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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Agree Realty’s Fourth Quarter and Full Year 2017 Conference Call. All participants will be in listen-only mode. [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 fourth quarter and full year 2017 earnings call. I am very pleased to have Clay Thelen, our Chief Financial Officer joining me this morning for his first call with our company. Clay has made an immediate impact on our organization and has been a fantastic fit with our team.
I am looking forward to every one of you getting to know him in the near future. This past year was yet another record year for Agree Realty as we continued on our journey to be considered among the premier retail real estate investment trusts.
Opportunistic investment activity and proactive portfolio management have strengthened our best-in-class portfolio while several strategic capital market transactions position our company for continued growth. The company’s record year was capped off with the fourth quarter during which we reinforced our high-quality portfolio with superior assets and fortified our best-in-class balance sheet.
In 2017, we delivered nearly 8% AFFO per share growth in addition to increasing our well-covered dividend by 5.5%. These per share results were accomplished while maintaining our balance sheet at an average 4.6 times net debt to recurring EBITDA and prudently accessing 12 year unsecured fixed rate debt.
When combined with the quality of our real estate portfolio and tenant base, we believe these risk-adjusted returns are even more impressive. On prior calls, I have commented on the dynamically changing retail environment and our desire to pursue only best-in-class retailers and high quality properties that we believe will thrive in an Omni-channel retail world.
But the changes we have undertaken and the composition of our portfolio throughout the past year reflect our execution of this strategy. As you’ve hopefully seen in our earnings release, during 2017, we executed on several transactions that materially altered our top tenant base. Most notably the TJX Companies comprised of TJ Maxx, Marshalls and Home Goods is now our number five tenant.
We have a strong bias towards off-price retail and the experience and value proposition that it provides for consumers. We enjoy strong working relationship with TJX and we are very pleased to have the world’s foremost off-price retailer as an important tenant and partner for our growing company.
In addition to TJX Companies, Dave AutoZone and Dave & Buster’s, are now both listed as top tenants for us. Both partners are leaders in their respective sectors and have strong management teams with we enjoy great relationships.
While we added several retailers to our top tenants in 2017, several retailers were eliminated as top tenants through a combination of portfolio growth and opportunistic dispositions. Notably Burger King Franchisee Meridian Restaurants, PJs Wholesale, 24 Hour Fitness, AMC and Taco Bell’s Franchisee Charter Foods are no longer material concentrations in our portfolio.
These changes are aligned with our goal of partnering with leading retailers that have successfully implemented a 20% through the Omni-channel strategy or have a significant impediment and destructive power of ecommerce.
During the fourth quarter of 2017, we invested $114 million in 25 high-quality retail net lease properties. Of those 25 investments, 18 assets were sourced through our acquisition platform representing total acquisition volume of $98.1 million for the quarter. The properties were acquired at a weighted average cap rate of 7.1% and had a weighted average remaining lease term of approximately 8.8 years.
The acquired properties are located across 14 states in at least the 12 sector-leading tenants. These tenants operate in ten diverse sectors including off-price retail, auto parts, convenience stores, tire and auto service, health and fitness and crafted novelties.
More than 46% of annualized base rent acquired during the quarter comes from investment-grade tenants including TJ Maxx, Home Goods, Marshalls, AutoZone, O'Reilly Auto Parts and National Tire &Battery.
During the quarter, we acquired replaceable asset in Secaucus New Jersey for $43 million. The property is located across the Lincoln Tunnel less than four miles from Manhattan and is part of a 3.5 million square foot mixed use project.
It is leased to a very high-performing Home Goods Marshalls combo store, Michaels and PetSmart. TJX represents more than half of the annualized base rent derived from the assets and the property is located at the intersection of the New Jersey Turnpike in the Secaucus Bypass with over 230,000 vehicles per day and a five mile day time population density of almost 1.8 million people.
In connection with this transaction, the company assumed a $21.5 million fixed rate mortgage that matures in October of 2019 and carries an interest rate of 3.32%. Excluding the impact of this unique transaction in Secaucus, the company’s fourth quarter acquisitions were purchased at a weighted average cap rate of 7.6% and had a weighted average remaining lease term of approximately 10.3 years.
For the full year 2017, we invested in 90 properties in 30 states, representing record investment volume of $394 million. Of the $394 million invested in 2017, we originated a record $337 million to our acquisition platform. With 79 properties acquired in 2017, are leased to 49 leading retail tenants operating in 22 distinct sectors and 47% of annualized base rents are derived from retailers with an investment-grade credit rating.
While we are able to achieve record acquisition volume in 2017, we continue to adhere to our rigorous underwriting standard that focus on retail real estate fundamentals. I’ll speak to these underwriting standards and how they materialize in terms of our portfolio composition in a few minutes.
Subsequent to year end, we announced 2018 acquisition guidance of $250 million to $300 million, as well as disposition guidance of $25 million to $50 million. We are excited about our origination as well as disposition pipelines and look forward to updating you on these opportunities later this year.
Turning to our development and partner capital solutions platforms, we are pleased to announce that we commenced construction on two additional ground-up developments for Mister Car Wash during this quarter.
