Prepared remarks
Good morning. And welcome to the Agree Realty Second Quarter 2026 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch-tone phone. To withdraw your question, please press star then 1. Please limit yourself to 2 questions during this call. Note, this event is being recorded. I would now like to turn the conference over to Reuben Goldman Treatman, Senior Director of Corporate Finance. Please go ahead, Reuben.
Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's second quarter 2026 earnings call. Before turning the call over to Joel and Peter to discuss our results for the quarter, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities law, including statements related to our updated 2026 guidance. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-Ks, for a discussion of various risks and uncertainties underlying our forward-looking statements. In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO, net debt to enterprise value, fixed charge coverage ratio, and pro forma net debt to recurring EBITDA. Reconciliations of our historical non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release, website, and SEC filings. I will now turn the call over to Joel.
Thanks, Reuben, and thank you all for joining us this morning. I am extremely pleased with our performance during the second quarter, which represents a significant milestone in our company's history. During the quarter, we invested a company record of $500 million across our three external growth platforms. While the numbers are quite impressive, the combination of real estate attributes, credit composition, and lease term similarly represent the highest-quality quarter in our company's history. All three of our external growth platforms have broad and expansive pipelines, enabling us to once again raise our full-year investment volume guidance to an updated range of $1.6 billion to $1.8 billion. The midpoint of this range surpasses last year's investment activity and represents a 24% increase over our initial investment volume guidance provided at the beginning of the year. Based on our increased investment activities and the performance of our portfolio year to date, we are raising our full-year AFFO per share guidance by $0.02 at the midpoint to a new range of $4.57 to $4.59. This translates to nearly 6% AFFO per share growth at the midpoint and underscores what has long differentiated Agree Realty: our ability to compound consistent, reliable earnings growth while maintaining unwavering discipline in our investment and balance sheet strategies. Peter will provide further details on the guidance range and its inputs shortly. That said, the underappreciated and I believe more compelling story is the unique market position that we have now established. Over time, we have built durable competitive moats, deep retailer relationships, and an internal asset management platform that delivers a full suite of solutions to our partners. These advantages have created a differentiated business that has been over 15 years in the making. As I have said many times, spread investing is quite simple. Constructing a retail net lease leader with multiple growth frontiers wholly focused on a distinct sandbox of the country's best retailers was the ultimate goal. We are supporting this growth by continuing to invest in the people, processes, and technology that underpin our platform. That commitment to constant improvement has long been part of our DNA. Today it is reflected in how we are leveraging AI across the organization to improve decision making, streamline workflows, and accelerate transaction execution. While we are already benefiting from meaningful efficiencies, I believe the longer-term opportunity is even greater as AI becomes increasingly embedded throughout our platform. Combined with enhanced integrations, the next iteration of our ARC platform is coming online later this year. These investments will further strengthen our operating leverage. Moving on to the second quarter in detail. We invested a company record of over $500 million across 102 properties across our three platforms. This includes $451 million of acquisitions across 82 retail net lease assets, the highest level of quarterly activity since the depths of COVID. The properties acquired during the quarter are leased to leading operators in the auto parts, home improvement, grocery, farm and rural supply, and convenience store sectors. Notable acquisitions during the quarter included three Walmart Supercenter ground leases in Missouri, Ohio and Wisconsin, a Walmart Neighborhood Market in Oregon, a portfolio of BP-branded travel centers, and a Home Depot ground lease in New Hampshire. The acquired properties had a weighted average cap rate of 7%, and a weighted average lease term of 11.2 years. Approximately 13.5% of annualized base rents acquired were derived from ground lease assets, while investment-grade retailers accounted for over 73% of the annualized base rents acquired. During the second quarter, our development and Developer Funding Platform (DFP) continued to scale and set a company record for construction start volume. Five projects broke ground with total anticipated costs of approximately $88 million, including our seventh and eighth 7-Elevens currently under construction, as well as three Ross Dress for Less locations, two Burlingtons, and three TJX concepts. Through June 30, we have commenced more than $105 million of projects, over three times the level achieved in the prior period, underscoring our continued progress toward our medium-term objective of $250 million of annual development and DFP commencements. In total, we had 20 projects either completed or under construction during the first half of the year, representing a company record of approximately $200 million of committed capital. We anticipate development and DFP spend will materially progress in coming quarters. Construction continued on 10 projects during the quarter with aggregate anticipated cost of over $83 million. These projects include Burlington, Sunbelt Rentals, and Ross. One Sunbelt Rentals project in Missouri was completed during the quarter for just over $6 million. As we foreshadowed in our prior white papers, we continue to believe deeply in and invest heavily in both the off-price and large-format convenience store sectors. Today, we are among the largest owners of both in the country and have a significant pipeline