Agree Realty Corporation (ADC) Q2 2025 Earnings Conference Call Transcript

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Overview

The earnings call summary and Q&A indicate a positive outlook. The company has increased its investment guidance and AFFO per share guidance, showing confidence in future growth. The strategic focus on necessity-based retailers and strong development projects further supports this. Despite consumer sentiment deterioration, the company benefits from its durable goods focus. The dividend increase and strong debt metrics add to the positive sentiment. The Q&A did highlight some uncertainties, but overall, the strategic growth plans and financial health suggest a positive stock price movement.

Key Financial Performance

Investment Volume $725 million invested year-to-date, representing a more than twofold increase compared to the first half of last year. The increase is attributed to the expansion of their three external growth platforms.

Investment Guidance Midpoint of the updated range ($1.4 billion to $1.6 billion) represents a 58% increase over total investment volume for last year. This reflects the company's confidence in its growth platforms and market position.

Capital Raised Over $1 billion of capital raised year-to-date, including $800 million in the second quarter. This includes $415 million of forward equity and a $400 million public bond offering. The raised capital supports growth and strengthens the balance sheet.

Liquidity Total liquidity stood at $2.3 billion at quarter end, including cash on hand, forward equity, and $1 billion of availability on the revolving credit facility. This positions the company well for future growth.

Net Debt to Recurring EBITDA Pro forma net debt to recurring EBITDA was 3.1x at quarter end, the lowest level since Q4 2022. This reflects the company's strong financial position.

Core FFO per Share $1.05 for the second quarter, representing a 1.3% year-over-year increase. The increase is attributed to higher investment activity and efficient capital management.

AFFO per Share $1.06 for the second quarter, representing a 1.7% year-over-year increase. The increase is driven by higher investment activity and lower treasury stock method dilution.

Dividend Monthly cash dividends of $0.256 per common share for April, May, and June, equating to an annualized dividend of over $3.07 per share. This represents a 2.4% year-over-year increase, supported by consistent earnings growth.

Development Spend $140 million of committed capital for 25 projects either completed or under construction during the first half of the year. This represents a 50% year-over-year increase, driven by increased activity in development platforms.

Occupancy Rate 99.6% at quarter end, rebounding by 40 basis points due to re-tenanting efforts. This reflects the company's focus on maintaining high occupancy levels.

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Operating Highlights

Investment in external growth platforms: Invested over $725 million year-to-date, representing a more than twofold increase compared to the first half of last year. Full-year investment volume guidance raised to $1.4 billion to $1.6 billion, a 58% increase over last year.

Development and DFP platforms: Construction continued on 14 projects with aggregate anticipated costs of over $90 million. Wrapped up 4 projects with an aggregate investment of over $13 million. Development spend expected to increase by at least 50% year-over-year.

Retailer demand for brick-and-mortar locations: Highest level of retailer demand for new brick-and-mortar locations since the great financial crisis. Retailers are focused on adding net new stores.

Acquisition activity: Invested $350 million in 110 properties, including $328 million in acquisition volume across 91 retail net lease assets. Notable acquisitions include a $75 million grocery-dominated portfolio and a Walmart Supercenter in Ohio.

Operational efficiencies: Added over 20 new team members year-to-date. Deployed AI and machine learning tools, enhanced integrations, and streamlined workflows. Commenced the next iteration of Arc, expected to come online next year.

Portfolio management: Executed new leases, extensions, or options on 950,000 square feet of gross leasable area during the quarter. Occupancy increased to 99.6%.

Capital raising and liquidity: Raised over $1 billion of capital year-to-date, with $2.3 billion in total liquidity. Pro forma net debt to recurring EBITDA at 3.1x, the lowest level since Q4 2022.

Dividend growth: Declared monthly cash dividends of $0.256 per share, representing a 2.4% year-over-year increase. Anticipates $120 million in free cash flow after dividends this year, up over 15% from last year.

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Risk or Challenges

Economic Uncertainty: The company acknowledges the uncertain macro environment, which could impact retailer demand and overall market conditions.

Credit Loss Assumptions: The guidance includes assumptions of 25 to 50 basis points of credit loss, encompassing credit events, tenant vacancies, and other non-payments, which could affect financial performance.