The project is located in Orlando and Tavares, Florida are both subject to new 20 year net leases. Both projects are on schedule for a 2/3/2018 delivery and aggregate total project costs are anticipated to be approximately $5.5 million.
During the fourth quarter, we also made considerable progress on our five previously announced development and PCS projects. The company’s first project with Art Van Furniture home to their new flagship store located across Michigan’s only IKEA in Canton was completed after the first of the year with Art Van successfully celebrating their grand opening on February 1.
Our first two Mister Car Wash developments in Urbandale Iowa and Bernalillo, New Mexico, both celebrated their grand opening in the first quarter as well. These projects are subject to 20 year net leases and rent will commencing on both projects this quarter.
Construction is ongoing at our third Camping World project in Grand Rapids, Michigan. Anticipated total project costs are approximately $9.6 million. The project is subject to a new 20 year net lease and we anticipate rent to commence in full by the end of the second quarter.
Finally, our project with the leading Burger King Franchisee Tom’s King in North Ridgeville, Ohio also progressed on schedule in the fourth quarter. We anticipate rent to commence this quarter. For the full year 2017, we either completed or had under construction 11 development and PCS projects that represent almost $63 million of total committed capital.
Four of those projects were completed during this past year representing total investment volume of $21.4 million. I am very pleased with our progress during the year and we continue to be focused on providing full-service net lease real estate solutions to growing retailers that fit within our investment strategy.
During this past year, we also solidified and diversified our portfolio through proactive asset management and disposition efforts. In the fourth quarter, we sold eight properties for gross proceeds of $15.4 million.
For the full year 2017, we disposed 15 assets for $45.8 million in gross proceeds. Our 2017 disposition activity included the sale of four Walgreens thereby reducing our exposure to 7.7% as of 12/31/2017, down from 11.6% at the end of 2016.
Similarly, the company decreased its pharmacy exposure during the year realizing a roughly 390 basis point reduction from 16.2% to 12.3%. In addition to reducing our Walgreens and pharmacy concentrations during this past year, the company also opportunistically sold six Burger King Franchise restaurants.
We will continue to opportunistically divest with assets and redeploy capital, as well as call the portfolio of lower tier assets that aren’t representative of our high quality portfolio. Subsequent to year end, we are pleased to have received notice from Walgreens that they have completed the purchase of two of our stores previously leased to Rite Aid.
Four stores located in Albion and Webster New York are now owned and operated by Walgreens. Following these store transfers Rite Aid is no longer a top ten in our portfolio. I’d also note that our Rite Aid store in North Cape May, New Jersey is sub-leased to Facilius for the remainder of the primary term of the lease.
Inclusive of this sub-lease, our effective Rite Aid disclosure is currently 0.8% or four stores, which is half of our reported exposure at year-end 2017. We currently have a Walgreens under contract for sale and anticipate it to close in the next couple of weeks. Post the closing of this disposition and the Rite Aid store transfers, our Walgreens concentration will remain at approximately 7.7%.
Moving on to asset management activities, as of today, I am pleased to report that the company’s 2018 lease maturities represent only 0.8% of our annualized base rents. During the fourth quarter we executed new leases, extensions or options on approximately 203,000 square feet of gross leasable area. This includes our Sam's Club in Brooklyn Ohio which exercised their five year contractual option.
For the full year of 2017, we completed new leases, extensions or options at approximately 683,000 square feet of gross leasable space. As of December 31st, our growing retail portfolio consisted of 436 properties in 43 states. Our tenants are comprised primarily the industry-leading retailers operating in more than 28 distinct retail sectors with 44% of annualized base rent coming from tenants with investment-grade credit rating.
The portfolio remains effectively fully occupied at 99.7% and has a weighted average lease term of 10.2 years. In addition to these metrics, the quality of our portfolio is further demonstrated by our ground lease portfolio, which counts for 8% of total annualized base rent and of which 85% of rents are leased to leading retailers that carry an investment-grade credit rating.
During 2017, we are able to add a number of assets to this unique portfolio including Starbucks, CVS, Lowe’s and National and Tire & Battery. A closer examination of our ground lease portfolio demonstrates the unique nature of the asset composition and quality of the underlying real estate.
For example, today Lowe’s is our fourth largest tenant, taking a deeper dive is even more compelling. We have a grand total of five properties leased to Lowe’s three of which are full-size prototypical stores. All three of these prototypical stores are owned in fee simple by Agree Realty and ground leased to Lowe’s who has constructed the improvements and built their building on our property at their expense.
Conversely, the remaining two turnkey properties leased to Lowe’s are both small format Orchard Supply Hardware Stores. One located in the heart of Silicon Valley and the other in Southeast Florida. Lowe’s is a good example of the thoughtful portfolio construction and bottoms-up real estate analysis that we undertake in order to mitigate risk and maximize quality. The same exercise can be deformed for our Wal-Mart, Wawa, and other exposures.
I’d like to thank you for your patience and with that, I’ll turn it over to Clay to discuss our financial results for the fourth quarter and full year. Clay?
