Good morning, and welcome to the Agree Realty First Quarter 2019 Conference Call. [Operator Instructions]. 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, Joey.

Thank you, Operator. Good morning, everyone, and thank you for joining us for Agree Realty's First Quarter 2019 Earnings Call. Joining me this morning is Clay Thelen, our Chief Financial Officer. I'm pleased to report that we're off to a strong start to the year as we continue to capitalize on opportunities across all faces of our business. During the quarter, we further strengthened our portfolio through strategic investment activity and proactive asset management, while continuing to fortify our balance sheet through capital markets activity. Subsequent to quarter end, we commemorated our 25th anniversary as a public company by ringing the closing bell of the New York Stock Exchange. Our compounded average annual total shareholder return since the IPO is 13.2%, an impressive accomplishment that touched the bar for our future performance. Before we move on to our traditional update, I'd like to take a couple of minutes to clarify and expand upon our investment philosophy and underwriting standards, given some of the recent discussions we've had with investors during this busy conference season. I think the simplest place to start is what we're avoiding. First, private equity backed and other retailers with over-leveraged balance sheet that lacks the capacity to adapt to a dynamic retail environment and invest in an omni-channel future. Second, retailers that are overly susceptible to e-commerce due to commoditization and consumer price leverage. Third, retailers at traffic and highly discretionary and luxury goods that are susceptible to recessionary pressures. Fourth, we avoid an overemphasis on a store-level performance as a barometer for real estate and tenant quality. It is a data point, not a driver of our underwriting. In today's omni-channel retail world, store-level performance is becoming increasingly difficult to measure using traditional methods, such as store sales, EBITDA and rent coverage. Retailers today are…

Thank you, Joey. Good morning, everyone. I'll begin by quickly running through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities laws. Our actual results may differ significantly from the matters discussed in any forward-looking statement. In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO and net debt to recurring EBITDA. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release. As a reminder, beginning in the first quarter, we modified our calculation of Nareit FFO to exclude the add back of the amortization of above and below market lease intangibles and introduced core FFO, which includes the add back of this noncash item. Core FFO will be consistent with our historic reporting of FFO. Core funds from operations for the first quarter was $28.6 million, representing an increase of 29.8% over the first quarter of 2018. On a per-share basis, core FFO increased to $0.74 per share, a 4.7% year-over-year increase. Adjusted funds from operations for the first quarter was $27.7 million, a 27.3% increase over the comparable period of 2018. On a per-share basis, AFFO was $0.72, an increase of 2.7% year-over-year. In addition to the inclusion of core FFO this quarter and in accordance with the updated lease accounting standards effective January 1 of this year, we've updated our presentation of revenues on the income statement and consolidated our historical reporting of revenue line items into a single line item, rental income. Additionally, we began including the amortization of above and below market lease intangibles as contra revenue in the new rental income line item. It is important to note that both…

Thank you, Clay. To conclude, I'm very pleased with our performance at the start of the year, we're in excellent position for the remainder of 2019, and I look forward to seeing many of you at the upcoming RECon and May REIT conferences. At this time, operator, we will open it up for questions.

[Operator Instructions]. Our next question comes from Collin Mings from Raymond James.

First for me, can you just maybe expand on the entry of TBC into your list of top tenants, maybe some more details around the sale leaseback that was completed during the quarter? And then just more broadly, just as you think about your tire and automotive exposure, what you feel like is a natural limit to that in terms of overall portfolio exposure there?

Sure. So obviously, TBC is a subsidiary of Sumitomo Corporation. They're a leader in the tire and automotive service industry for over 60 years with 3,200-plus stores. The primarily -- primarily the exposure came through -- additional exposure came through a portfolio of fixed assets under sale leaseback with just over $14 million. And then we had a couple one-off acquisitions as well in the quarter. So in terms of our aggregate exposure to tire and auto service, again, our focus is on the industry leaders here. So it's National Tire and Battery, it's Goodyear, Bridgestone, Firestone. We're sitting today at approximately 8.8%. I think that's about the right place. So we would have no problem taking that up a couple of hundred basis points.

Okay. And then just bigger picture, just curious, Joey, your portfolio and team continuing to grow and obviously with Royalty Income announcing its entry into Europe yesterday, just curious to what extent could international expansion make sense for the company just begin out against they raising yesterday, up, raising acquisition guidance continuing to kind of grow that investment pipeline? How do you think about potential international opportunities?

Yes, I think, it's not a focus for us. Our focus remains disciplined on our sandbox of 30 to 35 industry leaders, really in the continental United States a couple of trillion dollars in net leased assets in this country. And we feel like given our market positioning and the depth of the opportunity pool, we get a significant runway in domestically in this country.

The next question comes from Rob Stevenson with Janney Capital Markets.

Joey, you spent some time early in the call talking about the investment-grade portfolio, et cetera. Can you talk about a little bit about how you guys value the fact that somebody is an investment-grade tenant in the underwriting process in terms of what that's worth to you when you underwrite an acquisition versus another acquisition that where the tenant may be good quality, but not investment grade?