Tenant Bankruptcy Risk: The company anticipates that certain tenants, such as At Home, may face bankruptcy or liquidation, posing risks to rental income and occupancy rates.

Interest Rate Exposure: Although the company has locked in attractive costs of capital, short-term borrowings remain exposed to floating interest rates, which could increase financial costs.

Supply Chain and Development Delays: The company has ongoing construction projects and anticipates increased development spending, which could face delays or cost overruns.

Stock Price Volatility: The company notes that stock price fluctuations could impact treasury stock method dilution and financial guidance.

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Guidance & Outlook

Full Year Investment Volume Guidance: Raised to a range of $1.4 billion to $1.6 billion, representing a 58% increase over total investment volume for last year.

AFFO Per Share Guidance: Raised by $0.02 at the midpoint to a new range of $4.29 to $4.32, representing over 4% growth at the midpoint.

Development Spend: Anticipated to increase by at least 50% year-over-year as platforms continue to ramp.

Retailer Demand: Highest level of retailer demand for new brick-and-mortar locations since the great financial crisis, acting as a tailwind to growth platforms.

Balance Sheet Position: With over $2.3 billion in total liquidity and no material debt maturities until 2028, the balance sheet is positioned to support growth well into next year.

Dividend Growth: Anticipated free cash flow after the dividend to be approximately $120 million this year, up over 15% from last year, supporting a growing and well-covered dividend.

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Shareholder Return Plan

Dividend Increase: During the second quarter, Agree Realty declared monthly cash dividends of $0.256 per common share for April, May, and June. This equates to an annualized dividend of over $3.07 per share, representing a 2.4% year-over-year increase.

Dividend Coverage: The dividend payout ratio was 72% of AFFO per share for the second quarter, indicating strong coverage. The company anticipates approximately $120 million in free cash flow after the dividend this year, up over 15% from last year.

Future Dividend Declaration: Subsequent to the quarter end, the company announced a monthly cash dividend of $0.256 per common share for July, maintaining the annualized dividend of over $3.07 per share.

Share Repurchase or Buyback: No share repurchase or buyback program was mentioned in the transcript.

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Key Q&A

Q:Can you give us some color about your ATM activity in 2Q and overall timing given your overnight equity offering in late April?

A:The ATM activity during the quarter all predated the overnight offering in April. During the overnight offering, the company promised investors to remain inactive in the capital markets and held that promise.

Q:You said acquisition cap rates would expand going forward. What's the magnitude? And any highlights on the tenants you're targeting?

A:No new tenants are being targeted. The company will stay within its existing focus areas. Q3 acquisitions are expected to be similar to Q1 but larger in volume.

Q:Given all the macro headline volatility, how are you thinking about retailer and consumer health right now? Do you have a view of whether it's improved or deteriorated year-to-date?

A:Consumer health has deteriorated, particularly consumer sentiment. However, the company's portfolio, focused on core durable goods and necessity-based retailers, benefits from this environment. Larger retailers with strong balance sheets are expected to gain market share.

Q:Do you think retailer health is improving overall?

A:Smaller retailers are likely to face challenges due to tariffs and macroeconomic pressures. Larger retailers with better balance sheets are expected to manage incremental costs better and gain market share.

Q:Can you talk about some of the opportunities you see in the DFP business for developments, including volume, quality, and pricing?

A:The company plans to break ground on a minimum of $100 million in projects before year-end, involving over 10 geographically diversified projects with large retailers. Development yields vary based on project scope and duration, ranging from 50 to 150 basis points above acquisition yields.

Q:What is the type of margin or spread that you're earning on the development versus an equivalent acquisition yield?

A:Development yields are benchmarked against acquisition pricing. For short-term projects, yields can be 50 basis points wider, while longer-term projects can be as wide as 150 basis points.

Q:What do you think is the upper limit of investment in the development platform? Will you shift more into this platform over time?

A:The company has a 3-year goal of putting $250 million in the ground per year. Development is additive to acquisitions and not a capital allocation shift. All three growth platforms will contribute to AFFO growth.

Q:Does the diversification of the three-pronged approach provide more consistency in the earnings algorithm?

A:Yes, the development and DFP platforms are additive to acquisitions, providing both qualitative and quantitative benefits. They build holistic relationships with retailers and differentiate the company in the net lease space.