Thank you, Joey and good morning everyone. Before we begin, I’d like to start by saying that I am truly excited to join a fantastic team. I look forward to building upon the tremendous success that the company has experienced over the past several years.
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 to 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 fourth quarter of 2017 was $28.6 million, an increase of 22.5% over the fourth quarter of 2016. For the full year 2017, total rental revenue increased 25% over the comparable period in 2016 to $105.3 million.
General and administrative expenses in the fourth quarter totaled $2.3 million. G&A expenses were 7.2% of total revenue in the fourth quarter, and 8.5% of total revenue for the full year. Also, in the fourth quarter, we recorded $347,000 in other income to reflect a credit we received post closing from an acquisition. This amount reflects the liability that we recorded at the time of closing a transaction and we will no longer incur.
Funds from operations for the fourth quarter was $21.3 million, representing an increase of 28.7% over the comparable period of 2016. On a per share basis, FFO increased to $0.71 per share, a 10.9% increase as compared to the fourth quarter of 2016.
For the full year 2017, funds from operations was $76.3 million, representing an increase of 28.9% over the comparable period of 2016. On a per share basis, FFO of $2.72 per share, represents a 7.1% increase as compared to the full year 2016.
Adjusted funds from operations for the fourth quarter was $20.9 million, a 29.2% increase over the comparable period of 2016. On a per share basis, AFFO was $0.70 and 11.4% increase as compared to the fourth quarter of 2016.
For the full year 2017, adjusted funds from operations was $75.7 million representing an increase of 29.7% over the comparable period of 2016. On a per share basis, 2017 AFFO was $2.70 per share a strong 7.8% increase as compared to the full year 2016.
Now moving to our capital markets activities. During the fourth quarter, we issued nearly 1.8 million shares of common stock through our at-the-market equity program at an average price of $49.3 raising gross proceeds of approximately $87.1 million. The entirety of the company’s fourth quarter ATM activity was a result of a reversed increase by long only, preeminent rededicated investor.
The total proceeds were raised through two separate transactions and represent what we believe was a highly cost-effective and efficient capital raise.
For the full year 2017, we issued a total of 2.4 million shares of common stock through at-the-market program at an average price of $49.17 realizing total gross proceeds of $116.5 million. The ATM program continues to be an effective tool to raise equity given the nature and granularity of our business.
As you may recall in June, the company completed a follow-on offering of 2.4 million shares of common stock. After deducting the discount and offering expenses, total net proceeds from the common equity offering are $108 million. Total common equity raised in 2017 both through the company’s ATM and June’s overnight offering totaled more than $229 million.
In addition to efficiently accessing the equity markets, we completed a $100 million private-placement of senior unsecured notes in September. The notes bear an interest at a fixed rate of 4.19% per year and have a 12 year term maturing in September 2029. The all-in pricing represented 165 basis points above the 12-year interpolated U.S. Treasury yield curve at the time of pricing.
During this past year, we also entered into two separate uncommitted $100 million private-placement shelf agreements. We remain committed to executing fixed rate, long-term financings. These two shelf agreements will allow us to issue additional senior unsecured notes to the investors at terms to be agreed upon at the time of any issuance. At year end, no notes had been issued under the shelf agreement.
As of December, 31, our total debt to enterprise value was approximately 24.5% and our fixed charge coverage ratio, which includes principal amortization was the strongest in the company’s history at 4.2 times.
Furthermore, net debt-to-recurring EBITDA was approximately 4.3 times. All three of these metrics are amongst the strongest of our peers and net debt-to-EBITDA remains well below our stated range of five to six times.
Our balance sheet is in tremendous position for the upcoming year with significant dry powder and optionality in regards to capital sources.
Cash on hand net of outstanding borrowings on our revolving credit facility totaled $45 million. In addition to our $250 million revolving credit facility, we have two untapped $100 million private-placement shelf agreements. We are not reliant on the equity markets to achieve our targeted 2018 acquisition volume and this prudent approach to leverage allows us to be opportunistic while making capital raising and capital allocation decisions.
The company paid a dividend of $0.52 per share in January 3 to stockholders record on December 20, 2017. The quarterly dividend represents a 5.1% increase over the $0.495 per share quarterly dividend declared in the fourth quarter of 2016. This was the company’s 95th consecutive cash dividend since its IPO in 1994 and represents a five year increase of 30% over the company’s 2012 quarter dividend.
For the year, the Company declared dividends of $2.025 per share, an increase of 5.5% over the dividends per share declared in 2016. Our quarterly payout ratios for the fourth quarter of 2017 were consisted 73% of FFO and 74% of AFFO. For the full year 2017, our payout ratios were 74% of FFO and 75% of AFFO. These payout ratios are at the low-end of the company’s targeted ranges and reflect a well-covered dividend.
With that, I’d like to turn the call back over to Joey.
Thank you, Clay. To wrap it up, 2017 represented another record year for our company. We entered 2018 in a fantastic position with a great team and a fortified balance sheet to take advantage of any opportunities as they arise.