Yes, look, it's a good question, it is a data point for us, it isn't really necessary a driver of our underwriting. Again, the 30 to 35 retailers that we're focused on and the vast majority of those frankly happen to be investment grade because they're industry-leading traditionally or typically they're public entities and they're the leading operators in their respective sector. That said, we have a number of tenants that are on that list, our top tenant list, frankly that don't carry a rating and then a couple that are sub-investment grade like Burlington, which we believe the future of off-price retail of their business trajectory is on the upswing. So if you look at our tenant roster, Tractor Supply, a publicly traded company lease adjust and leverage around approximately 2x or even lower, doesn't have a credit rating. We don't impute channel credit ratings, but I think it's fairly obvious that they will be an investment-grade retailer. Similarly Hobby Lobby, $900-plus million of EBITDA, private-held -- a privately-held company, founder doesn't really believe in long-term debt. So again that would be an investment-grade retailer. So it's a data point for us. Our focus is on, again, it's on those industry leaders in those retail categories where they are the -- having omni-channel presence and/or a significant mode around their business that precludes disruption in the future.

Okay. And then Walgreens is now down to 4.6%, the overall pharmacy is at 7.6%. How are you thinking about the non-Walgreens pharmacy, the CVS', the Rite Aid's in relation to Walgreens? Are you selling Walgreens specifically to bring down the individual tenant exposure? Because for a long period of time, it was outsized and you've got hit by that. Are you looking to bring down the overall pharmacy exposure below the current 7.6% and will sell CVS' and Rite Aid's as you go along as well?

I think, it's all of the above. We sold Walgreens obviously because of the historic concentration and opportunistically recycle their capital into other assets. As you mentioned, it's down to 4.6%. As I mentioned in my prepared remarks, we have another one under contract, which we anticipate closing in the next few weeks. I'll tell you pharmacy as a whole in this country, I think, similar to other spaces inclusive of grocery, furniture, among others will continue to see ongoing disruption. Now we're not overly fearful of the PillPack acquisition by Amazon or the online penetration at this time, but I think the pharmacy space, in general, really has some work to do on the front-end predominantly of those stores. And we'd like to see some ingenuity and creativity driving traffic into those stores and driving margin as well as top line revenue to the front end of those stores. So we're very comfortable where our pharmacy sits today. Again, just a few years ago, it was over 40%. Today, it's about 7.5%. So we're very comfortable where that sits. But we'll also continue to optimistically dispose of the assets like we did in the first quarter.

Our next question comes from Ki Bin Kim with SunTrust.

You already made some comments about this, but can you talk a little bit about how Hobby Lobby, Big Lots and Sunbelt Rentals, the thinking behind those investments and how that fits into some of the kind of parameters you already described on what do you want to buy and what you don't want to buy?

Sure. Again, look, we're looking for those industry leaders in those respective sectors. You may have noticed this morning that Ashtead Group prepared to Sunbelt got upgraded by S&P, so their investment grades from all 3 major rating agencies, the equipment rental business obviously has some barriers to entry, they're the leading operator along with United Rentals in a highly fragmented space in this country. We got a fantastic relationship with Sunbelt Rentals, and we've executed across really all three of our platforms to create value, acquisitions, Partner Capital Solutions as well as development with our 4 projects. Hobby Lobby, a very interesting company, a vertically-integrated retailer that frankly creates, manufacturers many of their goods, including their fixtures, really the 800-pound gorilla in the space today. We aren't interested investing in operators, such as Jo-Ann with a fabric basis and significant online penetration and margin erosion. And then Big Lots in Frankfort is a fantastic addition next to Aldi and Harbor Freight Tools. Again, there is a experience component of Big Lots, people are shopping, bargain hunting in that off-price space. So we think all 3 of those retailers, 2 of the 3 which carried about the big credit rating makes sense for -- in our portfolio today.

Okay. And in terms of balance sheet, obviously, your balance sheet is in great shape. And if you include the forward equity offering, your leverage is probably up 4% -- 4x? So how does that -- how do you think about continued equity usage going forward? You tapped the ATM this quarter. How should we think about your willingness to use equity going forward?

Sure. Ki Bin, so in terms of the forward, we haven't till September 3 to settle the 3.5 million shares or $190 million in available proceeds. Given our stock price in the fourth and first quarters, issuing on the ATM was accretive relative to the forward deal price, and we're confident certainty in the future uses of capital, given an evidence by our updated guidance. We'll continue to be opportunistic as it relates to the ATM. We raised $240 million since December. In terms of settling the forward between now and December, we'll settle amounts in order to staying within our stated leverage range. Today, the balance sheet 75% equity, 25% debt. We'll continue to match the uses of capital with this consistent disciplined approach and the future uses of capital merit will continue to be opportunistic with the ATM as well.

And so if the capital markets are there for you via a, attractive stock price, are you okay with may be going, may be adjusting the range for your debt leverage that you're okay with? I mean, I think it was 5x or above a little bit, previously, but are you okay with a lower-bound range at this point?

