Agree Realty Corporation: 2020 Q2 SEC Filing Summary
Business Context and Reporting Period
Agree Realty Corporation is a fully integrated REIT focused on acquiring, developing, owning and managing retail properties under long-term net leases. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020, with comparisons to the same periods in 2019.
- Portfolio: 936 properties in 46 states, totaling approximately 18.4 million square feet of gross leasable area.
- Occupancy: approximately 99.8% leased; weighted average remaining lease term of approximately 9.7 years.
- Approximately 61.0% of annualized base rent was attributable to tenants or parent entities with investment-grade credit ratings.
- Net real estate investments increased to $2.64 billion from $2.22 billion at December 31, 2019.
Financial Performance and Key Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Total revenues | $57.5 million | $44.9 million | $113.3 million | $87.3 million |
| Rental income | $57.5 million | $44.9 million | $113.3 million | $87.2 million |
| Income from operations | $29.2 million | $23.4 million | $58.8 million | $45.9 million |
| Net income | $25.4 million | $18.7 million | $46.8 million | $37.2 million |
| Net income attributable to Agree | $25.3 million | $18.6 million | $46.5 million | $36.9 million |
| Diluted EPS | $0.47 | $0.45 | $0.93 | $0.92 |
| Net cash from operating activities | Not separately provided | Not separately provided | $67.8 million | $57.6 million |
| Adjusted funds from operations | $40.7 million | $30.6 million | $77.9 million | $58.3 million |
| AFFO per diluted share | $0.76 | $0.74 | $1.57 | $1.45 |
- Q2 rental income increased 28%; six-month rental income increased 30%.
- Q2 net income increased 36%; six-month net income increased 26%.
- Approximate Q2 operating margin was 50.7%, compared with 52.1% in the prior-year quarter. Approximate six-month operating margin was 51.9%, compared with 52.6%.
- Approximate Q2 net margin was 44.2%, compared with 41.7% in Q2 2019. Approximate six-month net margin was 41.3%, compared with 42.7%.
- Net cash used in investing activities was $469.1 million, principally reflecting $504.4 million of property acquisitions.
- Net cash provided by financing activities was $395.6 million, including $541.7 million of net common-stock offering proceeds and a $89.0 million repayment of the revolving facility.
- Cash and cash equivalents plus escrow cash totaled $36.4 million at June 30, 2020, compared with $22.4 million at June 30, 2019.
Debt, Liquidity and Dividends
- Total gross indebtedness was $783.9 million, consisting of $33.9 million of mortgage debt, $240.0 million of unsecured term loans and $510.0 million of senior unsecured notes.
- The $500.0 million revolving credit facility had no outstanding balance, leaving $500.0 million available subject to covenant compliance.
- Total debt to total market capitalization was 18.2% at June 30, 2020.
- Debt maturities include approximately $68.7 million in 2023 and $101.0 million in 2024, including scheduled principal and balloon payments.
- The company was in compliance with all debt covenants at quarter-end and reported no going-concern uncertainties.
- The quarterly dividend increased to $0.60 per share, or an annualized $2.40, from $0.57 per share in Q2 2019. The dividend was paid July 10, 2020.
Material Changes Versus the Prior Comparable Period
- The portfolio expanded materially, from 722 properties and 13.1 million square feet at June 30, 2019 to 936 properties and 18.4 million square feet at June 30, 2020.
- The company acquired 75 properties for approximately $272.5 million in Q2 and 126 properties for approximately $499.5 million in the first half, with an underwritten weighted-average capitalization rate of approximately 6.5%.
- Eight properties were sold in Q2 for net proceeds of $18.2 million and a $5.0 million gain; 14 properties were sold year-to-date for $42.6 million of proceeds and a $6.6 million gain.
- Depreciation and amortization increased 44% in both the quarter and first half, reflecting the larger property base.
- Interest expense increased 14% in Q2 and 21% year-to-date because of higher borrowings used to fund acquisitions and development.
- Common shares outstanding increased to 53.9 million from 45.6 million at December 31, 2019, largely due to equity offerings. The April 2020 offering generated $170.4 million of net proceeds, and 2020 ATM and forward-sale activity remained available for future funding.
- Accumulated other comprehensive loss increased substantially, primarily because the fair value of interest-rate swaps declined as interest rates fell.
Guidance, Outlook, Management Commentary and Risks
- The filing does not provide formal full-year earnings or acquisition guidance.
- COVID-19 was identified as the most significant near-term uncertainty. Approximately 90% of second-quarter rent payments were collected, while lease modifications deferred approximately 3% of rent originally contracted for the quarter.
- Rent deferrals generally affected the timing, rather than the total amount, of lease payments, and the company continued recognizing rental income where collection remained probable. The impact on future rental revenue and cash flow could not be determined.
- Three tenants were moved to cash-basis revenue recognition during Q2; the related write-offs had an immaterial impact on net income for the quarter and first half.
- Key risks include tenant defaults, bankruptcies, additional store closures, rent abatements or deferrals, reduced consumer spending, asset impairments, covenant compliance, access to debt and equity markets, interest-rate volatility, refinancing risk and the transition away from LIBOR.
- Interest-rate swap liabilities totaled approximately $42.6 million at June 30, 2020, compared with $7.9 million at December 31, 2019. The company estimated that $6.3 million would be reclassified from accumulated other comprehensive income into interest expense during the following 12 months.
- Routine legal proceedings were not expected to have a material adverse effect, and no material subsequent events were reported through the financial statement issuance date.
Most Important Facts for Investors to Verify
- Whether tenant rent collections and rent deferrals improved or deteriorated after June 30, 2020, particularly among retail categories most affected by COVID-19.
- The sustainability of acquisition activity and whether acquisitions continue to generate the stated approximately 6.5% capitalization rates.
- Future AFFO per share relative to the $0.60 quarterly dividend and the effect of continued equity issuance on per-share growth.
- Funding plans for the approximately $68.7 million of 2023 and $101.0 million of 2024 debt maturities.
- Potential covenant, refinancing and interest-rate exposure, including the impact of LIBOR replacement and the significant swap liability.
- Whether tenant credit quality, occupancy, asset valuations or impairment charges change as the pandemic’s economic effects develop.