Joey Agree CEO Agree Realty Interview with Benzinga

Great, thanks for having me, Michael.

Sure. The company went public in 1994, Agree Realty Corporation, with 16 community-anchored shopping centers as a publicly traded REIT on the New York Stock Exchange. In 2010, a notable milestone for us was the launch of our acquisition platform. Since that time, we've invested several billion dollars, really creating a first-in-class net lease retail REIT that is a landlord to the largest retailers in the country. Today, Walmart is our largest tenant, TJ Maxx, Tractor Supply, CBS, Home Depot, and so on. The largest retailers in the country come to us as a preferred retail partner. We'll invest anywhere between $1.5 billion and $1.4 billion in net lease retail assets this year across all three of our platforms: development, acquisition, and our partner capital solutions platform.

Okay. Look, there has been a lot of noise and a lot of headlines about the devastation or the destruction of brick and mortar retail in the context of Amazon and e-commerce. What we're really challenging investors, retailers, and consumers to think about is brick and mortar retail being an integral part of an omnichannel world. The pandemic has accelerated a lot of the trends we've seen historically, really since Amazon's inception as more than just an e-book retailer, call it 2010, 2011. In 10 years, obviously e-commerce has expanded dramatically. I think everybody here is well aware of that. What they aren't aware of is that e-commerce-based retailers, or digitally native retailers, have found and have learned that brick and mortar retail presence also helps their sales. Today and in the future, what we think we're going to continue to see is brick and mortar being the linchpin for an omnichannel world. Amazon has a huge physical plant. Most people don't realize it. They obviously own Whole Foods; they have returns at Kohl's, they have Amazon Locker, Amazon Go, and now they are launching Amazon Fresh. They have a large physical plant that we see will continue to evolve. At the same time, historic brick and mortar retailers like the Walmarts of the world, Home Depot, Tractor Supply, dominant grocery stores, are all building out their digital capabilities and their e-commerce-based capabilities with things like click and collect, delivery, same-day delivery, even buy online pickup in store. The new acronym, BOPIS, which everybody is talking about in the retail world, solving that last mile — which is the most expensive piece for retailers to deliver, the most inefficient piece to deliver to someone's home — really revolves around an omnichannel brick and mortar presence being the linchpin of success. Whether you're ordering online, walking in store and purchasing goods and/or services, or ordering online and picking up at store or at a locker, 'Rethinking Retail' is about thinking about that omnichannel world, how brick and mortar plays into it, and how retailers and consumers can be most efficient and successful navigating that world.

It's a great question. Retail real estate is going through fundamental changes in this country. We have 24 square feet per capita in this country. I fully anticipate that e-commerce sales, whether delivered or picked up in store, are going to stabilize around 25% of total retail sales excluding fuel in this country. When you look at that, it is a significant portion of sales. We also have a significant square footage in this country per capita. The next closest country is Canada, at 16 square feet per capita. Western Europe has about 4 to 4.5 square feet per capita of retail square footage per person. Asia is the lowest at about 1.5 square feet per capita. There are densities and population centers and more rural areas in the United States relative to Asia that impact those numbers, but what we're seeing is retail is a K today. Strong retailers are on the upper half of that K; they are getting bigger and they are stronger. They have the balance sheets, the ability to invest in distribution, logistics, and all the capabilities that are necessary. Weaker retailers don't have the balance sheet, don't have the access to capital, haven't been investing historically in that true omnichannel experience for customers. Retail is going through those changes. Our focus at Agree has been working with the biggest and best retailers in the country. We call it our sandbox of 25 retailers plus or minus that are the best and strongest retailers in the country, that have the omnichannel capabilities, and that are positioned to not only succeed but have succeeded. Most of them have thrived during the pandemic, leveraging those logistics and distribution capabilities that we're talking about.

Yeah, just as recently as three years ago, two years ago, we would read about — every week on the cover of the Wall Street Journal, it seemed there were three successive weeks I think where Amazon was entering auto parts, Amazon was entering the grocery space, Amazon was entering this. Everybody thought this was a binary outcome: e-commerce retailers, historically Amazon being obviously the 100-pound gorilla, versus brick and mortar retailers. What has truly materialized is what the industry refers to as omnichannel retailers: distribution, same-day delivery, distribution from stores, shopping in stores, micro fulfillment, macro fulfillment from universal warehouses or larger warehouses like the Kroger-Ocado partnership developing here. What omnichannel really means is that the consumer has multiple different points of entry to purchase a good or service, whether it's on your phone, on an app, on a mobile website, on your desktop, walking in the store, purchasing online and buying and picking up in store. Omnichannel is a full 360-degree experience for the consumer, and it's incumbent upon retailers today to figure out how best to navigate that world and make it most efficient for the consumer. An omnichannel world provides a ton of opportunity for consumers. Many of us can recall — you, Michael — going to the mall, starting at Macy's or JC Penney on one end, checking the price of a good, whether it was a washing machine, a TV, or a sport coat, then traversing the half mile across the mall to Sears or JC Penney, checking the price there, and if it was cheaper at the first place, walking the half mile back and buying it. That has now turned into one click on your phone, so the consumer has all price transparency and leverage today. What's most important for retailers is convenience and being competitive with services and offerings. That's a true omnichannel world, very different from that mile back and forth in a brick and mortar only world.

