Good morning, everyone, and welcome to the Agree Realty Third Quarter 2018 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] And please note that today’s 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 third quarter 2018 earnings call. Joining me this morning is Clay Thelen, our Chief Financial Officer. I’m pleased to report that we had another very strong quarter with our three external growth platforms, producing record investment volume and significant capital markets activities that position our company for continued growth. During the third quarter, we invested $159 million among 52 high-quality retail net lease properties. 43 of these investments were sourced through our acquisition platform, representing aggregate acquisition volume of approximately $151 million for the third quarter. The properties were acquired at a weighted average cap rate of 7.2% and had a weighted average remaining lease term of 11.5 years. The acquire properties are located in 20 states and leased to 20 leading retailers operating in 14 different sectors, including off-price retail, craft and novelties, convenience stores, auto parts and tire and auto service. Notable retailers include TJ Maxx, Walmart, Best Buy, Hobby Lobby, Tractor Supply, 7-Eleven, O’Reilly Auto Parts, National Tire Battery, AutoZone, and Firestone. Through the first nine months of the year, we’ve invested a record $366 million into over 100 properties, geographically diversified across 29 states. As of 9/30, we’ve acquired 96 properties for a total of $351 million. These assets are leased to 38 different leading retail tenants operating in over 20 sectors. The properties were acquired at a weighted average cap rate of 7.2%, with the weighted average remaining lease term of 12.3 years. More than 46% of the annualized base rent acquired during the first nine months of the year comes from retailers with an investment-grade credit rating. I would note that, we do not imply ratings to high quality names such as Tractor Supply, Hobby Lobby, and Publix. Even…

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 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 the most directly comparable GAAP measures can be found in our earnings release. As announced in yesterday’s press release, total rental revenue, including percentage rents, for the third quarter was $33.6 million, an increase of 23% compared to the same period last year. Year-to-date, total rental revenue has increased 26.1% to $96.7 million. General and administrative expenses in the third quarter totaled $2.9 million or 7.9% of total revenue. We still anticipate G&A expenses will be approximately 8% of total revenues for the year. Income tax expense for the quarter was $125,000. We anticipate total income tax expense for the year to be in the range of $500,000 to $550,000. Funds from operations for the third quarter was $23.5 million, representing an increase of 17.7% over the comparable period of 2017. On a per share basis, FFO increased to $0.72 per share, a 4.3% increase as compared to the prior year period. Funds from operations for the first nine months of 2018 was $67.8 million, representing an increase of 23.5% over the comparable period of 2017. On a per share basis, FFO increased to $2.13 per share, a 6.6% year-over-year increase. Adjusted funds from operations for the third quarter was $23.4 million, a 17.4% increase over the comparable period of 2017. On a per share basis, AFFO was $0.72, an increase…

Thank you, Clay. To conclude, I’m very pleased with our strong performance during the first three quarters. We’re in a tremendous position for the remainder of the year, and I look forward to seeing many of you at the upcoming REITworld Conference in November. At this time, Operator, we’ll open it up for question.

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And the first questioner today will be Rob Stevenson with Janney. Please go ahead with your question.

Good morning, guys. Joey, can you talk a little bit about the cap rates on the two ground leases that you guys acquired versus the 7.2% blended for the overall acquisitions during the third quarter and why buying ground leases at this point is still attractive to you. I assume that cap rates were lower than the 7.2%.

Yes. Good morning, Rob. I think, it’s fair to say that those cap rates were generally lower on the ground lease transactions. At the same time, the rent per square foot along with the underlying real estate reflects the ground lease nature of those transactions. The notable ground lease transaction during the quarter was the Walmart in Manassas, Virginia, which is a Supercenter, a high performing store, paying really the $3.54 a square foot. And so I’ll tell you, when we invested in larger boxes, Walmart, Home Depot, Lowe’s, et cetera, we obviously prefer a ground lease structure rather than have our capital invested into the building improvements itself. So we’ll continue to find opportunities and execute opportunities. I’ll tell you, our pipeline has some more opportunities that are similar to the Walmart in Manassas as well as the Texas Roadhouse. And we think it’s a great risk-adjusted return.

