Agree Realty Corporation — Q1 2012 Form 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a self-managed REIT focused on owning, developing, acquiring and managing single-tenant retail properties with predominantly triple-net leases. The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011.
At March 31, 2012, the portfolio comprised 85 properties in 21 states, approximately 3.4 million square feet of gross leasable area, 96% aggregate occupancy and approximately 11 years of weighted-average remaining lease term. Approximately 52% of annualized base rent came from Walgreens, Kmart and CVS.
Financial Performance and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $9.2 million | $9.2 million | Flat |
| Income from operations | $4.9 million | $5.1 million | Down 4% |
| Net income | $4.7 million | $4.7 million | Up 1% |
| Net income attributable to Agree | $4.6 million | $4.5 million | Up 1% |
| FFO | $5.5 million | $6.3 million | Down 13% |
| Operating cash flow | $3.8 million | $6.1 million | Down 37% |
| Basic EPS | $0.43 | $0.47 | Down $0.04 |
| Dividends declared per share | $0.40 | $0.40 | Unchanged |
Minimum rents increased 6% to $8.5 million, primarily from 13 single-tenant property acquisitions, partly offset by the impact of the Borders bankruptcy. Total revenue was approximately flat because Q1 2011 included $411,000 of development fee income, while no development fee income was recorded in Q1 2012.
Income from operations represented approximately 53% of total revenue. Net income represented approximately 52% of total revenue, including a $908,000 gain on asset dispositions and $65,000 of discontinued operations. Continuing-operations income before discontinued operations was $3.8 million, compared with $4.1 million in Q1 2011.
Real estate investments, net, were $270.6 million at March 31, 2012, versus $271.5 million at December 31, 2011. Cash and cash equivalents declined to $465,000 from $2.0 million.
Debt, Liquidity and Cash Flow
- Total debt was approximately $83.3 million, consisting of $52.9 million of mortgage debt and $30.4 million outstanding under the unsecured revolving credit facility.
- The $85 million credit facility matures in October 2014 and may be extended, subject to conditions. The company was in compliance with its covenants at March 31, 2012.
- Debt was approximately 23.8% of total market capitalization, based on management’s calculation.
- Approximately $23.0 million of mortgage debt was variable-rate debt, with a July 2013 maturity that may be extended for two years. A swap effectively fixed $24.5 million of variable-rate borrowings at 3.744%; the swap liability was $577,000.
- Management estimated that a 100-basis-point increase in variable interest rates would increase annual interest expense by approximately $304,000.
- Operating cash flow of $3.8 million did not cover $9.7 million of real estate acquisitions and $4.1 million of dividends and distributions during the quarter.
- The company raised approximately $35 million net through a January/February 2012 offering of 1.495 million shares and used proceeds primarily to reduce credit-facility borrowings and for general corporate purposes.
Material Changes Versus the Prior Comparable Period
- Minimum rents increased $453,000, or 6%, from acquisitions, but Borders-related rent declined $376,000.
- Development fee income fell from $411,000 to zero; management stated that no additional development fee projects were currently anticipated.
- Depreciation and amortization increased 13% to $1.7 million, and interest expense increased 12% to $1.1 million, reflecting property acquisitions and higher borrowings.
- FFO declined $810,000, primarily because of the absence of development fee income, higher interest and depreciation-related costs, and other operating changes.
- Investing cash flow shifted from $3.6 million provided in Q1 2011 to $9.1 million used in Q1 2012, mainly due to increased acquisitions.
- Four former Borders properties were conveyed to the lender on March 6, 2012, through a consensual deed-in-lieu-of-foreclosure, satisfying approximately $9.2 million of non-recourse mortgage debt. The transaction contributed to the $908,000 gain on asset dispositions.
- Three retail assets were acquired for approximately $6.0 million at a weighted-average capitalization rate of 7.9%.
- Shares outstanding increased to 11.4 million at March 31, 2012, from 9.9 million at December 31, 2011, due primarily to the equity offering and equity compensation.
Outlook, Commentary and Risks
Management expects to fund near-term operations, capital expenditures and dividends through operating cash flow and the credit facility, and stated that it expects adequate liquidity for at least the next 12 months. The company intends to continue acquiring and developing long-term, single-tenant net-leased retail properties and may use additional debt or equity financing.
Management identified risks related to economic and real estate conditions, tenant bankruptcies, tenant concentration, lease renewals and re-leasing, interest-rate volatility, refinancing availability, capital expenditure requirements, acquisition and development performance, and maintaining REIT qualification. Seven leases representing approximately $161,000 of annualized base rent were scheduled to expire from April through December 2012, assuming no renewals or early terminations. Kmart extended two leases covering 142,700 square feet through September 2014.
The filing reports no material changes to previously disclosed risk factors, no material litigation other than routine insured matters, and effective disclosure controls. Results for the quarter are not necessarily indicative of full-year results. No formal earnings or FFO guidance was provided.
Important Facts for Investors to Verify
- Confirm the company’s ability to refinance or extend the approximately $23.0 million variable-rate mortgage maturing in July 2013 and manage other scheduled debt maturities.
- Assess tenant concentration, particularly the 34% of annualized base rent from Walgreens and approximately 52% from the top three tenants.
- Monitor Borders-related vacancy, rent recovery and property disposition effects after the deed-in-lieu-of-foreclosure transactions.
- Reconcile dividend coverage against operating cash flow and FFO, including the effect of acquisitions, capital expenditures and distributions.
- Evaluate the sustainability of rent growth after the loss of development fee income and the contribution from recent acquisitions.
- Review the impact of equity issuance and potential future financing on per-share results and leverage.