At this point, we will open it up for questions.
[Operator Instructions] The first question comes from David Corak with B. Riley FBR. Please go ahead.
Good morning, gentlemen. Joey, I love to get your thoughts on the Rite Aid opportunity, specifically what the implications there are for Walgreens? Do you think something strategic needs to happen there to be competitive with the Rite Aid and the CVS as well? Just any color you can provide would be helpful.
Yes, good morning, David. I think first, as I touched on our prepared remarks, our effective Rite Aid exposure is now – now and really four stores, 0.8% of rents or half of our previous exposure as reported really at year end. And so, we’ve made some obviously significant progress through the two purchases from Walgreens as well as the Facilius sub-lease that was through Rite Aid.
But the Rite Aid Albertsons combination will result in a stronger, larger, more diversified companies, pro forma the leverage is sub-four times, pro forma $24 billion company. I’ll be honest, I’d say, we don’t view it as an industry leader that currently fits our investment criteria. It certainly an interesting match-up between Rite Aid and Albertsons. In terms of Walgreens, our focus really hasn’t changed.
Our exposure remains at 7.7% given those transactions and the disposition we anticipate closing next week. And we still – we are focused on continuing to reduce that exposure towards our year-end target of approximately 5% through opportunistic dispositions and as well as portfolio growth.
Is that still a late 2018 kind of target?
Yes, it’s a late 2018. It’s not a hard target for us. But we’ve been very clear. We wanted to get some 10% 2017 our goal is around 5%, obviously the Rite Aid purchase of these two stores, plus the disposition we are still at 7.7, but that still remains a target for us.
Okay. And then, appreciate the deeper dive, deeper detail of the level of assets. Could you maybe walk us through the same sort of exercise for a Wawa, and if you those stats in front of you?
Yes, sure, first I should apologize, because I think we’ve done – and it’s my responsibility, a poor job but really articulating the value and how the portfolio composition of the assets in our ground lease portfolio really shows through and I think we’ve consistently said is that around 8% of our overall portfolio, but we haven’t broken it down and so that’s we are making a concerted effort to do that here, as you heard with Lowe’s in the prepared remarks.
Wawa we can do this same thing. Wawa is our number six tenant. We have nine Wawa assets, $2.7 million in ABR, 2.3% of our total portfolio. Wawa is very interesting. Obviously we have five stores and four of that we developed which are all ground leased to the company. And then we have four stores in the mid-Atlantic, one of them is on a ground lease and then the other three are on term key master leases.
So, our Wawa exposure, 58% of it is ground leased and the remaining 42% is under a three store master lease. So again, six ground leases, three stores on term key under a master lease, high-performing in the Mid-Atlantic, diversified among four, five states.
And so, I think that exercise going through Lowe’s and seeing how the asset underwriting of the portfolio composition and now Wawa really shows through in our top tenant base is not only interesting, I think it’s compelling for investors to understand better and its incumbent upon us to do so.
Fair enough. I’ll hop back in the queue. Thanks.
Great, thanks, David.
The next question comes from Nick Joseph with Citi. Please go ahead.
Thanks. Joey, just getting again ground leases, you mentioned of ABR currently. Where could you see that trending going forward?
Yes, either a negative – it’s a tough question to answer. The ground leases that we continue to add to the portfolio are both through development as well as acquisitions. We were fortunate to add a small ground lease portfolio in 2017 as I mentioned National Tire & Battery, Starbucks, the CVS, they are really opportunistic.
They are typically one-offs. So it’s hung around 8%. We’ll continue to try to develop and source. We think it is on a risk-adjusted basis. There is nothing better than a ground lease. We’ve all having tenant skinning again and we love the reversionary interest in the building since we have no investment. And so it’s tough to tell. We’d like to keep it around this level or even increase it frankly. But it’s difficult to find those types of investments out there.
Thanks. And then just on G&A. You’ve continued to drive it down as a percentage of revenue and I think 2017 it finished at about 8.5%. What are expectations for 2018 for that?
Hi, Nick, it’s Clay. Appreciate the question. In terms of G&A going into 2018, we are focused on a runrate of 8% of total revenue in terms of modeling into the year.
The next question will come from Rob Stevenson with Janney. Please go ahead.
Good morning guys. Joey, can you talk about where cap rates have been effectively on the 2016 and early 2017 development in partner capital solutions assets do completed versus the acquisitions that you guys have made recently?
Sure, with our historical returns on development in partner capital solutions have been moved. Right, we are targeting obviously a variable component of 250 basis point spreads that where we can buy lifetime products, obviously that’s a static look. At the same time, we have fixed hurdles and so we are targeting around that 8% range of partner capital solutions depending upon and the projects have come in there.
Dependent upon our scope and what we are doing in terms, if we are taking over a project and constructing it ourselves or it’s put to reverse build-to-suit, those are different returns for us. So time energy and efficiency are important for us. And then returns we continue to target 9% returns in terms of organic development activity where we spend 18 to 24 months on a project.