Okay. And then, if I look at the changes in your sector exposure over the last year, may tire and auto is up to 150 basis points, auto parts is up 100. So you guys are materially increased your exposure to the auto space. Also the off-price retail, I think is up about 220 basis points were the only real notable decline is in the quick service restaurants. I mean, how are you guys thinking about those sectors going forward. Is this the trend that you guys expect? Was it more driven by just opportunistic? Is there – should we expect to see quick service continuing to decline and auto is continuing to increase? Or in aggregate is auto sort of 12.5% of revenues ABR about as high as you want on a combined basis about as high as you want to get it?

Yes. No, it’s a great question, Rob and it goes straight to the heart of our strategy, frankly. The only correction, I would make is obviously, pharmacy is decreased year-over-year 350 plus basis points as well. But you’re correct to point out the restaurant-quick service decrease of roughly 130 basis points. We prefer industry leading retailers in those omnichannel sectors or which had moats around their businesses that are frankly small box retailers that we’re going to buy a fee simple interest on a turnkey basis or frankly or develop for them. Tire and auto service specifically there are some very high-quality names that we have very good relationships with National Tire and Battery, Goodyear. And so we target those across all three of our external growth platforms. The same can be said for auto parts, we are very active O'Reilly and AutoZone are both now top tenants for us. You’re looking at the average of average box size of 6,000 to 8,000 square feet, main and main retail corridors, investment-grade balance sheets, low rents per square foot, easily fungible, fungible boxes for retenanting if and when they were ever to vacate the premises. And so – those are sectors that we were frankly – we were very attracted too and we will continue to invest aggressively as well as off-price with TJ Maxx, Marshalls, HomeGoods, Ross as well as Burlington. So I think your question goes, as I said, right to the heart of our strategy, but the strategy we’ve been executing on for a number of years and you’ll continue to see us execute on the future.

Where is the Car Wash located? The Car Wash stuff located. What sector is that classified under?

That’s a good question. Car Wash is in auto service. So Mister Car Wash is…

Okay. So that’s explained some those increased from 5.5% to 8%.

Correct, but there’s also a significant number of tire stores in there as well. National Tire and Battery, Bridgestone, Firestone and Goodyear, Big O Tires and so – and then the sale lease back with Belle Tire early in the year.

Okay. Thanks guys.

And the next questioner to be Christy McElroy with Citi. Please go ahead.

Hey, good morning, everyone. Just, so in raising the acquisition guidance, you’re looking at another $100 million or so at the midpoint, realizing we’re only three weeks into the quarter, but you’ve got $350 million completed. Can you say how much you may have completed in October so far? Or how much is under contract or LOI today? Just trying to get a sense for expected timing of deals in Q4 or whether it’s more frontend loaded or backend loaded, in terms of your expectations?

Yes. Close to date in the first three weeks approximate, call it, $10 million to $15 million. Nothing significant, it will be backend loaded. The team was really focused on the number of transactions here that we’re closing at the end of Q3. I think we had 16 closings the last week of the third quarter. And so the transaction team was very busy there. In terms of the guidance, the increase in guidance, we want to give people the straight shot. And so we see obviously, visibility to that $425 million to $475 million. You can assume it’s either under contract or a letter of intent. The challenge today, and we have 70 days of visibility and we’ve talked about that in our prior calls with investors, is that we don’t know if some of these transactions could push into the first quarter of 2019, dependent upon the often sellers as well as retailers providing estoppels and the like. So the only uncertainty, we have there is the timing of these transactions. I’ll tell you, we’re already building our Q1 pipeline. And so as these transactions progress, we’ll get some more visibility.