of additional opportunities. On the disposition front, we sold 14 properties during the quarter for gross proceeds of approximately $30 million at a weighted average cap rate of 7%. The dispositions were primarily comprised of three Goodyear locations and four Advance Auto Parts stores as we continue to cull our portfolio of lower-performing or non-core opportunities. I would note that none of the dispositions were of investment-grade credit and they had limited term remaining of approximately 6.9 years. Our asset management team continues to address upcoming lease maturities. We executed new leases, extensions, or options on approximately 760,000 square feet of gross leasable area during the second quarter with a recapture rate of approximately 105%. This included a Sam's Club in Maryland and a Walmart Supercenter in Georgia. In the first half of the year, we executed new leases, extensions or options on approximately 1.6 million square feet of gross leasable area with a recapture rate of approximately 105%. We are in an excellent position for the remainder of the year with just 18 leases, representing 40 basis points of annualized base rents, maturing, which is down by over 100 basis points from the start of the year. Given the progress achieved year to date, our occupancy ticked up 10 basis points sequentially to match another company record of 99.8%. At quarter end, our best-in-class portfolio stood at approximately 2,830 properties, spanning all 50 states and the District of Columbia. The portfolio includes 268 ground leases comprising over 10% of annualized base rents. Our investment-grade exposure stood at nearly two-thirds of our portfolio. With that, I will hand the call over to Peter to discuss our financial results for the quarter.
Thank you, Joel. Starting with earnings, core FFO per share was $1.13 for the second quarter, which represents a 7.5% increase compared to the second quarter of last year. AFFO per share was $1.14 for the quarter, representing a 7.4% year-over-year increase. As Joel highlighted, we have updated our full-year 2026 earnings outlook to reflect a very strong first half of the year. We raised our full-year AFFO per share guidance to a new range of $4.57 to $4.59, which is a $0.02 increase at the midpoint and implies year-over-year growth of nearly 6%. The increase in our earnings guidance is driven by higher investment activity as well as the continued strong performance of our portfolio. Our guidance has been updated to include an assumption of 25 basis points of credit and occupancy loss for the year, which is at the low end of our prior range of 25 to 50 basis points. As a reminder, our definition of credit and occupancy loss is fully loaded, encompassing not only credit events, but downtime due to a tenant vacating at lease maturity unrelated to credit issues, and other partial or non-payments for any reason. It also includes all operating and tax expenses that Agree Realty is responsible for paying while a space is vacant, in addition to lost rental revenue. The supplemental that we introduced last quarter breaks out these components. Year to date, we have experienced 10 basis points of fully loaded credit and occupancy loss. Moving on to the balance sheet, total capital markets activity year to date is over $1 billion. During the quarter, we sold approximately 400,000 shares of forward equity for net proceeds of approximately $31 million. We also settled approximately 4.3 million shares of existing forward equity for net proceeds of almost $315 million. From a debt perspective, we drew down the remaining $100 million on our $350 million 5.5-year delayed draw term loan, which is swapped at a fixed rate of approximately 4%. We also took further steps to hedge against interest rate volatility, entering into another $50 million of forward-starting swaps during the quarter. In total, we now have $300 million of forward-starting swaps, effectively fixing the base rate for a contemplated 10-year unsecured debt issuance at roughly 4.1%. Over the past five years, we have received approximately $63 million of net proceeds from our proactive hedging activity resulting in annual interest savings of over $6 million. This excludes the $300 million of outstanding forward-starting swaps that are currently in the money. Those swaps, together with approximately $1.1 billion of outstanding forward equity, represent approximately $1.4 billion of hedge capital, providing meaningful visibility into our medium-term cost of capital during a period of macro uncertainty. At quarter end, total liquidity stood at approximately $1.9 billion, including cash on hand, forward equity, as well as over $750 million available on our revolving credit facility, which is net of amounts outstanding on our commercial paper program at quarter end. In addition, we anticipate free cash flow after the dividend to exceed $140 million this year, more than a 10% year-over-year increase. Pro forma for the settlement of all outstanding forward equity, our net debt to recurring EBITDA was approximately 3.7x as we continue to maintain a conservative and well-positioned balance sheet. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was 5.2x. Our net debt to enterprise value was approximately 29%, and our fixed charge coverage ratio, which includes the preferred dividend, remains very healthy at 4.1x. Our only floating rate exposure remains short-term borrowings. We continue to have no material debt maturities until 2028. Our balance sheet is extremely well positioned to fund our growth in the next year, as we have locked in an attractive cost of capital with an expansive opportunity set across all three external growth platforms. Our consistent and reliable earnings growth continues to support a growing and well-covered dividend. During the second quarter, we increased our monthly cash dividend to $0.267 per common share for April, May, and June. The monthly dividend equates to an annualized dividend of over $3.20 per share and represents a 4.3% year-over-year increase. Our dividend is very well covered with a payout ratio of 70% of AFFO per share for the second quarter. Subsequent to quarter end, we announced a monthly cash dividend of $0.267 per common share for July. The monthly dividend also equates to an annualized dividend of over $3.20 per share and represents a 4.3% year-over-year increase. With that, I would like to turn the call back over to Joel.