Okay. And then, you guys have about $41 million under construction today. I mean, given your conversations with some of these existing tenants where you are now on project two or three or four for some of these. How significant is the pipeline when you look out in terms of likely starts over the remainder of 2018 and into 2019?
Well, it’s hard to time exactly. I’d anticipate a couple starts during this quarter or early second quarter of 2018. We’ve got a couple exciting projects with new tenants frankly that we are going to get in the ground hopefully when it falls out. It’s tough to tell.
I’ll tell you that we continue to work on opportunities to leverage all three platforms, find those synergies with retailers and be a comprehensive full-service real estate solution. And we don’t view ourselves as a finance company. We view ourselves as a real estate company and as I said in my prepared remarks, our goal here is to become – is to be considered as one of the preeminent retail REITs.
And we think that we have the ability to our three external growth platforms, the balance sheet, the team and the relationships to effectuate that.
Okay. I mean, you’ve got – you have – you said that the Art Van is in service now and then there is – I think another three, the Mister Car Wash and the Burger King that are likely to be completed this quarter as well, I mean, is it – what are the chances that you guys are able to sort of keep $35 million, $40 million pipeline going or is it likely to be sort of taste and spurt the stuff comes in and out of the portfolio throughout the year and into 2019?
No, I think it’s fair to say that that’s a good runrate for us. Our focus going into future, I mean, we said approximately year-and-a-half ago our intermediate goal, so we call that three years was to deliver $50 million to $100 million on an annual basis in PCS and development activity and leasing going about to do that.
Both camping world – sorry, excuse me Mister Car Washes are open and operating in Urbandale Iowa and Bernalillo, New Mexico. The Art Van, the flagship store is open. It’s fantastic, it’s spectacular. It had a spectacular grand opening in February 1 and it’s doing very well. So those three stores are now all open.
Okay. Thanks guys.
Thanks, Rob.
The next question comes from Nick Joseph with Citi. Please go ahead.
Hey it’s Michael Bilerman. Joey, just – I mean, just had a curiosity, you are talking about becoming a premium and retail REIT enterprise value is approaching $2 billion. I guess, at what point do you consider giving guidance like, 99.9% of the retail?
Good morning, Michael. How are you?
And Joe, it’s Friday.
What happened? Nick dropped off, I thought - I felt like that buddy got chopped for a second.
Two questions.
Okay, well, we didn’t – so, look, I think, we try to do is give as many inputs as we can, acquisition, disposition activity and G&A and I agree that the cash flows in that lease are consistent and they are. We have visibility into existing cash flows and hopefully so do you as well as investors.
The real challenge is the timing and sources of uses of capital on a small cap base approaching $2 billion like you said, are really the huge driver. And timing is a really strong factor. At the same time, we want to remain flesh bone opportunistic in that we raise and deploy capital and I said a bunch of things our visibility truly extends outside the development of course 90 days out. We average 71 days of LOI execution to close.
And I would never want to do anything that inhibits our ability to move quickly and decisively. Our goal remains the same as to deliver solid double-digit total returns to investors with almost 8% AFFO per share growth and are growing 4.5% dividend, we achieved that in 2017. We are focused on doing in 2018.
So, I know that was longwinded, but the small cap base and the bottom-line is the timing – it’s the timing of uses and sources of capital make it very challenging, for us to get accurate guidance that wouldn’t be so wide that it would frankly would be worthless.
Well, I mean, if you can lay out what the assumptions are, right I mean, we are smart people and you can run it through our model in terms of running acquisitions and dispositions and various cap rates and how that affects interest expense and instead of us asking about G&A on a call, you can put the G&A in the press release. I mean, there is a reason why the bulk of REITs provide that guidance and not so, I know….
Well, I think it’s really the time – I think it’s the timing of the sources of capital which has changed. I mean, I don’t think the anticipated ATM activity in Q4 for example, taking our balance sheet down to 4.3% of course, we have a drag. We have some drag on earnings.
When you do that, but at the same time, we opportunistically advertised the balance sheet and put ourselves in position to run into 2018 with what I consider one of the strongest balance sheets in REIT than right along the net REIT space. And so, I just wouldn’t want to inhibit our ability to be flexible, nimble and opportunistic in any way. But I understand what you are asking for.
Yes, I don’t think giving guidance or putting a goal post about where you would want to see it from a balance sheet perspective and doing some mid-quarter or mid-year convention on a transaction activity and having the number out there necessarily inhibits you.
I think it actually does the reverse and actually allows you to pivot off of a number and explain how things are evolving either sooner or later relative to expectations. So, I don’t know, as you gotten larger, you’ve executed well. It always is something that, I think more details on the pieces of guidance if you don’t want to give a underlying number, but at least put out all the pieces in your press release at a minimum.
It’s a point well taken. I’ll tell you none of our stated goal posts have changed in term of uses of capital or leverage profile, 5 to 6 times. That said, it’s all dropped down to 4.3 times in advance of the year. But, I understand what you are saying. This is a growing and evolving company, it’s approaching $2 billion and there will be a time and place I think that you are right and I am not sure how far off that is. But we continue to provide more and more information for investors.
