Agree Realty Corporation: Q2 2014 Form 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a self-managed REIT focused primarily on acquiring and developing long-term net-leased retail properties. This filing covers the three and six months ended June 30, 2014; financial statements are unaudited.
- Portfolio: 142 properties in 34 states, approximately 3.9 million square feet, 99% leased, with a weighted average remaining lease term of approximately 11 years.
- Tenant concentration: national tenants generated approximately 86% of annualized base rent. Walgreens represented 25.6%; the top ten tenants represented 61.1%.
- During the first six months, the Company acquired 11 retail properties for approximately $34.5 million and continued several development and redevelopment projects.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Total revenue | $12.9 million | $10.6 million | $25.5 million | $20.5 million |
| Income from operations | $4.6 million | $5.9 million | $11.8 million | $11.6 million |
| Net income | $2.7 million | $4.5 million | $8.2 million | $9.9 million |
| Net income attributable to Agree | $2.7 million | $4.4 million | $8.0 million | $9.7 million |
| Basic EPS | $0.18 | $0.34 | $0.55 | $0.75 |
| Diluted EPS | $0.18 | $0.34 | $0.54 | $0.75 |
| Funds from operations | $8.1 million | $6.8 million | $16.0 million | $13.2 million |
| Adjusted funds from operations | $8.3 million | $7.0 million | $16.4 million | $13.4 million |
- Revenue increased 21.7% in the quarter and 24.1% year to date, principally from property acquisitions and completed developments.
- Q2 operating margin was approximately 35.6%, compared with 55.7% in the prior-year quarter. The decline primarily reflected a $2.8 million impairment charge and higher depreciation and property expenses.
- Q2 net margin was approximately 21.1%, compared with 42.7% in Q2 2013. Six-month net margin was approximately 32.3%, compared with 48.3% in the prior-year period.
- Operating cash flow increased to $16.7 million from $14.2 million for the first six months.
- Cash used in investing activities was $39.5 million, including $35.1 million for acquisitions and $9.3 million for development. Financing activities provided $9.9 million.
- Cash and cash equivalents declined to $1.6 million at June 30, 2014 from $14.5 million at December 31, 2013.
- Total assets were $481.2 million, including $440.9 million of net real estate investments. Total debt was $181.3 million.
- Management reported debt equal to approximately 28% of total market capitalization, versus a stated target of 65% or less.
- The Company declared a quarterly dividend of $0.43 per common share, paid July 8, 2014.
Material Changes Versus the Prior Comparable Period
- Minimum rent increased 18% in Q2 and 20% for the first six months, while operating cost reimbursements increased 63% and 77%, respectively.
- Interest expense rose 23% in Q2 and 24% year to date because of increased borrowings supporting acquisitions.
- Depreciation and amortization increased 16% in Q2 and 24% year to date due to acquisitions and completed developments.
- Net income attributable to Agree declined approximately 40% in Q2 and 17% year to date, despite higher revenue, primarily because of the impairment charge, increased interest expense, and lower discontinued-operation income.
- FFO increased 19% in Q2 and 21% year to date; AFFO increased 18% in Q2 and 22% year to date.
- The Company sold the Ironwood, Michigan shopping center for approximately $5.0 million. The sale generated a $123,000 gain in discontinued operations, compared with a $946,000 gain from a property sale in the first six months of 2013.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected operating cash flow, the credit facility, additional financings, and new credit facilities to provide sufficient liquidity for operations and dividends for at least the next 12 months. No specific earnings or FFO guidance was provided.
- In July 2014, after quarter-end, the Company entered into a $250 million senior unsecured revolving credit and term loan agreement. It replaced the prior $85 million credit facility with a new $150 million revolver and added a $65 million seven-year term loan, while retaining the existing $35 million term loan.
- The new revolver matures in July 2018, with a potential one-year extension; the new term loan matures in July 2021. The new term loan was swapped to an implied all-in rate of approximately 3.74% at closing.
- At June 30, 2014, $43.4 million was outstanding on the prior revolver and $41.6 million remained available, subject to borrowing conditions. The Company was in compliance with debt covenants.
- The $2.8 million impairment charge related to the Chippewa Commons shopping center followed an anchor tenant’s decision not to extend its lease, which is expected to increase vacancy and reduce cash flows.
- Interest-rate exposure remained material. A 100-basis-point increase in applicable variable-rate debt was estimated to increase annual interest expense by approximately $434,000.
- Key risks include tenant concentration and tenant bankruptcy, lease rollover and re-leasing risk, property-level vacancies, real estate and economic conditions, acquisition and development execution, refinancing and interest-rate risk, access to capital, and maintaining REIT qualification.
- The Company early adopted ASU 2014-08 on discontinued operations. Individual property sales generally will no longer be classified as discontinued operations unless they represent a strategic shift.
- The Company was evaluating the future revenue-recognition standard, ASU 2014-09, and had not determined its impact or adoption method.
- No material changes to previously reported risk factors were disclosed. The filing reports no material litigation, defaults, or changes in internal control.
Important Facts for Investors to Verify
- Reconcile the decline in GAAP EPS and net income with the $2.8 million impairment, higher interest expense, and discontinued-operation changes.
- Assess tenant concentration, particularly Walgreens’ 25.6% share of annualized base rent and the top ten tenants’ 61.1% share.
- Review the Chippewa Commons vacancy outlook, re-leasing prospects, and potential for additional impairment.
- Confirm the post-quarter-end refinancing terms, borrowing capacity, covenant compliance, and effect on interest expense and liquidity.
- Compare dividend and distribution requirements with AFFO, operating cash flow, acquisition spending, and scheduled debt repayments.
- Evaluate upcoming debt maturities, including the prior revolver balance and mortgage obligations, and the Company’s ability to refinance or extend them.
- Review the assumptions underlying non-GAAP FFO and AFFO and compare them with other REITs’ methodologies.