Agree Realty Corporation 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a fully integrated REIT focused on owning, acquiring, developing and managing retail properties under long-term net leases. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods.
- Portfolio at June 30, 2021: 1,262 properties in 46 states, approximately 26.1 million square feet of gross leasable area.
- Portfolio occupancy: approximately 99.5%; weighted-average remaining lease term: approximately 9.7 years.
- Approximately 67.7% of annualized base rent was derived from investment-grade-rated tenants or their parent entities.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Total revenues | $82.5 million | $57.5 million | $160.4 million | $113.3 million |
| Rental income | $82.5 million | $57.5 million | $160.3 million | $113.3 million |
| Income from operations | $43.4 million | $29.2 million | $83.2 million | $58.8 million |
| Net income | $22.5 million | $25.4 million | $52.7 million | $46.8 million |
| Net income attributable to Agree | $22.3 million | $25.3 million | $52.5 million | $46.5 million |
| Diluted earnings per share | $0.34 | $0.47 | $0.82 | $0.93 |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $117.9 million | $67.8 million |
| Adjusted funds from operations | $57.6 million | $40.7 million | $110.1 million | $77.9 million |
| Diluted AFFO per share | $0.88 | $0.76 | $1.71 | $1.57 |
- Second-quarter operating margin was approximately 52.5%, compared with approximately 50.7% in the prior-year quarter. Six-month operating margin was approximately 51.9% in both periods.
- Second-quarter net margin declined to approximately 27.2% from approximately 44.2%, primarily because of a $14.6 million loss on early extinguishment of term loans and settlement of related interest-rate swaps.
- Six-month net margin was approximately 32.9%, compared with approximately 41.3% in 2020, also reflecting the debt extinguishment charge.
- Second-quarter rental income increased 44%; six-month rental income increased 41%, primarily because of substantial portfolio growth and acquisitions.
Liquidity, Capital Allocation and Debt
- Cash and cash equivalents were $177.0 million at June 30, 2021; cash including escrow was $188.4 million, compared with $8.0 million at December 31, 2020.
- The $500.0 million revolving credit facility had no outstanding borrowings, leaving $500.0 million available subject to covenant compliance. The facility matures in January 2024, with extension options up to January 2025.
- Total debt principal was $1.54 billion, consisting of $1.51 billion of senior unsecured notes and $33.0 million of mortgage debt. Term loans totaling $240.0 million were repaid in May 2021.
- Total debt to enterprise value was 24.7% at June 30, 2021. Management reported compliance with all material debt covenants.
- Debt maturities include $29.2 million in 2023, $51.0 million in 2025 and approximately $1.46 billion thereafter.
- The Company issued $350.0 million of 2.000% notes due 2028 and $300.0 million of 2.600% notes due 2033 in May 2021. Net proceeds were used to repay term loans and settle related swaps.
- Net cash used in investing activities was $735.0 million, including $741.4 million for real estate acquisitions and $28.7 million for development.
- Net cash provided by financing activities was $797.5 million, including $595.0 million from common stock offerings and $640.6 million of senior-notes proceeds, partly offset by debt repayments and $102.1 million of dividends.
Material Changes Versus the Prior Comparable Period
- The Company acquired 140 retail net lease assets for approximately $734.9 million during the first six months, compared with a substantially smaller portfolio base in the prior year.
- Net real estate investments increased to $3.85 billion from $3.30 billion at December 31, 2020; the portfolio grew from 1,129 properties at year-end 2020 to 1,262 properties.
- Common shares outstanding increased to 68.9 million from 60.0 million at December 31, 2020, reflecting equity offerings used in part to fund acquisitions.
- Rental income, depreciation and amortization, and interest expense increased with the larger portfolio and higher borrowings. Interest expense rose 48% in the quarter and 33% for the six months.
- No impairment provision was recorded in 2021, compared with $1.1 million in each comparable 2020 period.
- The annualized dividend increased to $2.60 per common share in the second quarter, up 8.3% from $2.40 in the second quarter of 2020.
- FFO increased to $38.7 million in the quarter and $87.3 million for the first six months, while AFFO increased to $57.6 million and $110.1 million, respectively.
Outlook, Risks and Unusual Items
- The filing does not provide a clear full-year earnings, acquisition, revenue or AFFO guidance figure.
- Management stated that substantially all rent payments originally contracted for the second quarter were collected. COVID-19 rent deferrals outstanding at June 30, 2021 were $0.9 million, and four tenants were being accounted for on a cash basis because collection was no longer considered probable; the impact was described as immaterial for the period.
- COVID-19 remains a significant uncertainty, with potential effects on tenant liquidity, rent collection, property values, debt covenants and access to capital.
- The May debt refinancing produced a $14.6 million charge, including $13.4 million of swap termination costs and $1.2 million of write-offs of unamortized financing costs.
- Interest-rate swaps had a net liability fair value of $4.1 million at quarter-end. The Company entered into forward-starting swaps covering $200.0 million of anticipated long-term debt issuance through a maximum period ending December 2022.
- Legal matters were described as routine and not expected to have a material adverse effect. Management identified no conditions raising substantial doubt about the Company’s ability to continue as a going concern.
Most Important Facts for Investors to Verify
- Whether acquisition growth can be sustained without excessive equity dilution or leverage, including settlement obligations under outstanding 2020 and 2021 ATM forward-sale agreements.
- The timing and refinancing strategy for the large senior unsecured-note maturities beginning in 2025 and thereafter.
- Tenant rent collection, deferred rent repayment and any renewed COVID-19 effects on retail tenants.
- Reconciliation of AFFO and other non-GAAP measures to GAAP results, including the treatment of the $14.6 million debt extinguishment charge.
- Future acquisition capitalization rates, development performance and portfolio occupancy trends.
- Compliance with debt covenants and sensitivity to interest rates, refinancing conditions and changes in the availability of capital.