Agree Realty Corporation: 2014 Q3 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 quarter and nine months ended September 30, 2014. The portfolio comprised 161 properties in 35 states, totaling approximately 4.1 million square feet, with 98.5% aggregate occupancy and a weighted average remaining lease term of approximately 11.6 years.
During the first nine months of 2014, the Company acquired 29 retail net-lease properties for approximately $76.0 million and completed several development and redevelopment projects. Walgreens represented 24.3% of annualized base rent, while the top ten tenants represented 57.9%.
Key financial metrics
| Metric | Three months ended September 30, 2014 | Nine months ended September 30, 2014 | Comparable prior period |
|---|---|---|---|
| Total revenue | $13.76 million | $39.24 million | $11.27 million and $31.80 million |
| Income from operations | $7.70 million | $19.45 million | $6.54 million and $18.14 million |
| Net income | $4.97 million | $13.19 million | $4.65 million and $14.57 million |
| Net income attributable to Agree Realty | $4.85 million | $12.89 million | $4.53 million and $14.19 million |
| Basic EPS | $0.33 | $0.88 | $0.35 and $1.10 |
| Diluted EPS | $0.33 | $0.87 | $0.35 and $1.10 |
| Funds from operations | $8.32 million | $24.30 million | $7.25 million and $20.44 million |
| Adjusted funds from operations | $8.43 million | $24.80 million | $7.42 million and $20.83 million |
Operating margin was approximately 56.0% for the quarter and 49.6% for the nine-month period. Net margin was approximately 36.1% and 33.6%, respectively. FFO per diluted share was $0.55 for the quarter and $1.61 for the nine months.
Net cash provided by operating activities was $25.31 million for the first nine months, compared with $21.22 million in the prior-year period. Cash used in investing activities was $77.61 million, principally reflecting $70.95 million of acquisitions and $13.10 million of development spending. Financing activities provided $39.17 million. Cash and cash equivalents declined from $14.54 million at December 31, 2013 to $1.40 million at September 30, 2014.
Debt, liquidity and capitalization
- Total notes payable were $224.19 million at September 30, 2014, compared with $158.40 million at December 31, 2013.
- Debt consisted of $107.69 million of mortgage notes, $16.50 million drawn on the unsecured revolving facility and $100.00 million of unsecured term loans.
- The Company entered into a $250.0 million senior unsecured revolving credit and term loan arrangement in July 2014. The revolving facility had $133.50 million of remaining availability, subject to customary conditions.
- Mortgage debt carried a weighted average interest rate of 4.30%. Interest rate swaps fixed rates on substantial portions of variable-rate debt, including the $65.0 million new term loan at a 2.0904% LIBOR component.
- Total assets were $522.82 million and total stockholders’ equity was $286.62 million at September 30, 2014.
- Management reported debt at approximately 35% of total market capitalization and stated that the Company was in compliance with its debt covenants.
- The Company declared a quarterly dividend of $0.43 per common share, paid October 14, 2014.
Material changes versus the prior comparable period
- Third-quarter revenue increased 22.0%, driven primarily by acquisitions and completed developments. Nine-month revenue increased 23.4%.
- Minimum rents increased 21% for both the quarter and nine-month period, reflecting acquired and developed properties.
- Quarterly net income increased 7%, but nine-month net income declined 9% because of higher interest expense, impairment charges and the absence of prior-year gains from property sales.
- Interest expense increased 49% in the quarter and 33% for the nine months, reflecting higher borrowings, higher rates on term-loan financing and approximately $251,000 of deferred financing cost write-offs related to the refinancing.
- General and administrative expense increased 10% in the quarter and 6% for the nine months, although G&A declined as a percentage of rental revenue.
- Depreciation and amortization increased 35% in the quarter and 28% for the nine months due to property acquisitions and completed developments.
- FFO increased 15% for the quarter and 19% for the nine months; AFFO increased 14% and 19%, respectively.
- Cash flow from operations increased 19%, while investing cash use increased 5% and financing cash provided declined 32% compared with the prior-year period.
Guidance, outlook, risks and unusual items
Management stated that operating cash flow, the revolving credit facility and additional financing sources should be adequate to fund operations and dividends for at least the next 12 months. No formal earnings or acquisition guidance was provided in the filing.
- The Company recorded $3.02 million of real estate impairment charges for the nine months, including $220,000 for Petoskey Town Center and $2.80 million for Chippewa Commons after an anchor tenant declined to extend its lease.
- Petoskey Town Center was sold after September 30, 2014 for approximately $5.1 million.
- The Company sold two properties during 2014 for net proceeds of approximately $6.74 million and recognized a $293,000 loss on sale in continuing operations.
- Interest-rate risk remains material. A 100-basis-point increase in rates on unhedged variable-rate debt was estimated to increase annual interest expense by approximately $165,000.
- Key risks include tenant concentration and tenant bankruptcies, vacancies and re-leasing risk, property-level operating cost increases, real estate market conditions, acquisition and development execution, financing and refinancing availability, interest-rate volatility, and maintaining REIT qualification.
- Mortgage debt includes non-recourse obligations with customary exceptions, as well as cross-default and cross-collateralization provisions. Approximately $21.56 million of mortgage debt was recourse debt subject to a limited guaranty.
- The Company early adopted the revised discontinued-operations guidance in the first quarter of 2014. It was evaluating the future impact and adoption method of the new revenue-recognition standard, which was not expected to apply to lease revenue.
- Management reported no material changes to previously disclosed risk factors, no material litigation, and effective disclosure controls and procedures.
Important facts for investors to verify
- Confirm the sustainability of acquisition-driven rent growth and the continued 98.5% occupancy rate.
- Review tenant concentration, particularly Walgreens’ 24.3% contribution to annualized base rent and the top ten tenants’ 57.9% share.
- Assess upcoming debt maturities, including the $16.5 million revolving balance due in 2018 and mortgage maturities concentrated in 2017 and 2018.
- Reconcile dividend requirements with AFFO, capital expenditures, development spending and the substantially reduced cash balance.
- Monitor Petoskey Town Center’s completed sale and any further effects from the Chippewa Commons vacancy and impairment.
- Evaluate leverage, covenant headroom, refinancing availability and exposure to changes in unhedged interest rates.
- Review the Company’s non-GAAP FFO and AFFO definitions for comparability with other REITs.