Power Connections Fireside Chat with Joey Agree

What's the latest and greatest at Agree Realty?

Well, I think we're seeing a post-COVID normalization of sales. Number one, we saw everyone's experience with brick and mortar shut down for a protracted period of time. We saw COVID surge sales oddities—everything from sporting goods to home furnishings, office supplies, computers, electronics. Today we're starting to see a normalization of those sales, still 30% above pre-pandemic levels. That said, we're starting to see a normalization for brick and mortar. I think the real story for the next, let's call it seven to ten years, is going to be the true rationalization of industrial distribution space with brick and mortar locations for a true omnichannel future. So all the retailers that we work with—our largest is Walmart, the Walmarts, Dollar Generals of the world, Best Buys—they're all working on different modalities, trying to figure out how to distribute efficiently and economically profitably and drive EBITDA. How to distribute goods primarily to consumers today in a true omnichannel world. So we saw the pendulum swing. You may recall several years ago, the Wall Street Journal three weeks in a row: Amazon is going to kill pharmacy, Amazon was going to kill grocery, Amazon was going to kill auto parts. That was all, excuse my French, a bunch of [BS]. So what we're seeing today is Amazon opening stores—obviously the Amazon Fresh concept, now the Amazon Fashion concept, the first one in California. What we're seeing now is that retailers have realized that e-commerce distribution from macro fulfillment only doesn't work without autonomous vehicles. With rising labor costs and rising fuel costs, it didn't work before all that. But today, making money online is the paradox for retailers: how do you make money online when 40% of goods ordered online are returned? Just ask my wife—it's probably 70%—but they are returned. And so that's what we're seeing today, and that is the future. This takes billions of dollars in investments for the largest retailers in the world. I've been down to Bentonville and seen Walmart's micro-fulfillment towers which they're bolting onto stores. I've seen the Ocado/Kroger facilities. They're all experimenting with these extremely expensive modalities to actually have a comprehensive omnichannel platform.

Yeah. But before the internet, we had brick and mortar: you went to the mall, you went to one side to JCPenney or Hudson's or Macy's, and you walked a half a mile to the other side of the mall, and you price-checked at another department store, then you walked your ass half a mile back because it was cheaper. Well, today we have an iPhone, we have Amazon; you can see the price of any good or service like that. So today, brick and mortar is one piece to a whole omnichannel experience. That includes in-store shopping, same-day deliveries, half-hour deliveries which are demanded in many urban areas, buy online pick up in store, click and collect, exterior lockers—we're seeing retailers like Best Buy add exterior lockers to their stores—micro-fulfillment out of stores, macro-fulfillment for large distribution, automated distribution facilities. All of these are different components of a true omnichannel future for retailers. The problem is making money. It's extremely expensive; we're in a price-competitive world today. Again, you can see the price of anything competitively within ten seconds on your iPhone. So today, retailers have to navigate that.

Well, I'd say we're seeing the deleveraging of a lot of the pandemic-era surge sales. Obviously, we talked about some of the sectors we saw surges: grocery, massive surges; people weren't eating out; we saw a lot of pent-up consumer demand. Truly today, we're seeing a deleveraging also from fashion post those surge sales. So it's a very mixed consumer. If you look at any of the prints in the last two weeks during earnings season, from a Walmart, Dollar General, Lowe's, Target dropping the knife twice—it's a very mixed bag for consumers. It's a confused macro environment for retailers. And so we're seeing a normalization in a very, frankly, abnormal world today. The world is truly abnormal.

So we start with... When I launched our acquisition platform in 2010, we started with two things. One: we were going to be focused on e-commerce-resistant industries and the leaders within those respective industries. E-commerce resistance today is a misnomer; very few things are e-commerce resistant. So that's gone to omnichannel brick-and-mortar critical—that's one. Two: recession-resistant durable goods and services that are necessity-based. We don't do discretionary, we don't do luxury, we don't do anywhere where a lot of people in here probably shop. So we're focused on the top 30 to 35 retailers in this country. Again, Walmart being our largest tenant. Portfolio today is 69% investment grade. The majority of the non-investment grade is just unrated retailers—Chick-fil-A, Publix, Hobby Lobby—two of them don't even have any long-term debt; they're just unrated. And then we pair that perspective of the world with a ground-up underwriting approach. So we're looking at fungibility of boxes, market rents, we're looking at access, visibility, signage, trying to get to the residual value if and when that retailer either doesn't renew or files for bankruptcy and rejects the lease.

Yeah, I like giving myself more things to do, I guess. You know, we opened the second building in Bloomfield Hills on our campus just before COVID. When COVID hit, we saw an opportunity: we reopened the public equity markets twice and raised over $500 million in a span of three weeks while everyone was frankly searching for toilet paper. Our balance sheet and our portfolio: we didn't have a rent collection problem; we collected effectively 100% of rents. So we doubled investment volume from about $700 million in 2019 to over $1.3 billion in 2020. That... we ran out of space very quickly once everybody got back to the office. We are asking everybody to work from the office full-time here, and so we were at max capacity. So recently we bought the former Art Van (then Loves for about a week) on Woodward in Royal Oak. And it's going to be the premier office location in the state of Michigan. Now, we're going to spend upwards of $20 million on this. You'll see it cracked from the exterior pretty soon. And it's going to be a 50,000 square foot single floor plate instead of two buildings today. Single floor plate with all of the amenities for a 21st-century collaborative environment. We're going to repeat the health and wellness initiatives we have—that's the gym, the locker rooms, the coffee bar, the cafe, and all those perks. We want people to come for careers at Agree Realty, not a job. And so we want to create an environment where they want to come to work, but where they enjoy coming to work. And this is a company that moves very fast. It's probably the busiest commercial real estate company in the country. We'll do 350 transactions plus this year—that's 300 plus acquisitions. We started 15 projects alone in the first quarter in terms of partner capital solutions or development. We'll sell another 15 assets probably during the year. So you're looking at three to four hundred transactions annually, wholly owned on balance sheet, no partners. It's a closing and a half a day effectively. So it's an exciting environment, it's a fast-paced growing environment. We've added I think 14 team members year-to-date, and now we've got to move again.

