Agree Realty Corporation — FY2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, filed February 22, 2018. Agree Realty is a fully integrated REIT focused on owning, acquiring, developing and managing primarily retail properties under long-term net leases.
- Portfolio: 436 properties in 43 states, approximately 8.7 million square feet, 99.7% leased and weighted-average remaining lease term of approximately 10.2 years.
- Net lease properties generated approximately 98.5% of annualized base rent; community shopping centers generated the balance.
- Annualized base rent was $119.2 million; Walgreens represented 7.7% of annualized base rent. Approximately 43.9% of annualized base rent came from investment-grade tenants or their parent companies.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenues | $116.6 million | $91.5 million | 27% |
| Minimum rents | $105.1 million | $84.0 million | 25% |
| Income from operations | $62.4 million | $51.5 million | 21% |
| Net income | $58.8 million | $45.8 million | 28% |
| Net income attributable to Agree Realty | $58.1 million | $45.1 million | 29% |
| Diluted EPS | $2.08 | $1.97 | 6% |
| FFO | $76.3 million | $59.2 million | 29% |
| FFO per diluted share | $2.72 | $2.54 | 7% |
| AFFO | $75.7 million | $58.4 million | 30% |
| AFFO per diluted share | $2.70 | $2.51 | 8% |
| Cash flow from operations | $82.2 million | $61.7 million | 33% |
The consolidated statements report 2017 revenue of $116.6 million; the selected financial data table reports $116.9 million, and the filing does not clearly explain the difference. Based on the consolidated statements, operating margin was approximately 53.5% and net margin was approximately 50.4%.
- Real estate investments before accumulated depreciation increased to $1.30 billion from $1.02 billion; total assets were approximately $1.49 billion.
- Cash and cash equivalents were $50.8 million at year-end, compared with $33.4 million in 2016.
- Investing cash outflow was $327.1 million, primarily reflecting acquisitions and development. Financing cash inflow was $262.3 million.
- Dividends declared increased to $2.025 per share from $1.920 per share. The fourth-quarter dividend was $0.520 per share, or $2.08 annualized.
Material changes versus the prior comparable period
- Agree Realty acquired 79 properties for approximately $338.0 million and completed four developments costing approximately $21.4 million. Total 2017 investment volume was approximately $359.4 million.
- The portfolio expanded from 366 to 436 properties and from approximately 7.0 million to 8.7 million square feet.
- The company sold properties for net proceeds of $44.3 million and recorded a net gain of $14.2 million, compared with $28.9 million of proceeds and a $10.0 million gain in 2016.
- Interest expense increased 18% to $18.1 million as borrowings increased to fund growth.
- General and administrative expense increased 36% to $9.9 million, primarily due to higher headcount and professional costs, although G&A declined as a percentage of revenue to 8.5% from 8.8%.
- The company issued $100.0 million of 4.19% senior unsecured notes due September 2029, issued 2.37 million shares through its ATM program for gross proceeds of approximately $116.5 million, and completed a follow-on offering that generated approximately $108.0 million of net proceeds.
Debt, liquidity and capital structure
- Total debt outstanding before deferred financing costs was $522.4 million, compared with $404.1 million at December 31, 2016.
- Debt to total market capitalization was approximately 24.5%; debt to total gross assets was approximately 33.0%.
- Debt consisted of $89.1 million of mortgage debt, $159.3 million of unsecured term loans, $260.0 million of senior unsecured notes and $14.0 million drawn under the revolving credit facility.
- The revolving facility had $236.0 million available at year-end, subject to covenant compliance. The company reported compliance with applicable debt covenants.
- Notable near-term maturities include a $25.0 million mortgage balloon payment in April 2018, approximately $40.0 million of term-loan maturities in 2019, and additional mortgage maturities in 2019 and 2020.
- Five interest-rate swaps had aggregate notional amounts of approximately $184.3 million. Management estimated that a 100-basis-point increase in variable rates would increase annual interest expense by approximately $0.1 million.
Outlook, management commentary, risks and unusual items
Management intends to continue expanding through acquisitions, development and Partner Capital Solutions while maintaining a diversified portfolio of long-term net-leased retail properties. The filing provides no quantitative earnings or acquisition guidance.
- Seven development and PCS projects were under construction or commenced during the fourth quarter, with anticipated total project costs of approximately $41.3 million. Eleven projects were completed or under construction during 2017, with anticipated total costs of approximately $62.7 million.
- The company expects to continue quarterly dividends but cannot assure their amount or continued increases. Future distributions depend on operating cash flow, liquidity, capital requirements, debt restrictions and REIT distribution requirements.
- Key risks include tenant defaults or bankruptcies, retail disruption from e-commerce, concentration in single-tenant properties, lease renewals and re-leasing costs, competition for properties and financing, interest-rate and refinancing risk, debt covenant restrictions, environmental liabilities, uninsured losses and loss of REIT qualification.
- Walgreens exposure warrants monitoring: Walgreens represented 7.7% of annualized base rent, and the filing discusses Walgreens Boots Alliance’s planned acquisition of certain Rite Aid stores.
- No real estate impairment charges were recorded in 2017 or 2016. The 2017 gain on property sales was a material contributor to reported net income.
- The Tax Cuts and Jobs Act produced a $0.2 million discrete tax benefit through a reduction in a deferred tax liability. The filing states that adoption of the new revenue standard was not expected to create a material cumulative effect.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported no material weakness, unresolved SEC staff comments or material litigation.
Most important facts for an investor to verify
- Reconcile the $116.6 million revenue figure in the consolidated statements with the $116.9 million figure in selected financial data.
- Assess coverage of the $2.025 per-share dividend against AFFO of $2.70 per diluted share and operating cash flow.
- Review refinancing plans for the 2018 mortgage maturity and the 2019 term-loan and mortgage maturities.
- Monitor Walgreens and other major tenants, including tenant credit quality, store closures and lease expirations.
- Evaluate whether acquisition and development growth can continue without materially increasing leverage or diluting per-share results.
- Review debt covenants, cross-default provisions, secured debt exposure and the $236.0 million of stated revolving-credit availability.
- Confirm the effect of new lease and revenue accounting standards on future balance sheets, lease liabilities and revenue presentation.