The pandemic has accelerated the trends we've already seen. Outside of a few aberrations, unfortunately in a lot of aspects, the larger companies who are our partners, who are our tenants, are winning. This is very expensive to compete in that omnichannel world. It's very expensive from a distribution perspective; it's very expensive to be able to compete on price. Ultimately, the consumer wins; they are getting the cheapest price because they have price transparency. The larger retailers have an inherent advantage here when it comes to investing, access to capital, cost of capital, public capital markets, and all areas of their business. That said, local merchants — we get through this pandemic — it's going to open up a lot of opportunity for local merchants to focus on service, in-person service, and unique assortment and merchandising and all the different things that local merchants can build. Who the real losers are, which is readily apparent today, are the regional or weaker national players that are stuck in the middle. They don't have the one-on-one relationship that you have with your local merchant, whether it's a dry cleaners or a clothing store, and they also don't have the access and cost of capital to compete with the nationals. Again, we really see retail as a K: the strong getting stronger and the weak really dissipating and dying off. We've seen a lot of indications of increased bankruptcies due to that frankly.

Yeah, I mean look, omnichannel is a very expensive proposition. The big secret out there, which really isn't a secret, is that retailers lose money online. Most of that is due to shipping and returns. They are all trying to figure out how to make money online across all these sectors. The only retailer that truly makes money online is eBay, and eBay has no inventory; they sell third-party goods. While revenues have increased, EBITDA and margins have shrunk. I order things online 70% of the time they get returned because they don't fit or you don't want it anymore. It's a very expensive proposition. As retailers navigate that world, they encourage consumers to solve the last mile by driving to the store rather than shipping it, which is the most inefficient piece for a retailer. It presents a lot of opportunities for retailers to frankly 'Rethink Retail,' and that's what we're challenging everybody to do: stay away from the retail narrative that brick and mortar is dead. The real retail narrative today is that strong brick and mortar retailers, or strong e-commerce based retailers or digitally native brands, are going to thrive when they bring all of these pieces together and figure out how to make them profitable.

Yeah, we saw a pandemic and we saw an opportunity. We've always had a historic, rock solid balance sheet. During the month of April specifically, we built a war chest. We raised over $1.2 billion in capital this year: $350 million in our first unsecured public bond, the rest in common equity. We built the war chest, took our balance sheet to 0.7 times debt to recurring EBITDA, which is the lowest in the REIT space, and effectively built a billion-dollar plus war chest. What you saw in Q3 was really the deployment of that war chest. We acquired approximately $460 million in real estate, at least 80% plus nationally recognized, industry-leading retailers: the best in the country. Home Depot, Walmart, Lowe's, TJ Maxx, Marshalls, National Tire and Battery, AutoZone, O'Reilly, our first Wegmans, a small format Target in Scottsdale, Arizona on Camelback Road, some really high-profile real estate; a TJ Maxx combo store (HomeGoods, Marshalls) in Napa Valley; we bought the HomeGoods in the Hamptons; we bought the TJX combo store at the University of Oregon right off campus in Eugene. We took advantage of the capital that we raised. Our average transaction takes about 70 days. We closed about 90 specific transactions in the third quarter and have really built what we think is the strongest retail portfolio in the country with fantastic partners and a great team here at Agree that's been working their tails off in the middle of a pandemic.