Okay. And then just sort of related to that, you’ve got the September forward in your back pocket, as we look into 2019, how are you thinking about the settling of the $190 million. Would it be similar to the strategy around $160 million, where you had sort of built up your pipeline to the point where you are nearing six times and you pulled the trigger and understandably it was related to the issuance of the September forward, but would you potentially use the same strategy next year is you’re kind of building up your pipeline, you get to that six times and you kind of pull the trigger on all of it? Or would you potentially do it in tranches prior to September?

Good morning, Christy. First off, I’d say ultimately to the settlement of the September forward will be dependent on the uses of capital and the timing of those uses of capital. I’d say, we’re committed to stay in within our targeted leverage range of five to six times. And we’ll continually evaluate our leverage to make sure were selling an amount reflective of the growth of the business and ensuring on a quarterly basis, where within our stated range of five to six times.

Okay. And then just one last quick question on the Walgreens, given the decline in the exposure in the quarter, can you give us a how many of the six properties sold to where Walgreens? And can you tell us the average cap rate on those, just to get a sense for where pharmacies are trading today with Walgreens BBB credit?

Yes, sure. So one Walgreens was sold during the quarter was in Waterford, Michigan approximately 10 years left remaining base term there. I’d tell you it’s a BB minus store and that sold at approximately at 6.25% cap rate.

Thank you very much.

Thanks Christy.

And the next questioner today will be Collin Mings with Raymond James. Please go ahead.

Thanks. Good morning, Joey. Good morning, Clay. Just to start, Joey, can you just give us an update on your Mattress Firm exposure and how you’re approaching their bankruptcy?

Sure. We spent some time with them – just the last couple of weeks. I’ll tell you Mattress Firm – first, we were wary of that business model to start, the store clustering never made too much sense to me to have two or three stores in any given intersection or retail corridor. The real estate team frankly, had a very poor reputation from the beginning. We have a total of nine stores in the portfolio, we sold one subsequent to quarter end, we have another store under contract to sales, we anticipate having eight stores here quite shortly. None of our stores have been closed or the lease rejected, I’ll tell you that nearly all of our stores are outlets – outlast, excuse me, to target Walmart or TJ Maxx anchored centers. So I think again, it’s emblematic of our real estate underwriting. If you look at our stores, they are fantastic pieces of real estate, and so we’ve been – we haven’t been part of any of the few hundred store closures or leases rejected or losing today.

Got you. So it sounds like it will be kind of a – maybe a combination of maybe some dispositions as well as just some retenanting. Is that fair or?

I think, we have another disposition under contract, I’ll tell you, I don’t think we’ll have any retenanting. I think it’s fair to assume that our expectation is that all these – all of our stores remain open.

Okay. Okay. I appreciate the detail there. And then just going back to some of the prepared remarks, just can you maybe just expand a little bit more on the opportunity and projected returns on the Sunbelt Rentals Build-to-Suit projects?

Yes, our teams – was down at Sunbelt, our development team last week. It’s a fantastic relationship. We’re working with Sunbelt obviously on these two projects that we’ve announced as well as additional projects. The two projects we’ve announced are retenanting of existing structures. We also anticipate pursuing some ground-up opportunities with Sunbelt as well as some potential acquisitions. And so we’ll continue to execute across all three platforms, returns will be in line with our historical thresholds.

Okay. And I’ll just sneak one last one in there, and kind of just on that note, as far as asset pricing. I recognize Joey, you call it in the past that you’re not necessarily the best gauge of broader market movements given your strategy, but can you just maybe update us on what you’re seeing in terms of pricing or deal flow, just especially in context of the moving to tenure since August.

Yes. I would tell you that asset pricing, we haven’t seen any movement in the tenure, they are correlated to the tenure as you mentioned, since August. The high-quality assets such as the assets that we’re acquiring and developing continue to trade in a similar range throughout the year, even with that 70 basis point increase in the tenure since the start of the year. We’ll see what that correlates to in 2019, but I think we’re going to continue to see the bifurcation of high quality versus low quality, similar to what we’ve seen in the shopping center in the mall place, and there is a lot of capital chasing the high-quality asset, typically [indiscernible] dollars.

All right. Thanks, Joey. I’ll turn it over.