Thanks, Peter. Operator, at this time, let's open it up for questions.
Questions and answers
We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Michael Goldsmith with UBS. Your line is open. Please go ahead.
Good morning. Thanks for taking my question. You had robust acquisition volume in the first quarter and now again in the second quarter. Just with acquisition activity accelerating across the net lease sector, are you seeing any changes in the bidding behavior for the transactions you are pursuing, particularly maybe the larger portfolios or investment-grade assets?
Morning, Michael. No material changes we have seen. Cap rates have effectively been bound within a band for going on three years now, so we have not seen any material changes or new entrants to the competitive set. We will, as you would anticipate, continue to monitor the 10-year Treasury with it being elevated to roughly 4.7%, but we have not observed any material changes to date.
Just maybe more specifically here, the quality of the acquisition improved—over 73% came from investment-grade this quarter, up from 60% last quarter, cap rates remaining the same. So what is allowing you to acquire higher-credit assets without sacrificing yield? Is that something that you expect to persist or are you seeing any broader change in transaction opportunities across the net lease market?
Well, I appreciate the question. It is due to our team, the depth of relationships we have, and the asymmetrical opportunities that we pursue with our retail partners. I would remind everybody that we are not imputing any investment-grade ratings here—Hobby Lobby, for example, we continue to show as unrated. Alta, Publix, Boot Barn, and other leading operators are strong credits in their respective spaces. What you are seeing is the result of the depth and strength of our team and how all three platforms create value across relationships for the top retail partners in the country.
Your next question comes from the line of Smedes Rose with Citi. Your line is open. Please go ahead.
Hi. Good morning. This is actually Nick Kerr on for Smedes this morning. Can you just walk us through the BP transaction and some of the rationale behind that and what makes travel centers of interest for Agree?
Sure, Nick. The BP transaction was approximately $75 million. These are large-format travel centers with BP North America credit guaranteeing them, an A- rated credit. As I mentioned in the prepared remarks, we continue to pursue large-format convenience stores as well as off-price. We published white papers on both spaces. These are tremendous opportunities for us with strong participants, and we will continue to work across all three platforms to execute on opportunities to add to our portfolio. These BP travel centers are typically interstate exit locations with long-term leases and significant escalations.
Thanks for that. And then the second one is on ground leases—you guys have been leaning more into those. Could you walk us through what makes those attractive on a risk-adjusted return perspective?
I wouldn't say we have been leaning in intentionally. What we do is a function of what we uncover through all of our efforts across our platforms. This quarter, our ground lease exposure was elevated. We have some significant ground lease exposure coming in at roughly 10% to 11% of the overall portfolio. We think it's extremely unique and high credit. The tenant typically builds the building at their own expense; we own the land. If the tenant were to leave for any reason, the building reverts to us. Compared to leaseholds, we own the fee simple interest in the land; we don't carry the building on our books when the tenant builds it, and we don't take depreciation on it while the tenant is in place. If the tenant leaves, the building becomes ours free and clear and we have demonstrated in our investor deck case studies that recapturing such buildings can lead to significant rent markups. I consider ground leases among my favorite risk-adjusted returns in the net lease sector. We will continue to pursue opportunities across our three platforms and execute when the right situations arise.
Your next question comes from the line of John with Wells Fargo. Your line is open. Please go ahead.
