Agree Realty Corporation — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Agree Realty is a fully integrated REIT focused on owning, acquiring, developing, and managing retail properties subject primarily to long-term net leases. This unaudited Form 10-Q covers the three months ended March 31, 2023, with comparison to the three months ended March 31, 2022.
- Portfolio at March 31, 2023: 1,908 properties in 48 states, approximately 40.1 million square feet of GLA.
- Portfolio occupancy: approximately 99.7%; weighted average remaining lease term: approximately 8.8 years.
- Approximately 68.0% of annualized base rent came from tenants or parent companies with investment-grade credit ratings.
- Agree Realty held a 99.6% common interest in Agree Limited Partnership and operated as a single reportable segment.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $126.6 million | $98.3 million | +28.8% |
| Rental income | $126.6 million | $98.3 million | +28.8% |
| Income from operations | $60.5 million | $50.9 million | +18.8% |
| Net income | $41.8 million | $36.3 million | +15.1% |
| Net income attributable to common stockholders | $39.8 million | $34.3 million | +16.1% |
| Diluted EPS | $0.44 | $0.48 | Down due primarily to share growth |
| Net cash provided by operating activities | $94.2 million | $61.5 million | +53.4% |
| FFO attributable to Operating Partnership common unitholders | $80.3 million | $61.6 million | +30.4% |
| Core FFO | $89.0 million | $69.7 million | +27.6% |
| AFFO | $89.1 million | $69.2 million | +28.8% |
Net income margin was approximately 33.0% in Q1 2023 versus 36.9% in Q1 2022. The comparison was affected by the $2.3 million property-sale gain recognized in Q1 2022 and the $20.6 million change in fair value and settlement of interest rate swaps recorded in other comprehensive income in Q1 2022, rather than earnings.
- Operating expenses increased to $66.1 million from $49.7 million, primarily reflecting portfolio growth. Depreciation and amortization increased 42% to $40.6 million.
- Interest expense increased 29% to $18.0 million, due to higher borrowings and higher Revolving Credit Facility rates.
- Common dividend declared was $0.240 per share per month, or $2.880 annualized, up 5.7% from the $2.724 annualized rate in Q1 2022. Preferred dividends were $0.08854 per depositary share per month.
- Net real estate investments were $6.01 billion at March 31, 2023, up from $5.74 billion at December 31, 2022. Total assets were $6.99 billion.
Cash Flow, Debt, and Liquidity
- Operating cash flow was $94.2 million. Investing cash outflow was $331.1 million, including $303.4 million for acquisitions and $27.7 million for development and other real estate investments.
- Financing cash flow was $221.0 million, including $195.1 million of net common-stock offering proceeds and $96.0 million of net Revolving Credit Facility borrowings.
- Cash and cash equivalents plus escrow cash declined to $12.9 million from $28.9 million at December 31, 2022.
- Total gross debt was approximately $2.06 billion, consisting of $1.81 billion of senior unsecured notes, $196.0 million drawn on the Revolving Credit Facility, and $50.2 million of mortgage debt.
- The $1.0 billion Revolving Credit Facility had $804.0 million of available capacity, subject to covenant compliance, and matures in January 2026 with extension options to January 2027.
- Total debt represented approximately 23.8% of total enterprise value. Management reported compliance with all debt covenants.
- Scheduled debt maturities include a $4.6 million mortgage balloon payment in the remainder of 2023, $50.0 million of senior notes in 2025, and the $196.0 million Revolving Credit Facility maturity in 2026 unless extended or refinanced.
Material Changes Versus the Prior Comparable Period
- The Company acquired 66 retail net lease assets for approximately $303.9 million, compared with 106 assets for approximately $409.8 million in Q1 2022. The 2023 acquisitions had a weighted average lease term of approximately 13.1 years and a 6.7% underwritten weighted-average capitalization rate.
- The portfolio increased from approximately 1,510 properties and 31.0 million square feet at March 31, 2022 to 1,908 properties and 40.1 million square feet at March 31, 2023.
- No properties were disposed of in Q1 2023, compared with one property sale and a $2.3 million gain in Q1 2022.
- Development and Partner Capital Solutions activity included five projects commenced and three completed in Q1 2023; 26 projects remained under construction at quarter-end, with anticipated total costs of approximately $105.1 million.
- Common shares outstanding increased to 93.2 million at March 31, 2023 from 90.2 million at December 31, 2022. The Company settled 2.945 million October 2022 forward-sale shares for approximately $195.2 million of net proceeds during the quarter.
- Remaining forward-sale obligations included 1.205 million shares required to be settled by September 2023 and 4.105 million shares under the ATM program required to be settled between November and December 2023.
Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide a specific quantitative earnings, acquisition, or same-store operating guidance range.
- Management expects to fund short-term liquidity needs through cash, operating cash flow, and Revolving Credit Facility borrowings, and long-term needs through operating cash flow, debt, and common or preferred equity issuance.
- Management stated that no conditions raised substantial doubt about the Company’s ability to continue as a going concern within one year after issuance of the financial statements.
- Key risks include tenant defaults or bankruptcies, retail-sector disruption, inflation and broader macroeconomic conditions, higher interest rates, refinancing and capital-market access, property acquisition and development execution, lease renewals and re-leasing, dividend capacity, cybersecurity, environmental liabilities, REIT qualification, and debt covenant restrictions.
- Seven leases across five tenants were being accounted for on a cash basis because collection was no longer considered probable; related rental-income reductions were less than $0.1 million in Q1 2023. No general allowance for operating lease receivables was recorded.
- No impairment provision was recorded in Q1 2023, compared with a $1.0 million provision in Q1 2022.
- The Company had no outstanding interest-rate derivatives at March 31, 2023. Approximately $2.5 million of accumulated swap-related amounts were expected to be reclassified as a reduction of interest expense over the following 12 months.
- Routine litigation was not expected to have a material adverse effect, and the filing reported no material subsequent events through issuance.
Important Facts for Investors to Verify
- Reconcile FFO, Core FFO, and AFFO to GAAP net income and assess the Company’s definitions against peer calculations.
- Evaluate whether operating cash flow and AFFO adequately cover common and preferred dividends, development commitments, and recurring capital needs.
- Review the scheduled 2025 and 2026 maturities, Revolving Credit Facility exposure, variable-rate interest costs, and available refinancing capacity.
- Monitor settlement timing and dilution from the remaining October 2022 forward-sale shares and ATM forward-sale agreements.
- Assess tenant credit quality, the seven leases on cash-basis accounting, straight-line rent receivables of $56.9 million, and the potential for future collection adjustments.
- Review the 26 development or Partner Capital Solutions projects and approximately $105.1 million of anticipated remaining costs.
- Consider the effects of acquisitions, equity issuance, and portfolio growth on per-share results, including the Q1 2023 diluted EPS decline despite higher total earnings.