily as a direct impediment to the total returns that we provided shareholders in those periods of time.

The next question comes from Ki Bin Kim with SunTrust. Please go ahead.

Thanks and good morning out there. So when Amazon bought TOPEC I thought that was probably one of the more obvious verticals they will go into, yet Walgreens stock was down around 10%. So my question is I know you've been talking about decreasing your exposure over time, but when that announcement came, did that at all change the way you thought about your overall longer-term exposure and the pace of where you want to take that exposure down to?

No. It really has. And I would tell you that what we are --if you --as we mentioned in the prepared remarks and people can see on the slides, our pharmacy concentration in 2013 was 37%. It's now down currently to 10.5% %. Our Walgreens concentration in 2013 was 27.5% now down to 6.7%. So that trend in trajectory will continue both by denominator growth as well as capital recycling. In terms of the Amazon TOPEC acquisition, first, I would tell you I don't think it's overly relevant to comment on the size of the acquisition or a PillPack only doing a $100 million in revenue or referring to the history of mail-order pharmacy or an internet pharmacy. So I'll keep --I'm going to keep those comments to a minimum. I think pharmacy like many retail industries, the vast majority of them today is now in the headlines. And I would tell you that's -- I wouldn't underestimate a few components of the pharmaceutical business, and the retail pharmaceutical business, most notably the convenience, the urgency as well as the service component. On the same end nor would I get too carried away with the headline risk. We've seen it basically with every retail sector in the past year with Amazon potentially or inherently ending up entering into it through it acquisition or organically. What I do think is most relevant is the realization and it's something that we firmly believe here is that we're going through a dynamically changing retail world today, an omni-channel world. And so for me, there are really three critical things. Number one, we've the best operators in any sector. We believe Walgreens and CVS are the two best operators. Two, they occupy high-quality real estate on with strong residuals and these are hard corners, we frankly sold pharmacy exposure from the bottom of our portfolio. And then lastly and most importantly, we don't have a crystal ball, we don't claim to. And we want to diversify portfolio from tenant sector perspective, and that's what we have been stated that we're going to achieve, and what we've executed too. So I'm very confident that we'll meet these objectives. We will continue to adhere to them. I think all you have to do is follow the trends that I spoke too and you can see visually on these slides kind of what that trajectory is. So we have a clear strategy. We're going to execute it today. And again, Walgreens is down to 6.7% of our portfolio today. And you'll only see that number go down and we're very comfortable with the real estate underlying.

Okay and the past couple years or a couple years ago you're buying about $200 million or so of real estate deals per year. And obviously you grow that very methodically, now you had a base $400 million. Is there anything from business standpoint or personnel or how you source things that has to enhance or change as you kind of growing that pipeline over time?

No, look, we built for the future of this organization from people processes and systems. Our acquisition and transactional team now is comprised of 11 people that includes our diligence team. That team just two years ago was four or five people until we're built from -- built for growth. We've invested several hundred thousand dollars in systems in this organization from CRM to database software to things frankly that I can't even operate, but the team here has done a fantastic job, look projecting for. We anticipated this growth. We've anticipated the trajectory and frankly we're built to continue into the future to ADC 3.0.

The next the next question comes from Todd Stender with Wells Fargo. Please go ahead.

Hi, good morning, guys. Can we hear more details on the Camping World property developed? Maybe size, expected yield. I'm not sure if I missed that. Maybe your comfort level with the tenant and then maybe in comparison how you're looking at the Aldi project? Maybe some of the economics around that.

Yes, sure. So the Camping world in Grand Rapids is about $9 million - $9.5 million project. This Camping World was a former, but really a retrofit and expansion of an existing operation. Camping World operated the retail store, but didn't operate the motor vehicle dealership portion of it. So the store is effectively complete now. It will be in line with our historical PCS yields. It's the third Camping World in our portfolio. The transactions we've done with Camping World now vary really, it's a good example of what we can provide retailers in terms of value. One ground-up build a suit in Georgetown, Kentucky, a Tyler Texas effectively sale-leaseback with a renovation component. And now the PCS project in Grand Rapids, Michigan. I would tell you don't expect us to do any large-scale sale-leaseback, those types of financing transactions with Camping World. We're going to stick to our knitting and look to create and provide value to our shareholders. In terms of the Aldi, that's a renovation of a former staple box through our PCS platform with a private developer just over about $ 3 million in costs similar yield hurdles for that project. It's our first turnkey, all the project we're excited -- Aldi is in our portfolio currently I believe our ground leases. And so we're a big fan of all the -- the discount grocery business we think as much headline as Amazon getting in this country in terms of entering grocery with the acquisition of Whole Foods. All these is probably as or more disruptive as any of the grocer's in this country today with their low price and efficient modeling. So this will be a new Aldi prototype. The stores are absolutely beautiful on the inside. We're excited for that store to get open and operating.

How big is that prototype Joey?

It's about 20,000 feet, it's a former staples box, so it's a retrofit of that staples right off the freeway.

And thank you for that. And then how about the shopko, you guys took an impairment on that asset. How many years were left on the lease and how about the cap rate you got for i?

There was about -- let me double check but I believe there was approximately 10-11 years remaining on the lease. We took the impairment and subsequently sold it during the third quarter. That was a upper single digits 10 cap almost cap rate there. We just frankly don't -- look, number one, we don't like holding assets if and until a tenant vacate through a bankruptcy or a lease expiration. We don't hold onto assets and we don't believe in the residuals and we don't hold onto assets frankly that we don't believe in the business model on a go-forward basis. So it was an appropriate thing for us to do to eliminate our only Shopko exposure, and keep our focus intently on the best operators and the respective sectors that we're focused.

The next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.

Good morning, everyone. So given you sold Walgreens in the quarter I think it was 6.3 cap if I remember hearing correctly, and you're selling franchise restaurants in the 6% range. What drove the 7.1 cap rate on total dispositions in the quarter? And maybe some more detail on the higher cap rate assets you sold this quarter?

Yes. So the quarter was really comprised of fast food restaurants, a sonic restaurant, fast food operator franchise. A couple Burger Kings and the Walgreens. The gap cap rate on those is really driven by the remaining lease term on the franchise restaurants which gap out. On a cash basis those dispositions were in the six -seven range on a cash basis. So we will get it and say what it's an opportunities or opportunistic sales, and we think there is the appropriate thing to recycle the capital and reduce exposure.

So what would be the gap on the two Walgreens book, the one you sold this quarter and last quarter then?

Those are effectively flat, Waterford had a small bump that took up into the mid- 6s, 6.4, 6.5.

Okay and then just digging more, your exposure to grocery increased by almost 900,000. What acquisition drove that? I don't think it was new tenants in the top tenant list so --

Yes, no, so our grocery exposure is really dominated by national operators, leading operators not interested in second or third tier. We acquired a stop and shop on a ground lease during the quarter. So it's a ground leased [Indiscernible] high-performing store, which we did some lease modifications with the tenant commensurate with the transaction. The remainder of our grocery exposure is geographically and tenant diverse. It's onr Publix, it's Ruler Foods, Krogers Deep Discount, its Walmart Neighborhood Market dollar general market, one high V, an HEB in Texas, really those leading operators national and regional. We're not interested in B or C operators in the grocery space.

Okay, seeing no further questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.

Well, I want to thank everybody for their patience this morning and for joining us. And we look forward to speaking you again with our third quarter results. Have a good week. Thank everybody.

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