And is there any change yet as you approach and get a bigger company on changing the board and going to annual elections and doing some of the corporate governance improvements?
Yes, I think there is an opportunity this year frankly for us to continue to look at all of those things. Most notably, potentially looking at the Board. We take each quarter a deep dive into our business all the way from the top to the bottom, from the board level to the analyst level and the Board is fully support – our Board has been fully supportive of that.
But I think we are going to potentially have an opportunity this year to really put ourselves in a position, all the way from, starting at the Board level and we’ve got some great Board members to really take, what we all call, ADC’s 3.0. We think we would achieve 2.0 to take it to ADC 3.0 getting new fresh divergent opinions on that Board.
And annual elections.
Annual election is something, all the corporate governance is saying, there is something that we will continue with the Board. We will continue to consider.
Okay, thank you.
Thank you, Michael.
The next question comes from Collin Mings with Raymond James. Please go ahead.
Thanks. Good morning, Joey. Good morning, Clay.
Good morning Collin.
Just as we look at 2018 lease expirations and maybe even 2019, Joey, are there any other redevelopment opportunities like the one you executed on Boynton Beach last year?
There potentially are. And so, as I mentioned in the 2018 – sorry, our 2018 lease expirations are now down to effectively 0.8%. I’ll note that in those – of that 0.8%, 63% of that tied to – three remaining came outs that we have in our portfolio, which is option notifications do quite shortly here.
We’ve spoke in depth and it’s in our Investor Deck posted online. The quality of that underlying real estate came out paying sub $2 a square foot on average on a net basis. We think that there are some potential redevelopment opportunities and we look forward to potentially getting our hands on those and executing on them in 2018.
Okay. And then, just going back to some of the comments in Clay’s prepared remarks, just given again, you’ve highlighted a couple times, just finished 2017 with debt-to-EBITDA at 4.3 times and really if we look back over the last year or so, I mean, you’ve really been running the company sub-five times. Kind of two-part question here.
Has the recent pullback in the stock price just impacted any investment community decisions as far as what’s coming through from a pipeline standpoint? And then, recognizing you have a higher leverage target out there, but really have been operating below that for a period of time. How are you, the Board thinking about that leverage target? Does it makes sense even ratchet that down a little bit? Just given, I think, clearly you’ve been rewarded by having a conservative balance sheet?
Look, I think, the conservative underpinnings of this company are the foundation of our execution. We are focused on executing our operating strategy, our stated leverage target of 5 to 6 times remains, but as I said earlier, we are going to be opportunistic in terms of sources of capital.
We know we connect to Q2 with our three origination platforms as well as a disposition platform. And we never want the balance sheet to get in the way. And so, when you are able to run a balance sheet of 4.6 times levered drive nearly 8% AFFO growth with a growing dividend by 5.5% of – approximately 4.5% dividend growing at 5.5% today.
We think it is very compelling. I think there are frankly few REITs that have the ability to do that and then if you look at what our permanent financing structure when we undertook in 2017 and in 2016 and before that, accessing 12 year unsecured debt, long-term fixed rate. If you take our leverage up into the mid size in line with our peer review looking – you are looking at 9 plus percent AFFO growth in 2017.
That said, we wouldn’t be positioned as well as we are today going into 2018. So we don’t run this company on a quarter-to-quarter basis. We are cognizant of all the implications of our decisions, but we are going into 2018 with $40 million in firepower, no outstanding balance in our facility, 4.3 times levered, the lowest leverage profile in the space and frankly a team that’s focused on delivering those results.
Okay. So, I guess, it takes the same. Nothing is really – they temporary – or the transitory movement in the stock price really has an impact on your decision and it sounds like you continue to maybe get as high as towards the low-end of that leverage target. Are both those fair statements?
Yes, I think those are fair statements and just to start upon the first – your first statement there, look, the stock prices impact our investment decisions, because it didn’t impact our investment decisions when we had a two in front of the stock or a three or even a five in front of the stock price.
We don’t operate on the margins. We have the widest spreads in the net lease space. We have a cost of capital today that allows us to go buy assets and acquire assets that are frankly trophies like Secaucus, but at the same time, we are focused on individual value-creation across all three of our origination platforms.
So we are in a very unique position and the optionality which Clay spoke to and the dry powder that our balance sheet has today, we think puts us a in a prime position for 2018 and beyond.
Great. Thanks, Joey, I’ll turn it over.
Thank you, Collin.
The next question comes from George Hoglund with Jefferies. Please go ahead.
Hey, good morning guys. Just one of you can give a little bit more color on some of the asset sales in terms of reducing exposure, especially the Burger King and it seems to be a little bit of a shift given how you have been growing the Burger King exposure before, just, one of you can provide some color there.
Sure. We remain focused on recycling capital accretively divesting of assets on that don’t fit within the portfolio. The Burger King specifically, the six Meridian restaurants that we sold in 2017 are opportunistic dispositions for us.
