Business Context and Reporting Period
Agree Realty Corporation is a fully integrated REIT focused on owning, acquiring, developing and managing retail properties subject to net leases. This unaudited Form 10-Q covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018.
- Portfolio at March 31, 2019: 694 properties in 46 states, approximately 11.9 million square feet, 99.7% leased and weighted average remaining lease term of approximately 10.2 years.
- The company acquired 48 retail net lease assets for approximately $141.7 million and completed or had under construction nine developments or Partnership Capital Solutions projects.
- The company was approximately 99.1% owner of its Operating Partnership.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues | $42.3 million | $32.3 million | 31% |
| Income from operations | $22.5 million | $17.6 million | 27% |
| Net income | $18.5 million | $16.6 million | 11% |
| Net income attributable to Agree Realty | $18.3 million | $16.5 million | 12% |
| Diluted EPS | $0.48 | $0.53 | Down $0.05 |
| Net cash provided by operating activities | $23.5 million | $17.8 million | 32% |
| FFO | $25.3 million | $19.8 million | 28% |
| Core FFO | $28.6 million | $22.0 million | 30% |
| AFFO | $27.7 million | $21.8 million | 27% |
| AFFO per diluted share | $0.72 | $0.70 | 3% |
- Operating margin was approximately 53.1%, compared with 54.6% in the prior-year quarter. Net margin was approximately 43.7%, compared with 51.5%; the comparison was affected by gains on asset sales, impairment charges and higher interest expense.
- Rental income increased to $42.3 million from $32.3 million, primarily because of additional properties owned in 2019.
- General and administrative expense increased 35% to $4.0 million, primarily due to higher headcount, compensation under the equity incentive program and professional costs.
- Interest expense increased 38% to $7.6 million because of higher borrowings used to finance property acquisitions and development.
- Gain on sale of assets declined to $3.4 million from $4.6 million. The company sold two properties for net proceeds of $9.8 million.
- The company recorded a $0.4 million impairment provision, compared with none in the prior-year quarter.
Cash Flow, Liquidity and Capitalization
- Investing activities used $138.7 million, including $142.3 million for acquisitions and $6.1 million for development, partly offset by $9.8 million of asset-sale proceeds.
- Financing activities provided $86.5 million, including $57.8 million of net common-stock offering proceeds and $52.0 million of net revolving-credit borrowings.
- Cash and cash equivalents were $22.3 million at March 31, 2019; cash and cash held in escrow totaled $25.3 million.
- Total principal debt was $775.2 million, consisting of $60.8 million of mortgages, $258.4 million of unsecured term loans, $385.0 million of senior unsecured notes and $71.0 million drawn on the revolving credit facility.
- The company had $254.0 million available under its $325.0 million revolving credit facility and was in compliance with all debt covenants.
- Total debt represented approximately 22.5% of total market capitalization. Total assets were $2.15 billion and total equity was $1.29 billion at March 31, 2019.
- The quarterly dividend was $0.555 per share, compared with $0.520 for the comparable 2018 quarter. The dividend was paid on April 12, 2019.
Material Changes Versus the Prior Comparable Period
- Property growth drove a 31% increase in rental income and a 28% increase in FFO, but the substantially higher share count contributed to diluted EPS declining from $0.53 to $0.48.
- Weighted average diluted shares used in EPS increased to 38.3 million from 30.9 million, principally reflecting equity issuance and the forward equity offering.
- The company issued 874,268 shares under its ATM program at an average price of $66.79, generating approximately $58.4 million of gross proceeds. Approximately $10.4 million remained available under the program at quarter-end.
- Revolving-credit borrowings increased to $71.0 million from $19.0 million at December 31, 2018, while total principal debt increased from $724.1 million to $775.2 million.
- The company adopted ASC 842, the new lease accounting standard, on January 1, 2019. It recognized $7.5 million of right-of-use assets and lease liabilities, with no cumulative-effect adjustment to opening retained earnings, and presented lease and non-lease rental income in a single rental-income line.
- A forward sale agreement for 3.5 million shares remained unsettled at quarter-end and must be settled no later than September 3, 2019. The company had not yet received proceeds.
Guidance, Outlook, Commentary and Risks
- Management expects to fund short-term liquidity needs through operating cash flow and revolving-credit borrowings, and long-term capital needs through operating cash flow, debt issuance, equity issuance and other financing sources.
- The 2019 term loan, with $18.4 million outstanding, matures in May 2019. A $21.5 million mortgage matures in October 2019. Management expects to use the revolving credit facility to fund these maturities; total expected 2019 debt maturities were approximately $39.8 million.
- Management stated that it believes financing can be obtained on reasonable terms, but cautioned that additional capital may not be available or may not be available on acceptable terms.
- Key risks include economic and real estate market conditions, interest-rate volatility, refinancing and rollover risk, tenant bankruptcies or loss of major tenants, the ability to re-lease space, capital expenditure requirements, covenant compliance and continued qualification as a REIT.
- The company entered into forward-starting interest-rate swaps for a forecasted $100 million long-term debt issuance. The swaps were valued as a $0.5 million liability at March 31, 2019.
- There were no material changes to previously disclosed risk factors, no material litigation beyond routine insured matters and no defaults under senior securities.
- Management concluded that disclosure controls and procedures were effective and that no material change had affected internal control over financial reporting.
Investor Verification Items
- Verify the funding, refinancing or repayment of the May 2019 term-loan maturity and October 2019 mortgage maturity.
- Monitor revolving-credit usage, covenant headroom and the January 2021 facility maturity, including extension options.
- Confirm settlement timing and net proceeds of the 3.5 million-share forward sale agreement due by September 3, 2019.
- Assess whether acquisition activity and leverage growth continue to translate into per-share AFFO growth after dilution.
- Review tenant concentration, investment-grade tenant exposure, lease expirations and the sustainability of the 99.7% leased rate.
- Reconcile the filing’s non-GAAP FFO, Core FFO and AFFO definitions with those used by comparable REITs.
- Consider the effect of interest rates on variable-rate debt, derivative valuations and future refinancing costs.
- Note that first-quarter operating results may not be indicative of full-year 2019 results.