Agree Realty Corporation — Form 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a self-managed REIT focused on acquiring and developing net-leased retail properties. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
- Portfolio: 128 properties in 33 states, totaling approximately 3.8 million square feet.
- Occupancy: 98% leased, with approximately 12 years of weighted-average lease term remaining.
- Tenant concentration: approximately 48% of annualized base rent came from the five largest tenants; Walgreens represented 26%.
- The company completed 16 retail acquisitions during the first nine months of 2013 for approximately $70.0 million.
Financial Performance and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $11.6 million | $9.2 million | $32.7 million | $26.2 million |
| Income from operations | $6.3 million | $5.5 million | $18.2 million | $14.6 million |
| Net income | $4.6 million | $4.0 million | $14.6 million | $13.9 million |
| Net income attributable to Agree | $4.5 million | $3.9 million | $14.2 million | $13.4 million |
| Diluted EPS | $0.35 | $0.35 | $1.10 | $1.21 |
| Funds from operations | $7.3 million | $6.1 million | $20.4 million | $17.3 million |
| Adjusted funds from operations | $7.3 million | $6.2 million | $20.7 million | $17.9 million |
| Cash flow from operations | Not separately provided | Not separately provided | $21.2 million | $14.3 million |
Q3 operating margin was approximately 54.2%, compared with 59.6% in the prior-year quarter. The decline primarily reflected higher depreciation and amortization, general and administrative costs, and a $450,000 impairment charge. Nine-month operating margin was approximately 55.6%, compared with 55.8% in 2012.
- Minimum rents increased 24% in Q3 and 25% for the first nine months, primarily from acquisitions and completed developments.
- Interest expense increased 22% in Q3 and 27% for the first nine months due to higher borrowings supporting portfolio growth.
- Q3 diluted EPS was unchanged, while nine-month diluted EPS declined because the prior-year period included greater gains from discontinued operations and the company issued additional shares.
- At September 30, 2013, total assets were $443.6 million, including $402.0 million of net real estate investments.
- Cash and cash equivalents were $5.8 million, compared with $1.3 million at December 31, 2012.
Debt, Liquidity, and Capital Resources
- Total debt was $189.8 million, consisting of $114.8 million of mortgage debt, $40.0 million outstanding under the unsecured revolving facility, and a new $35.0 million unsecured term loan.
- The $85.0 million revolving facility had $45.0 million available at quarter-end and matures in October 2015, subject to extension options.
- The seven-year term loan matures in September 2020 and includes an accordion feature for up to an additional $35.0 million.
- Weighted-average interest on mortgage debt was 4.39%. The company used interest-rate swaps to fix rates on portions of its variable-rate debt.
- Management reported compliance with debt covenants and estimated debt at approximately 32% of enterprise value.
- Operating cash flow of $21.2 million was more than the $15.4 million of dividends paid during the first nine months.
- Investing cash outflows were $74.1 million, primarily for real estate acquisitions, while financing cash inflows were $57.4 million.
- A $45.0 million net common-stock offering completed in January 2013 was used for debt reduction and general corporate purposes.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, net income, FFO, AFFO, and operating cash flow increased, supported by acquisitions and development activity.
- Debt increased from $160.9 million at December 31, 2012 to $189.8 million at September 30, 2013, while the company expanded its real estate portfolio.
- Common shares outstanding increased from 11.4 million at year-end 2012 to 13.2 million at September 30, 2013, primarily due to the January equity offering and equity compensation.
- Depreciation and amortization increased 34% for the first nine months, and interest expense increased 27%.
- The company recorded a $450,000 impairment related to a shopping center under contract for sale.
- Discontinued operations declined sharply because of property dispositions: nine-month income from discontinued operations was $953,000 in 2013 versus $2.9 million in 2012.
- The quarterly dividend was $0.41 per common share, paid October 8, 2013.
Outlook, Commentary, Risks, and Unusual Items
Management stated that cash flow, the revolving credit facility, and additional financing sources should provide sufficient liquidity for operations and dividends for at least the next 12 months. The company expects to continue expanding through acquisitions, developments, and its Joint Venture Capital Solutions program.
- Development projects included a Walgreens redevelopment in Ann Arbor, Michigan; a Wawa project in St. Petersburg, Florida; and a completed Hobby Lobby development in Grand Forks, North Dakota.
- A subsequent project in New Lenox, Illinois, with TJ Maxx, Ross Dress for Less, and Petco leases, was estimated at approximately $8 million and expected to be completed in late 2014.
- Construction in progress was approximately $12.8 million, with estimated additional funding of $1.8 million required for current projects.
- Three leases were scheduled to expire during the fourth quarter of 2013. One lease would not be renewed, representing 42,241 square feet and $159,203 of annualized base rent; management was negotiating with a replacement tenant.
- Key risks include tenant concentration, tenant bankruptcies, re-leasing risk, real estate market conditions, access to debt and equity financing, interest-rate volatility, refinancing requirements, development performance, impairment risk, and maintaining REIT qualification.
- A 100-basis-point increase in applicable variable interest rates would increase annual interest expense by approximately $400,000, according to the filing.
- The filing states that there were no material changes to previously disclosed risk factors, no material litigation, and effective disclosure controls.
Important Facts for Investors to Verify
- Whether acquisition-driven rent growth and 98% occupancy remain sustainable as leases mature.
- The refinancing or extension plan for the $40.0 million revolving facility maturing in 2015 and other scheduled debt maturities.
- The effect of tenant concentration, particularly Walgreens and the other top-five tenants, on future cash flow.
- Whether development projects achieve expected costs, completion dates, lease commencements, and returns.
- The valuation and eventual disposition of the shopping center associated with the $450,000 impairment.
- FFO and AFFO reconciliation, including the effect of stock-based compensation, straight-line rent, and other non-cash adjustments.
- The company’s ability to fund dividends, acquisitions, development spending, and debt repayments without excessive additional leverage or equity dilution.