And our next questioner today will be R.J. Milligan with Baird. Please go ahead.

Hey, good morning, guys. Joey, first a couple of years ago, probably the normal run rate for acquisitions, I think you guys had said excluding sort of the bigger portfolio deals was about $200 million a year. Obviously, you guys have grown the portfolio, and grown the Company, and grown the headcount. And we saw obviously bigger acquisition volume last year, this year were over $400 million. I’m curious, what do you think the appropriate going regular way run rate is for acquisition volume?

Look, I’ll tell you, we look at every transaction in its entirety and we’re now – we’re true aggregators. So in terms of a run rate, the team here has grown both by headcount, as well as continues to grow in their terms of their professional development. And so our origination team today has seven people. We just hired new analysts, who will also be joining the team, that team continues to produce fantastic opportunities. In terms of go forward guidance, I’ll be honest, I didn’t think we would have a $425 million to $475 million at the beginning of this year, we’ll evaluate where we are, we’ll have some visibility into Q1 shortly and as we have historically release our initial guidance, the first week of January as well as the total of our acquisitions in 2018.

And so was – were there any larger portfolio attraction to this quarter in terms of the activity?

Not really. I mean there was a couple of portfolio is called in $8 million to $12 million range, but outside of that, it’s truly aggregation. So it becomes challenging to predict the timing, it becomes challenging to predict the volume, but the team here continues to produce high-quality opportunities. Just to give you a sense of our pipeline for Q4 little bit back to Christy’s question as well, over 70% of our pipeline of the stands right now for Q4 is investment-grade retailers, is dominated by Walmart, Home Depot, National Tire and Battery, O'Reilly, AutoZone, the highest quality names in those sectors. Those are all one-off opportunities that some we’ve been working on for six months, some we’ve been working on for three weeks or above. And so it really builds – it comes in waves, typically, the summer months are normally quiet, but we’re going to continue to be actively sourcing high-quality opportunities.

Okay, that’s helpful. And I guess my last question is, this quarter started three projects for $8 million or just over $8 million in the capital solutions. I’m just curious, how do you think about allocating resources in G&A to what’s become a much smaller investment or pipeline relative to your acquisitions pipeline?

Yes. We’re very pleased to add it to that team recently. So Jon Bauman joined us previously add Ramco-Gershenson, Josh Bratton moved over from the diligence side to Director of Development and so Laith is doing a fantastic job building and growing that team. We’ve invested completed or commenced roughly $60 million to-date in 2018. We anticipate a couple of more projects commencing quite shortly here in Q4 as well. In terms of allocation of resources and G&A, we’re investing across all areas of the business today. Our headcount is up to 37. We’re currently in process of expanding our footprint in terms of office. We’re out of seats here. We’re investing aggressively in terms of people, processes, and systems because we know we have the balance sheet and the capabilities that continue to grow across all three platforms and then importantly, we have to support them from a lease administration, asset management in accounting perspective.

All right. Thanks guys.

And our next questioner today will be Ki Bin Kim with SunTrust, Please go ahead.

Good morning. This is Alexei filing in for Ki Bin today. Looks like my first question has already been asked with regards to the acquisition run rate. So I’ll jump to my second question, could you shed some light on what the impairment charge relates to you this quarter?

Good morning, Alexei. We recorded $488,000 an impairment charge for the quarter. This is driven by the termination of a lease and the write-off of the related intangible asset.

Okay, understood. And another quick follow up, just correct me if I’m wrong. I think you mentioned that you sold your last remaining Shopko this quarter, is that correct?

Correct.

Okay, great. Thank you.

And the next questioner today will be Todd Stender with Wells Fargo. Please go ahead.

Hi, thanks. In the release you guys highlighted the Old Navy lease, I guess was extended in Q3. Can you provide some of the economics around that lease and maybe others that’s either were extended or new and maybe just look at Q4 and early part of next year?