Q:Does the recent acquisition of Albertsons leases reflect a view that Albertsons fits into the scale and stability within grocery that you're interested in?

A:Yes, the acquisition aligns with the company's strategy of investing in the largest grocers. Albertsons leases represent a minority of the portfolio, with strong performance metrics such as average sales of $740 per square foot and rent-to-sales below 2%.

Q:On the bad debt guidance of 25 to 50 bps, is there anything identified, or does it just give room for potential expirations not renewing?

A:The guidance includes a cushion for unknown credit events. Based on known issues, credit loss is expected to be closer to 25 basis points, with the higher end of the range accounting for unforeseen events.

Q:Could you provide an update on your watch list?

A:The watch list is minimal, with At Home and Big Lots being the primary components earlier in the year. Remaining credit issues are de minimis and not material.

Q:How many Big Lots assets were sold or re-leased, and what was the final outcome?

A:Most Big Lots assets have been re-leased or sold, with significant rent increases on re-leased properties. One or two assets are still being worked through.

Q:Why do you think demand for brick-and-mortar locations is so strong despite macroeconomic uncertainty?

A:Retailers are focusing on physical stores as hubs rather than spokes, realizing the importance of in-store pickup and returns for profitability. Larger operators are also taking market share, and specific sectors like auto parts and convenience stores are driving demand.

Q:Is there anything lumpy on the expense side driving the AFFO per share ramp in the second half of the year?

A:No, the ramp is primarily driven by increased acquisition volumes and treasury stock method dilution adjustments.

Q:Are the lease structures for developments different from acquisitions in terms of duration, yield, or contracts?

A:Development leases are generally 10-20 years with yields 50 to 150 basis points wider than acquisitions, depending on project scope and duration.

Q:What is the opportunity with Genuine Parts Company, which was added to the top tenant list?

A:Genuine Parts Company (NAPA) aligns with the company's focus on investment-grade auto parts retailers. There are no plans to materially increase exposure from current levels.

Q:Review of Unclear Management Responses

A:Management avoided directly addressing the magnitude of acquisition cap rate expansion and provided vague responses about retailer health improvement, focusing instead on broader trends and challenges for smaller retailers.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

ADC Transcript

Agree Realty Corporation (ADC) Q3 2025 Earnings Call Transcript

Positive10-22

The earnings call summary and Q&A session reveal a generally positive outlook. The company has raised its guidance for investment volume and AFFO per share, indicating confidence in future growth. The balance sheet is strong, with significant liquidity and no major debt maturities. Retailer demand is high, and dividend growth is well-supported. The Q&A session confirms strong tenant health and strategic alignment with market trends. While some uncertainties exist, such as cap rate predictions, overall sentiment is positive, suggesting a likely stock price increase in the short term.

Agree Realty Corporation (ADC) Q2 2025 Earnings Conference Call Transcript

Positive8-1

Agree Realty Corporation (NYSE:ADC) Q1 2025 Earnings Call Transcript

Unknown4-24

The earnings call reveals stable financial performance with a slight increase in AFFO per share and a raised investment guidance, which are positive indicators. However, the lack of share repurchase, unclear responses in the Q&A, and no significant new partnerships or strategic shifts lead to a neutral sentiment. The absence of negative trends or risks suggests limited downside, but the lack of strong positive catalysts or strategic insights keeps the outlook from being more optimistic.

Agree Realty Corporation (ADC) Q3 2024 Earnings Call Transcript

Positive10-23

The earnings call summary highlights strong financial performance, including a high occupancy rate, increased dividends, and a healthy balance sheet. The Q&A section reveals management's confidence in future growth and risk mitigation strategies. Although construction costs are a concern, the overall sentiment is positive due to increased investment activity, low debt exposure, and strong investment-grade exposure. The positive guidance and strategic positioning suggest a positive stock price movement.

ADC Slides

Agree Realty Q2 2025 slides: Raised guidance amid retail portfolio strength

2025-07-31

ADC Report

AGREE REALTY CORP 10-Q

10-Q

2024-07-23

AGREE REALTY CORP 10-Q

10-Q

2024-04-23

AGREE REALTY CORP 10-K

10-K

2024-02-13

AGREE REALTY CORP 10-Q

10-Q

2023-10-24

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