Well, I think, as you look at historically, over the past couple of years, we really operated under 5x. Now our stated range, we haven't changed that from 5 to 6x, I think that's frankly purely common in the net leased space. But again, we look at all sources of capital to relative cost both actual and virtual cost to those capital and then the risks associated with those capital, and then we look at the uses in our pipeline and we try to keep up conservative leverage profile and the flexibility that will continue to allow this company to grow on a similar trajectory. So I would tell you that inclusive of the forward, our balance sheet is at what 3.7x. 3.7x includes the full set of -- full settlement of the September forward. And so we got fantastic optionality to fund our growing pipeline.

Our next question comes from Todd Stender with Wells Fargo.

Just looking at some of the tenants, I guess, to go back to Sherwin-Williams, were there more properties that were closed in Q1? I know the bulk was done by Q4, but I thought a couple bled into the first quarter.

That's right. Todd, so the remaining 5 properties that were under contract those projects is in diligence closed during the first quarter. So the total transaction was approximately $152 million I believe in 103 properties.

Okay. Got it. And then you spoke about Trader Joe's, did you close something in the first quarter and it's net new for you guys, right?

We did. So during the first quarter, we closed on our first CarMax in Columbia, South Carolina, a fantastic site, modernized facility, brand-new photo boost, approximately 20 acres on the freeway. And so that was our first entry into that space with CarMax, obviously the leading operator in the used-car sector in this country. And then we closed on our first HomeSense, which is T.J.Maxx, those are TJX's newest concept, parallel to HomeGoods, as well as a Trader Joe's in Paramus, New Jersey. So across the Lamborghini dealership there, right in the heart of Paramus. So our first CarMax, our first Trader Joe's, our first HomeSense, again we think fantastic operators, and I think everyone is familiar with them.

Is the Trader Joe's a sale-leaseback or that was you acquired it from another land?

No, acquired from a third-party land, where the only sale-leaseback during the quarter was a National Tire and Battery's sale leaseback for about 14-plus -- $14.5 million that I referenced, everything else was acquired through third-party sellers though our traditional amount.

[Operator Instructions]. Our next question comes from John Massocca with Ladenburg Thalmann.

So just to clarify on the disposition front in the quarter, those were all Walgreens, correct?

Yes, two Walgreens, very different stores, one had about 16 years left that we sold at effectively a 5%, 6% cap in Florida. The other one was a dark store that Walgreens had purchased from Rite Aid with just over four years left. So a two very different assets blended together at a 7% or 9% cap, just over 11 years of weighted average lease term.

So wouldn't really be fair to extrapolate that cap rate to the rest of Walgreens portfolio is probably more weighted towards the 5% obviously?

Correct. The dark store was over four years which is a Rite Aid what Walgreens purchased, that was a high single digit cap rate, so I wouldn't extrapolate.

But the other store, I thought like it's on either end of the bell curve as you will, the other store, the first one you sold is more typical of the portfolio?

Correct.

Okay. And then on the kind of PCS and Development pipeline front, what percentage of current projects being developed is the Kmart redevelopments versus the Gerber and Sunbelt development?

In terms of total costs?

Yes.

So you're looking at approximately $30 million in total cost and total committed capital there. I would tell you that approximately a third is the Kmart in Mount Pleasant, Frankfort redevelopment and then $20 million is the announced projects that are either heavy that are going through the process of just complete.

And how far do you think you can expand the Sunbelt kind of development program, you've been able to put it in place?

Good question, it depends on a multiple number of factors. Our team is working aggressively. I think they're a fantastic partner for us. We're pleased to commence the fourth store. It's unique that we're buying existing buildings and doing retrofit and redevelopments of existing structures and now we've commenced the ground-up in Georgetown, Kentucky, but our team is working in a number of states with Sunbelt. And hopefully, we'll continue to expand that relationship as we go forward in the year.

All right. Actually one more. On the last call, you talked a little bit urban condos and the other kind of unique opportunities. Was that something you were able to close in the current quarter? Is that still -- is that maybe further along -- further out in the pipeline?

No, nothing that closed during the quarter as I mentioned, the news about the Harris Teeter in the fourth quarter just in Charlotte was very interesting than instituting the first store with self-checkout, again that's an 18,000 square foot store in urban condo in a multi-store and mixed-use complex, small stores selling primarily prepared wine, food for off-premises consumption, nontraditional grocery. So that's a very unique asset. We have our Walgreens in Ann Arbor, obviously which is a very unique asset. And then we're working on multiple fronts to continue to find value in those urban environment. So nothing notable during the quarter, but we continue to explore all different types of net lease retail opportunities with those industry leaders.

This concludes our question-and-answer session. I would like to turn the conference back over to Joey Agree for any closing remarks.

Well, thank you, operator, and thank you, everybody for joining us. And we look forward to seeing many of you at the upcoming RECon and REIT conferences. Talk to you soon. Thank you.

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