Sure. Good morning, Todd. So Old Navy exercise their contractual option in Wisconsin that was a 20,000 square foot store, paying approximately $320,000 a year annually, five-year option, CPI bump, embedded in that option. In terms of the remaining two leases expiring this quarter, one is a small Dress Barn space, which were already at LOI with another tenant. And then lastly, the remaining lease expiration is the Kmart in Capital Plaza in Frankfort, Kentucky which – their option has lapsed and I talked about the redevelopment that is underway at that project.

Great. You don’t have much renewing next year. But can you just address maybe what you’re looking at as far as rents, if they’re below market and maybe any history, you can wrap around some of your renewal percentages?

Sure, we only have about 1.8% coming up next year. The two biggest pieces of that are Dave & Buster’s in Austin, Texas, which pays percentage rent when the store was recently remodeled, and so we’re confident there. The second piece is our only remaining Kmart in Grayling, Michigan, which we look forward to recapturing at some point, if and when, that lease gets rejected through this year’s bankruptcy. So those are the two big pieces for us. The Kmart was our initial asset from the IPO of the 2016, that were put in 1994. We think there is opportunities there to retenant potentially redevelop that asset, similar to the Mount Pleasant and Frankfort assets that have been undergoing redevelopment currently.

All right. Great. Just one last one. Looking at Tractor Supply just as a refresher, are these sale leasebacks with the company or you’re buying them?

They are.

They are. Okay.

No, they’re not.

They are not.

They are not sale leasebacks. So they are track – we’re big fans of Tractor Supply, hence the jump this quarter, the company have a vary, but conservative company. We have a fantastic relationship with their real estate team. The business is really thriving. They have no national competition. They also have the highest rated e-commerce website of any retailer. The profits have increased an average of 9% since 2012. Sales per square foot are approaching 260,000 foot just for context, Macy’s did about $195. And lastly, there the lease adjusted leverage ratio of approximately two times. So it’s tough to beat, it’s tough to beat that.

How big are these lots? What’s the size of the lot and maybe the length of the lease as well?

Typically, Tractor Supply signs executes 15-year initial based terms on approximately an acre and a half to two acres stores, prototypical stores are approximately 19,000 square feet plus an outdoor storage area. And so they are a force to be reckoned with in the farm and rural supply space and we continue to enjoy relationship and look for opportunities with them.

Great, thank you.

[Operator Instructions] And our next questioner today will be John Massocca with Ladenburg Thalmann. Please go ahead.

Good morning.

Good morning, John.

So what was the cap rate on dispositions x the Shopko sale?

The cap rate x the Shopko sale…

6.9%.

6.9% that’s a GAAP cap rate, John.

Okay. And then what maybe drove the increase in kind of rent from off-price retail. I know some of that was a couple of additions TJX, but what was maybe the rest of that?

Yes. So that’s TJ Maxx, we acquired an asset in Logan, Utah, the Burlington in Nampa, Idaho came online, so that was the development project in Burlington in Nampa that we completed during the quarter. And so really off-price retailers comprised typically have three tenants for us. TJ Maxx that’s Marshalls, HomeGoods as well as the namesake, Ross as well as Burlington and we look – we’re looking for opportunities, and frankly are executing an opportunity to continue to add exposure there.

Okay, make sense. And then Dave & Buster’s also came up by about $1 million in rent. Can you provide more color on that transaction?

Sure. We acquired a third-party transaction again, not a sale leaseback acquired a Dave & Buster’s in Kansas, Overland Park. So great demographics, high-quality asset, and so we are excited to add to that exposure, that brings our total Dave & Buster’s exposure to the three assets downtown New Orleans, the Austin, Texas when I mentioned previously and now the Overland Park store.

All right. That’s it for me. Thank you guys very much.

Great. Thanks, John.

And I look to be no further questions. So this will conclude our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.

Well, thank you, everybody for joining us. Good luck on our earnings season and we look forward to speaking you – speaking with you in neighboring California, talk to you soon. Thank you.

And the conference has now concluded. Thank you for attending today’s presentation and you may now disconnect your lines.