Hi. Good morning. First question is just on the DFP and development pipelines growing. Joel, is that from just more effort on your end and more emphasis on those investment lines? Or is there something about this environment that is creating more opportunity for you all?
John, we told everybody about 18 months ago that we were going to pick up our efforts in these areas given our capabilities with our retail partners to both develop and use our developer funding platform, and we are seeing those efforts come to fruition. Seven-Elevens numbers seven and eight have both commenced construction. We are extremely active in the off-price space, getting outsized returns with superior credit. Most importantly, we are creating a full-service value proposition as a true real estate investor in the net lease space, not just a spread investor. All three platforms are firing on all cylinders. When we talk to the biggest and best retailers in the country, our discussions are comprehensive: we can develop new stores, acquire via sale-leaseback, buy from third parties, or do orderly extensions. All different permutations of transactional activity separate us from our peers.
And then on the credit loss side, a very impressive performance this quarter. I'm curious how this has impacted your guide and expectations from here on out. What is on the watch list today? Are you seeing the run rate continue to trend down in terms of average credit and occupancy loss?
Sure, John. In terms of our credit loss guidance, as you noted, we've brought down our assumption in the guide to 25 basis points from the prior range of 25 to 50 basis points. Through the first half of the year, we had just 10 basis points of fully loaded credit and occupancy loss, and only 6 basis points in the second quarter. So the portfolio has performed exceptionally well in the first half of the year. Occupancy, as we noted, matches a company record at 99.8%. The 25 basis points assumed in our guide is relatively aligned with our longer-term average of credit loss we've seen on an annual basis. Looking at the back half of the year, there is no material exposure or tenants we've identified that would drive a significant acceleration in credit loss in Q3 or Q4. The watch list is in a really good spot; it's lower than it was a year or two ago. The biggest piece we had was some AMC exposure, but they were upgraded by S&P earlier this week, have raised equity, and there's some box office momentum. So I think the portfolio is in a strong position as we look to 2026 and beyond.
Your next question comes from the line of Jim Kammert with Evercore. Your line is open. Please go ahead.
Thank you. Good morning. When you think about achieving these partnership relationships with your retailers, you are not really seeking any sort of ancillary fee streams or anything like that. This is more about partnering and getting greater market share. It's not really an immediate economic gain. I'm trying to understand what you really extract from that.
Correction: there are no ancillary fee streams that we are receiving or would frankly anticipate receiving. Our ability to sit down with the largest retailers in the country and deploy the myriad capabilities we have is wholly distinct. Retailers have private developers that are not multi-billion-dollar organizations and may have financing or capital-stack challenges. There are public and private institutions that can acquire, and then there is Agree Realty that can do both. That differentiated strategy, now accelerated across all three platforms, is extremely appreciated by our retail partners. Pair that with an active asset management platform and a tremendous asset management team that is on call and ready at any time to address property challenges, and we are a very unique one-on-one partner for retailers.
Your next question comes from the line of Spencer Glimcher with Green Street. Your line is open. Please go ahead.
Thank you. So you guys commenced five projects in the quarter for about $90 million. As you continue to grow and expand the asset base, do you think there is a path to larger-format tenant development that would let you deploy more capital at one time?
Yes, Spencer. These turnkey developments generally average approximately $10 to $12 million per project. For certain off-price concepts or multi-concept parcels, we are open to executing two or more concepts together—two TJX concepts or a combination of Burlington and Ross or other pairings that fit our sandbox. We are more than open to executing larger-format or multi-concept developments and will continue to pursue those opportunities.
And then on the investment pipeline, as you look at the back half of the year, can you talk about what we should expect to see in terms of the composition of future acquisitions or capital deployment as it relates to your three different growth verticals?
In terms of asset composition, you will not see surprises from us. We are not going to move up the risk curve or transact in private equity-backed sale-leasebacks outside our sandbox. Our pipeline across all three platforms is extremely strong and growing. We are currently sourcing acquisitions for Q4 and have a couple dozen projects through development and DFP in process. We expect continued acceleration through Q3 and Q4, subject to diligence and timing, but there is no shortage of opportunities right now.
Your next question comes from the line of Eric Borden with BMO. Your line is open. Please go ahead.
Great. Thanks. Good morning, everyone. Ground leases were a large part of the portfolio in the investment volume this quarter. Just curious how large do you ultimately see the ground lease portfolio becoming as a percent of the business?
