Agree Realty Corporation — Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
Agree Realty is a fully integrated REIT focused on owning, acquiring, developing and managing retail properties subject primarily to net leases. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods.
- Portfolio at June 30, 2022: 1,607 properties in 48 states, approximately 33.8 million square feet of gross leasable area.
- Portfolio occupancy: approximately 99.6%; weighted-average remaining lease term: approximately 9.0 years.
- Approximately 67.5% of annualized base rent was derived from tenants or parent companies with investment-grade credit ratings.
Financial Performance and Key Metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Total revenue | $104.9 million | $82.5 million | +27% |
| Rental income | $104.8 million | $82.5 million | +27% |
| Income from operations | $52.3 million | $50.1 million | +4% |
| Net income | $36.1 million | $22.5 million | +61% |
| Net income attributable to common stockholders | $34.1 million | $22.3 million | +53% |
| Diluted earnings per share | $0.45 | $0.34 | +$0.11 |
| Adjusted funds from operations | $73.7 million | $57.6 million | +28% |
| Diluted AFFO per share and partnership unit | $0.97 | $0.88 | +10% |
For the six months ended June 30, 2022, revenue was $203.2 million, net income was $72.4 million, net income attributable to common stockholders was $68.4 million, and diluted AFFO per share and partnership unit was $1.94, compared with $160.4 million, $52.7 million, $52.5 million and $1.71, respectively, in the prior-year period.
Approximate Q2 operating margin was 49.9% based on income from operations divided by total revenue. Net income attributable to common stockholders represented approximately 32.5% of revenue. These are derived measures and are not presented as reported GAAP margins.
- Q2 operating expenses increased 34% to $52.5 million, including a 38% increase in depreciation and amortization to $32.0 million.
- Interest expense increased 24% to $15.5 million due primarily to higher borrowings used to fund acquisitions and development.
- Annualized common dividend declared during Q2 was $2.807 per share, up 7.8% from $2.604 in Q2 2021.
Cash Flow, Capital Investment, Debt and Liquidity
| Six months ended June 30 | 2022 | 2021 |
|---|---|---|
| Net cash provided by operating activities | $150.1 million | $117.9 million |
| Net cash used in investing activities | $(821.6) million | $(735.0) million |
| Net cash provided by financing activities | $653.3 million | $797.5 million |
| Ending cash and escrow balances | $27.1 million | $188.4 million |
- Six-month acquisitions totaled $833.5 million for 205 retail net lease assets; development and other real estate investment spending was $46.1 million.
- At June 30, total gross debt was approximately $2.0 billion: $1.51 billion of senior unsecured notes, $370.0 million drawn on the revolving facility and $74.5 million of mortgage debt.
- The $1.0 billion revolving credit facility had $370.0 million outstanding and $630.0 million available, subject to covenant compliance. It matures in January 2026, with extension options to January 2027.
- Total debt to enterprise value was 24.8%. Management reported compliance with all debt covenants.
- Debt maturities include $29.2 million of mortgage debt in 2023, $50.0 million of senior notes in 2025, and $370.0 million under the revolving facility in 2026, before available extension options.
Material Changes Versus the Prior Comparable Period
- The property portfolio increased from approximately 1,262 properties and 26.1 million square feet at June 30, 2021 to 1,607 properties and 33.8 million square feet at June 30, 2022.
- Rental income, revenue and operating cash flow increased primarily because of the larger portfolio and acquisitions completed during 2021 and 2022.
- Debt increased from approximately $1.70 billion of principal at December 31, 2021 to $1.95 billion at June 30, 2022, principally reflecting greater revolving credit borrowings and assumed mortgage debt.
- Common shares outstanding increased to 79.8 million from 71.3 million at December 31, 2021, reflecting equity issuance used to support growth.
- In May 2022, the Company completed a 5.75 million-share forward equity offering. As of June 30, no shares under that offering had been settled; anticipated net proceeds upon settlement were approximately $388.0 million.
- Q2 2021 included a $14.6 million loss on early extinguishment of term loans and related interest-rate swaps, which did not recur in Q2 2022. Q2 2021 also included a $6.8 million gain on asset sales compared with less than $0.1 million in Q2 2022.
- Interest-rate swap assets increased to $35.6 million from $1.9 million at December 31, 2021, reflecting changes in interest rates.
Outlook, Management Commentary, Risks and Unusual Items
The filing does not provide formal quantitative earnings or acquisition guidance. Management expects short-term liquidity needs to be funded through operating cash flow and revolver borrowings, with longer-term capital needs funded through operations, debt, common or preferred equity and other financing sources.
- Twenty-one development or Partner Capital Solutions projects were under construction at June 30, 2022, with anticipated total costs of approximately $68.0 million.
- The Company reported collecting substantially all rent payments originally contracted for during Q2. Three tenants were being accounted for on a cash basis because collection was no longer considered probable; related adjustments had an immaterial impact on Q2 and year-to-date rental income and net income.
- COVID-19 remains a significant uncertainty, including possible effects on tenant liquidity, rent collection, asset valuations, debt covenant compliance and capital-market access.
- Other principal risks include tenant defaults or bankruptcies, retail-sector disruption, lease rollover, higher interest rates, refinancing and rollover risk, availability and cost of debt or equity financing, cybersecurity, environmental liabilities, REIT qualification and restrictions under debt covenants.
- Interest-rate risk is concentrated in the variable-rate revolving facility and future refinancing requirements. The Company had three interest-rate swaps with aggregate notional amounts of $300.0 million and stated that it does not use derivatives for speculative purposes.
- Routine legal proceedings were not expected to have a material adverse effect. Management identified no conditions raising substantial doubt about going-concern status.
Important Facts for Investors to Verify
- Reconcile reported AFFO, Core FFO and FFO to GAAP net income and assess the Company’s definitions against those used by comparable REITs.
- Evaluate rent coverage, tenant concentration, investment-grade exposure and the collectability of the $47.1 million straight-line rent receivable.
- Monitor the $370.0 million revolver balance, 2023 mortgage maturities, 2025–2026 debt maturities and sensitivity to rising rates.
- Confirm settlement timing, share dilution and proceeds from the outstanding May 2022 forward equity agreements and remaining 2021 ATM forward sales.
- Assess whether acquisition volume, development commitments and dividend growth remain supported by operating cash flow without excessive reliance on debt or equity issuance.
- Review the effect of COVID-19, tenant credit deterioration, asset impairment risk and changing retail and capital-market conditions on future results.