Well, the first thing is I wouldn't frame it as a war, right? I think it's a competition. You can't force people to do anything that they don't want to do in an age of full mobility, in a LinkedIn world. And so all we can do, led by our VP of People and Culture, our EVP Nicole Whitabee, and her team, is foster the best environment for people to have a thriving career—providing vertical and horizontal mobility across the organization at a growing, dynamic, and fast-paced company—and then create again that office environment where they want to actually come to work. We've recently launched our rotational program where we take high-performing, generally younger people—younger career professionals—and move them around to different areas of the business, from our transaction team to acquisitions to development to asset management. We've launched ADC University, where we're teaching basic management skills. I think the biggest mistake I've seen in real estate (and people companies generally, trust me we did this ourselves) is they promote people when they're good at a tactical skill—a really good accountant, a really good lawyer, someone who's really good at analyzing or underwriting acquisitions—and then they promote them and make them a manager. It's a totally different skill set. We're focused on building competent managers, eventually they become Level Five leaders. So all we can do is offer the environment, the opportunity, and frankly the challenge. And it's not for everybody. This organization is for A players. We want A players. We want to retain them, we want to attract them, we want to develop and coach them, and we want to give them the opportunity to literally write their own book.

Well first, our offices are all glass internally—it's fully transparent, so there's nowhere to hide. If you want to hide, you don't come to Agree Realty, go somewhere else. That's one. I'll tell you, we don't have that challenge with the senior leaders of this organization. They're running fast-paced, dynamic, and growing teams. There are VPs. I don't fully understand millennials frankly, but there's a broad diverse set. Now, we made the decision to come back to work and not accept the hybrid environment. We have one team member that works in Philadelphia in a very specialized area, purchase price valuation. We made the decision to come back to work five days a week without a hybrid schedule because we believe it's the most productive and efficient use for our business. We worked remote during the pandemic. Working remote during the pandemic, we were successful at it, but at the same time, we ground people into the ground. They didn't realize what time to shut it off, they don't go home, they don't change the physical environment, they were going all day, all night. We were of course busy, but we weren't able to even monitor those stresses and those pushes and pulls. So I'll tell you, I personally believe in a suburban environment. We don't have mass transit; we own our two buildings; we're moving into one building. We don't have mass transit, we don't have these things. When the millennial tells us, 'Yeah, I want to work...' I sent away a millennial, but we'll pick on them. When a millennial tells us, 'Yeah, I live in Birmingham or Bloomfield or Royal Oak, but I only want to come in three days a week,' and they have no dog, no kids, no wife at home, I asked myself, 'What the hell are they doing at home?' I want people at our company. We want people in this organization that want to be around leaders, we want people that want to be around transactions, we want people that want to learn and grow. If you want a job, go somewhere else. If you want a career, if you want to be the best, walk in the door. That said, we're totally flexible if people have children at home and they have to start later or leave earlier—they have games or concerts or all those parental duties—or they've got to take their dog to the vet. We're totally flexible; we're not going to babysit people either. So I think it's regional. I think number one, I think edicts like Elon Musk's are unique. I think they come off the wrong way, frankly; I think the tone was wrong. But I think you have to do what's best for your business, and frankly in a constrained talent environment that we're in today, people make short-term decisions. We're in this for the long term.

Look, starting as a developer... This company didn't acquire anything until 2010. When we launched the acquisition platform in 2010, we had 72 properties in 16 states, all of which were developed. Development is a difficult business. The bulk of our activity—we'll invest between $1.5 and $1.7 billion this year—the bulk of that activity will be in acquisitions. Development in an inflationary environment, in a rising interest rate environment, especially speculative development, is playing with fire. Duration equals risk. Risk equals a premium, and so you have to have the associated premium if you're going to develop. The average project, especially for all the government officials in the state of Michigan here, the average project in Michigan takes too long. The permitting entitlement process—whether it's at the municipal level, the county with the county roads, or MDOT—it takes too long as opposed to many other states in this country. Again, duration equals risk. We have a lot of space in this country. We have too much industrial space that's overbuilt now; we're going to see that pull back. We have too much retail space—more than double what Canada has, more than four times what Western Europe has, 24 square feet per capita; Asia is about 1.5. So we're going to see a normalization of that space. Now, there's always product that's going functionally obsolete, there's always areas of expansion or redevelopment opportunities. But development is all about risk mitigation at the end of the day. If you try to play in any business and try to hit home runs, you're going to strike out. Our business is very simple; I tell everybody, we use probably too many sports analogies: we're singles and doubles hitters. I think I hit one home run maybe in my entire career, $6 billion in transactions later—a few triples—but we don't strike out. That's the key. So if you swing for the fences, be ready to come up empty. My suggestion, my recommendation to developers or real estate practitioners in their careers is: don't swing for the fences. One bad project takes down three good projects. We've all seen them happen, a lot of them frankly within about a two-block radius of this hotel right now.

Thanks for having me.