Hey Eric. It has hovered around that double-digit, roughly 10% to 11% mark for a number of quarters and years. Again, this is not a concerted effort to pursue ground leases exclusively; it is often what we uncover through our external activities. There is elevated ground lease exposure in the back half of the year due to some unique opportunities currently in our pipeline. But our ultimate goal is to assemble the highest-quality retail portfolio in the country, growing at roughly 400 properties per year and continuing to drive outsized AFFO to shareholders while maintaining a fortress balance sheet. Whether opportunities come in as turnkey developments or ground leases, we are fairly agnostic.
Last couple for Peter just on the cadence of the funding sources. You have about $425 million of forward equity contracts maturing in October, and you also noted potential for a 10-year unsecured paper. Just curious what you are thinking about in terms of the different funding sources and the cadence through the back half of the year?
I think first and foremost we are in a great position today with $1.9 billion of liquidity, including $1.1 billion of outstanding forward equity. We have plenty of flexibility and optionality for capital raising in the back half of the year. As you mentioned, about $425 million of forward equity currently matures in the back half of the year; we can choose to extend those contracts if we see fit, but there is a good chance, subject to capital needs and market conditions, those shares are settled in the back half of the year. We also have $300 million of forward-starting swaps in place, which takes a lot of base-rate risk off the table for a future 10-year issuance, and we will continue to evaluate the appropriate timing for an issuance in the back half of the year. We're not in a rush given the capital available to us and can afford to pick our spot.
Your next question comes from the line of Rob Stevenson with Huntington. Your line is open. Please go ahead.
Good morning, guys. Joel, how should we be thinking about your expense growth over the next couple of years versus today? You have done a good job bringing G&A down as a percent of revenue. You talked in your prepared remarks about a bunch of tech and AI initiatives. How much more opportunity is there for you to limit expense growth as a triple-net company?
I think there is tremendous opportunity. We have built scale—approximately 100 team members today—combined with lean processes and systems that are constantly improving. Our COO, Nicole, runs that side of the business and does a tremendous job. We are leveraging many tools, including in-house systems, and are getting better every single day. We expect continued compression of G&A as a percent of revenue. We will add select headcount, preferring to hire young talent, train them, and support their professional development, but we have room and capacity to do more. I'm excited about the initiatives mentioned in the prepared remarks, including ARC 3.0 coming online later this year.
Okay. And then Peter, just back to the capital standpoint, given the steeper yield curve, where is your most attractive source and what is the pricing on debt if you did anything in the back half of the year?
Including the swaps we have in place, the $300 million of forward-starting swaps that contemplate a 10-year issuance, we could probably issue 10-year debt in the low fives percent today. Given those swaps and the fact that we have fully drawn our $350 million term loan, a public unsecured offering is the most attractive longer-term debt option as we look forward.
Have a good weekend. Thank you.
Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Your line is open. Please go ahead.
Great. Hey. Just wanted to follow up on the longer-term target of $250 million for development and DFP. Can you double-click a little in terms of whether that is for existing tenants, how much is new tenants, and how you are going about scaling that opportunity? Thanks.
Good morning. These projects are generally for tenants we already own in the portfolio; we are not targeting new tenants we do not currently own. The $250 million goal we set about 18 months ago was a three-year objective. There's about a 50-50 chance we hit it this year, subject to diligence and timing. We are ahead of schedule and will set a new goal once we achieve this milestone. Our development and DFP teams continue to ramp; we have great relationships and new geographic territories where we're a preferred partner for retailers. We continue to demonstrate our value proposition and are excited to grow this channel. We have not had any material new entrants into this space that change our strategy.
And on the record investments quarter, specifically on acquisitions, you mentioned competition and cap rate trends earlier. You said you haven't seen many changes so far, but as rates have moved a little, is that impacting anything?
Rate movement has been volatile and the most recent move is near term. We have not seen cascading impacts from that yet. We'll continue to monitor the environment. Our space has not seen much change in competition; competition sharpens our edge and we welcome it. When we choose to pursue an asset, we are selective but can move quickly and aggressively when we want to win a transaction.
There are no further questions at this time. I will now turn the call back to Joel N. Agree for closing remarks.
Thank you, everybody, for joining us this morning. We look forward to seeing you in the near future, and enjoy the rest of your summer. Thank you.
This concludes today's call. Thank you for attending. You may now disconnect.