Look, I had a unique opportunity as a young CEO running a publicly traded company. We owned Borders' flagship store in Ann Arbor as well as the only office building the company ever owned, which was Borders' headquarters. I saw firsthand the first retailer that Amazon decimated. At the time, Amazon was just a digital bookseller; they weren't selling everything under the stars, just digital books. I saw firsthand what digitization and e-commerce could do and the impact and disruption it could create for a historic brick and mortar retailer. It was a scary time, I'm not going to lie. What we learned from that was the most important lesson of my career. We carried it forward and decided in April of 2010 to launch the acquisition platform and focus on the best retailers that at the time we said were e-commerce resistant; today we say they are brick and mortar omnichannel critical. We wanted to create a diversified, high-quality portfolio, knowing — and we had a young team including myself at the time — what the future looked like in terms of how powerful the internet and e-commerce was. We had a head start in terms of thought leadership. We've invested several billion dollars since that time in April 2010. The future has tons of opportunity. The largest space in the retail sector is net lease; it's 65% of US retail square footage — net lease. It's the largest sector, as opposed to malls, grocery-anchored centers, shopping centers, or power centers. It's also the oldest sector, the first stores where people rode their horse and buggy up to the corner store. It's also the most important and critical sector to be functional and successful in that omnichannel world. If you want to get cars in and out, people picking up goods, the use of drive-throughs and BOPIS pickup lanes, rapid delivery, same-day delivery, you can't be stuck as a retailer in the middle of a shopping center anymore or in the middle of a mall. Cars have to be able to circulate your site, similar to what they do at Chick-fil-A, Starbucks, or McDonald's. It's not about getting as many people in the door as possible anymore; it's about getting as many goods out of the store as possible, whether from ordering online and picking up or buying in store. Vehicular traffic and net lease — freestanding net lease — is a critical component to the future as retailers look to make things as efficient as possible, and then you exacerbate it in a contactless world in the midst of a pandemic. Our focus has been on the best retailers in that freestanding format that weren't relying upon anchors such as JC Penney, Macy's, or Sears to drive that type of traffic that we thought would be successful with the rise of Amazon and e-commerce. People forget this is only a little over 12 years old, this iPhone. It's all new, it was all fresh. We had a young team that frankly had a good vision of the future.

10 years is an eternity in today's world. In 10 years, I think frankly we will forget what retailers were historically — brick and mortar retailers and what retailers came started as online retailers. There will be Amazon formats and stores all across this country. They are gearing up for their second grocery concept, Amazon Fresh; the first two stores have opened in California already. 10 years from now, my children who are 7 and 9 years old won't remember if Walmart started online or Walmart started as a brick and mortar store. The same goes for Amazon. Home Depot is building 40 million square feet of distribution space for e-commerce today; they are building four or five total new stores. The world is going to blend together, and people aren't going to say 'oh, that's an online retailer' or 'that's a brick and mortar retailer.' It's going to all be omnichannel retail, and whatever is most effective and efficient for consumers is what's going to drive the end of the day, as long as retailers can be profitable. They still have to be profitable and service the demands and desires of consumers. I'm not sure if that drone that Jeff Bezos showed off on 60 Minutes years ago is going to actually deliver packages to our doors or not, but I'll tell you, we won't remember if Amazon started online. At least my kids won't remember if it started online or at that store down the street. It's all going to be the same omnichannel retail.

That's a great question. Most of the trends we see today were already in existence and readily apparent before the pandemic. The world was heading toward omnichannel; it was just the rate of change. What the pandemic does is accelerate it somewhere between 5 and 7 years, depending upon where the maturation of specific retail sectors were in the cycle. Let's take for example e-commerce grocery. Prior to the pandemic, which seems like a decade ago but it was only what, 9 months ago here in the US domestically, e-commerce grocery in this country was about 1.5 to 2% penetration rates. Compare and contrast that to Great Britain, which was about 6.5% penetration rates. The analysts, the grocers, the general pontificators of retail groceries thought that it would take 5 years approximately for the US e-commerce rate to hit Great Britain at 6 to 7%. Today, people believe that it stabilizes at 10% post pandemic. The rate of change has been absolutely amazing. I mean, my parents are using Instacart today; they never heard of Instacart before. The rate of change, the adoption, has been unbelievable. There are people who will never go back — contactless delivery through Instacart, Walmart Express, or Amazon. At the same time, while we saw the acceleration of pre-existing trends, we've seen some abnormalities. Pet stores: Petco filed to go public; PetSmart has thrived. Everyone has a dog; you can't get a dog anymore. Before the pandemic, everyone was saying Chewy was going to decimate these retailers. Sporting goods retailers ran out of bikes, guns, kayaks, paddleboards, all different types of outdoor activities. Academy Sports went public; pre-pandemic everyone thought they were in trouble, and that was a space that had a lot of challenges. And lastly, office supply stores. I mean, who would have thought that office supply stores would thrive ever again? With home offices, office supplies at Staples, OfficeMax, Office Depot have thrived. Those are idiosyncrasies. They may have some marginal pickup post pandemic, knock on wood hopefully sooner rather than later. But what we've really seen, I don't consider those investable sectors or retailers today; what we've really seen is just a dramatic acceleration of 5 to 10 years of existing trends across different sectors. I don't think this is going back for a lot of people.

Thanks for your time; I appreciate it.