You are talking about six cap trades. I’d rather own a TJ Maxx high-performing TJ Maxx Marshalls combo or Home Goods Marshalls combo store in Secaucus, New Jersey with 1.5 million people in the trade area four miles from Manhattan, than a number of Burger King Franchise restaurants.
And so, it’s an opportunistic disposition that’s based upon the aggressiveness of the price point in 10, 31 market at the same time, we are focused on building a leading 21st century Omni channel portfolio. And so you can see the addition of TJ Maxx as number five in our tenant base.
We now have ten TJ Maxx stores in our portfolio and what we are talking about is the leading junior box retailer and the best off-price retailer in the world. And so, our portfolio is a source of stability in a dynamically changing retail environment.
And most importantly, we are going to focus – continue to focus on creating the Omni channel portfolio of the 21st Century. And so, the movements that you see in and out of our portfolio are both a function of us wanting to change composition, but also opportunistically divesting of assets and redeployment of capital.
Okay, thanks for that. And then also just looking at the tenant, sort of the watch list, any notable changes there?
I think the most notable change frankly is Rite Aid which I commented on. We are down from 1.6% to an effective 0.8% after the asset sales to Walgreens and so now we are down to four Rite Aid, it’s 0.8% of the portfolio. And so there is an immaterial, we consider immaterial part of our overall portfolio. And so, that’s the most notable change there which we are very pleased with and frankly came to fruition in the last two to three weeks.
Okay, thanks guys.
Thanks, George.
The next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.
Good morning everyone.
Good morning, John.
It seems like you guys have been able to do more transactions over the last two years in dense coastal markets capping into Secaucus – a recent Secaucus deal and the Lowe's deal in Silicon Valley that may have been kind of hard for net lease REITs to invest in those areas given the low cap rates in those markets. What do you think allows you to acquire these properties and get them a cap rates that you find attractive?
It’s a good question, those are two prime examples. First, I want to congratulate you and we’ll miss Dan, but we know how well that you cover the net lease space. Just want to congratulate you on taking that seat.
Thank you.
Look, I’ll tell you, it’s a function of our relationships. It’s a function of the team here sourcing creative opportunities through multiple different channels. I mean, I am looking out of our conference room here and we have a fantastic growing and dynamic team. The acquisition team today is seven people with an eighth starting this summer. We look at opportunities long-term, short-term and that come from multiple directions inclusive of our relationships with tenants. And so, it all starts with relationships in this business. Our relationships provides us some unique opportunities that you would be atypical for most net lease REITs including those coastal opportunities to execute on. And so, that combined with our cost of capital today allows us to go into Secaucus, New Jersey, allows us to go into Silicon Valley and when we see an asset that we think is compelling, our team frankly in Secaucus was on the ground in 48 hours and it’s a function that that transaction was a function of relationships.
So, the Secaucus, maybe specifically the tenant brought that to you or was there some other relationship that drove that transaction? That's how atypical net lease sound like.
Well, I’ll tell you, no, we enjoy a fantastic working relationship with TJ MAXX, Jerry Rossi on our Board was the former President. We enjoy a fantastic working relationship with Michaels and with PetSmart and so we feel like we have a unique perspective and unique insights that stem all the way from to the Board level.
Okay, makes sense. And then, kind of with the existing portfolio, it’s not as big a portion of your portfolio used to be, but what’s your view on Academy Sports, especially given it’s not really – what you would call an ecommerce resistant retail subsector?
Yes, we are not big fans of the sporting goods sector overall. I think we have two big sporting goods, one in Boynton Beach adjacent to the new Orchard Supply Hardware. We have three Academy Sports in our portfolio. We are not focused on adding any sporting goods frankly in our portfolio today. Our focus is on Omni Channel retail world is hard or soft goods that can’t be easily commoditized and sold over the internet. And to me, a lot of the sporting goods space just struggles stem with the experience of the shopper and it’s difficult for them to overcome. So our portfolio of Academy Sports, we have three Academy Sports. We anticipate that number going down in terms of overall ABR and percentage of ABR. Those three stores - one is a very high-performing store in Texas. One is in Belton, Missouri, which is a fantastic piece of real estate a power center went up directly across the street. And third is in Topeka, Kansas, which is also a high-performing store with a low basis. And so, we are looking at those assets. We are watching Academy Sports the overall trends in the sporting goods space inclusive of the outdoor hunting and fishing component which is obviously the gun component which is topical today, the firearm component. And so, I wouldn’t anticipate us making additional investments in the sporting goods space and I would anticipate frankly our exposure to continue to be reduced.
Understood. And then, kind of lastly, what kind of runway is there for additional developments of Mister Car Wash? I know you worked pretty hard with them, kind of the structure these ground at developments. I think kind of along that same thing, are there competitors out there doing these ground-up projects with them or is this kind of something kind of unique to you guys?
No, these were the first four organic developments for Mister Car Wash, the nation’s largest car wash operator. Leonard Green sponsored company obviously. They have historically grown through the acquisition of independent or smaller change and had – we worked with Mister Car Wash to create an organic prototype the first two are opened in Bernalillo and Urbandale.
