Agree Realty Corporation — Form 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a fully integrated REIT focused on acquiring, developing, owning and managing retail properties under predominantly long-term net leases. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, with balance-sheet comparisons to December 31, 2015 and operating comparisons to the corresponding 2015 periods.
- Portfolio at June 30, 2016: 326 properties in 42 states, approximately 6.3 million square feet, 99.6% leased and approximately 11.0 years of weighted-average remaining lease term.
- The Company held a 98.6% interest in Agree Limited Partnership, its operating partnership.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|---|---|
| Total revenue | $21.8 million | $17.2 million | $42.1 million | $33.0 million |
| Income from operations | $11.6 million | $9.9 million | $22.8 million | $19.0 million |
| Net income attributable to Agree | $10.7 million | $10.3 million | $18.1 million | $16.6 million |
| Diluted earnings per share | $0.48 | $0.58 | $0.85 | $0.95 |
| Funds from operations | $13.8 million | $11.1 million | $26.4 million | $21.1 million |
| Adjusted funds from operations | $13.7 million | $11.0 million | $26.5 million | $21.1 million |
| Diluted FFO/AFFO per share | $0.61 | $0.62 | $1.22 | $1.18 |
- Second-quarter revenue increased 26.9%; six-month revenue increased 27.6%.
- Approximate operating margin was 53.1% in the second quarter and 54.3% for the first six months.
- Approximate net margin attributable to Agree was 48.8% in the second quarter and 43.1% for the first six months.
- Net cash provided by operating activities was $26.7 million for the first six months, compared with $21.2 million in 2015.
- Cash used in investing activities was $187.1 million, primarily reflecting $185.4 million of real estate acquisitions.
- Cash provided by financing activities was $161.7 million. Ending cash and cash equivalents were $4.0 million, compared with $2.9 million at December 31, 2015.
Balance Sheet, Debt and Liquidity
- Total assets were $973.1 million at June 30, 2016, compared with $789.9 million at December 31, 2015. Net real estate investments increased to $854.3 million from $699.4 million.
- Total debt was approximately $389.6 million, consisting of $91.6 million of mortgage debt, $100.0 million of unsecured term loans, $100.0 million of senior unsecured notes and $98.0 million drawn on the revolving credit facility.
- The $150.0 million revolving credit facility had $52.0 million available at June 30, 2016, and matures in July 2018, subject to a potential one-year extension.
- Total debt represented approximately 25.2% of total market capitalization, according to management.
- The Company was in compliance with applicable debt covenants at June 30, 2016.
- Scheduled debt maturities include approximately $22.5 million in 2017, $125.6 million in 2018, $38.9 million in 2020 and $198.4 million thereafter. The filing identifies significant balloon-payment exposure, including the revolving facility balance due in 2018.
- Interest-rate swaps covered approximately $187.3 million of notional debt and had a net liability fair value of $7.8 million. Management estimated that a 100-basis-point increase in variable interest rates would increase annual interest expense by approximately $1.0 million.
Material Changes Versus the Prior Comparable Period
- The Company acquired 34 retail net-lease assets for approximately $151.5 million in the second quarter and 46 assets for approximately $184.5 million in the first six months. The six-month acquisitions had an underwritten weighted-average capitalization rate of approximately 7.8% and a weighted-average lease term of approximately 10.7 years.
- Minimum rental income increased 25% in the second quarter and 26% for the first six months, primarily from acquired properties and, to a lesser extent, new developments.
- Operating expenses increased with portfolio growth, including higher real estate taxes, property operating expenses and depreciation and amortization.
- Interest expense increased 19% in the second quarter and 32% for the first six months, primarily due to the $100.0 million senior unsecured notes issued in May 2015, partly offset by mortgage repayments.
- Net income attributable to Agree increased only 4% in the second quarter and 9% for the first six months, while diluted EPS declined because the weighted-average share count increased substantially following equity issuance.
- The Company sold one Walgreens property for gross proceeds of approximately $7.3 million and recorded a net gain of approximately $2.7 million in the first half. The prior-year comparable period included gains on four property dispositions.
- The Company completed a May 2016 follow-on offering of 2.875 million shares, generating approximately $109.7 million of net proceeds, primarily used to repay revolving credit borrowings and for general corporate purposes. It also issued shares under its ATM program.
- No impairment charges were recorded in either the second quarter or first six months of 2016.
Outlook, Commentary, Risks and Unusual Items
- No specific earnings, FFO or acquisition guidance was provided in the filing.
- Management expects short-term liquidity needs to be funded through operating cash flow and the revolving credit facility, with longer-term needs funded through operating cash flow, debt, equity or other financing.
- On July 1, 2016, the operating partnership entered into a $40.0 million, seven-year unsecured 2023 Term Loan. An interest-rate swap beginning August 1, 2016 was intended to fix LIBOR at 1.3985% through maturity.
- The quarterly dividend was $0.48 per share and was paid July 15, 2016. The filing states that the Company expects to maintain its REIT qualification, subject to applicable requirements.
- Principal risks include property and tenant performance, tenant bankruptcies or lease expirations, re-leasing risk, acquisition and development execution, access to capital, refinancing and interest-rate risk, operating-cost inflation, and maintaining REIT status.
- Derivative agreements could require settlement of approximately $7.5 million if specified debt-default-related provisions were triggered.
- The financial statements are interim and unaudited; management cautions that six-month results may not be indicative of full-year results.
- The filing reports no material litigation beyond routine matters, no material changes to previously disclosed risk factors and effective disclosure controls.
Important Facts for Investors to Verify
- Whether portfolio acquisitions continue to produce expected occupancy, rent growth and capitalization-rate returns.
- The ability to refinance or repay the substantial 2018 revolving-facility maturity and other balloon obligations.
- Future access to equity and debt capital, including dilution from additional equity issuance.
- Tenant concentration, credit quality, lease expirations and potential re-leasing costs.
- The effect of interest-rate movements and the value and performance of interest-rate swaps.
- FFO and AFFO trends relative to the $0.48 quarterly dividend and the Company’s distribution requirements.
- The eventual impact of pending accounting standards, including leases, revenue recognition and expected credit losses.