The second two are now under construction in Florida and Orlando and Tavares and we’ll see how – Mister Car Wash, we’ll see most importantly, how those stores are performing, but no, we really don’t have any competitors as a function of Mister Car Wash’s ability to grow organically, as well as inorganically through acquisitions.
Makes sense. That’s it for me. Thank you guys very much.
Great, thank you.
The next question comes from Todd Stender with Wells Fargo. Please go ahead.
Thanks. The Secaucus acquisition sounds pretty compelling, but may carry a shorter lease term and also lower cap rate just based on your averages. Can you give a little more detail on this?
Yes, good morning. Todd. Looking forward to seeing you next week at the conference. Yes, so, Secaucus is interesting, almost 60% of the NOI is tied to the Home Goods Marshalls, combo store. It’s a very, again, extremely high-performing store. We talked about in the prepared remarks outside of that transaction our cap rates would have been materially higher. So that transaction was a mid six transaction. It has a shorter least term TJ MAXX almost 50% of the NOI, but eight years remaining and that’s really a strong performer for them. And so, outside of that transaction, our cap rates would have been, what 30, 40 basis points higher as well as, as I said in the prepared remarks, it dragged down lease term a little as well. I think, what’s most compelling it’s the underlying real estate for that transaction. It’s irreplaceable. We know how the stores perform, which are very strong and we think it’s pretty compelling given the dynamics of the New Jersey and New York markets.
Do these get added into – I think existing master lease or what’s the structure behind it?
No, single leases. So these were existing leases that were in place.
I guess upon renewal though, is that probably your angle? I mean, if you are entering it at six or so, do you want to make it in a shorter term lease you probably want to make sure they stick around.
We are very confident that they would stick around. It wasn’t – this wasn’t a low six transaction, but we are very confident that they will stick around and we are very confident in the underlying real estate. But in terms of adding it into a master lease, we don’t have any master leases. I am not aware that they do with any of those – with those tenants.
Okay, thanks. And then, just back to the Mister Car Wash, what yields are you developing in Florida? And how do they compare to the other two? I know one was in New Mexico, I forget the other location.
Yes, same yield that we’ve historically been developing. So, again, our target is 9% yields, really across the board, some projects come in higher, some projects come in a little bit lower, but same structure.
Great, thank you.
Thanks, Todd.
The next question comes from Ki Bin Kim with SunTrust. Please go ahead.
Thanks. What sort of rent recoveries look like for you guys in 2017 for all the leases that you’ve done or assets that you sold?
Yes, so, first off, we sold no dark assets in 2017. Our preference is to sell assets that we don’t wait until an asset goes dark. Most notably, the dark – the asset that drove up our disposition cap rates, not directly on point with your question with the Kmart in Oscoda, Michigan. Good luck to anybody besides my father who developed it finding the Kmart – finding us go to Michigan. But that disposition was we looked at the real estate, we looked at the credit profile. It was the only Kmart that we didn’t have a plan for and we said, you know what, it doesn’t fit the criteria of our portfolio. In terms of lease rollover in 2017, we spoke to 2018, it’s really unique for us. First of all, in 2017, we only had about a half dozen real leases that rolled. The most material lease that rolled was the Off Broadway Shoes in Boynton Beach, which we replaced with Orchard Supply Hardware. And so, if you look at rent-to-rent or ABR-to-ABR, NOI-to-NOI, you are looking at effectively and I’ll tell you it’s not good sample or a good sample size, a 35% increase there across those lease has expired and then in terms of 2017 versus 2018 on a runrate.
Okay, that’s pretty good.
Yes, and look, as I said, that – I wouldn’t expect that on a go-forward basis, when you can replace an Off Broadway Shoes with an Orchard Supply Hardware with Lowe’s Corporate Credit, that was a very unique opportunity that I think speaks to the quality of the underlying real estate, as well as the lack of options for Off Broadway Shoes and the existing tenant.
Okay. And, could you just speak to what is in the mindset of the seller today, if there has been any type of adjustment or a change in – how long it takes to get a deal done or kind of pipeline activity?
So, is your question, it’s an interesting one in context of us as a seller, what we believe or perceive the market’s mindset to be.
The market.
Well, I would tell you, I hope it’s fear. We were opportunistic. We like to make deals that we come up on the right side on. I would tell you in terms of cap rates, cap rates and interest rates – is there a correlation? Sure, but it takes six to 12 months. So we haven’t seen any sensitive change in cap rates, where we – we hope so. We hope – I’ve often talked about how developers and owners typically were thinking about marketing an asset at two primary emotions, fear and greed and when we are hoping that that slips over from greed to fear and so we can – that’s when we are going to find better opportunities and more opportunities across all three of our origination platforms from organic developments to short-term third-party leases. And so, that will take time. This is a huge fragmented market. And so, I’ll tell you, when and if we see cap rates move, we are going to be the first mover.
Okay, thank you.
Great, thanks, Ki Bin.
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 everybody for joining us this morning, and we look forward to seeing you at the upcoming conferences or speaking with you next quarter to discuss our first quarter 2018 results. Thanks again and have a great weekend.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.