Agree Realty Corporation — Form 10-Q Summary
Business Context and Reporting Period
Agree Realty is a fully integrated REIT focused on acquiring, developing and managing retail properties under net leases. This filing covers the three and nine months ended September 30, 2018; the financial statements are unaudited. At quarter-end, the portfolio included 520 properties in 45 states, approximately 10.0 million square feet of gross leasable area, 99.7% leased, with a weighted-average remaining lease term of approximately 10.1 years.
Financial Performance and Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $37.3 million | $30.4 million | $107.5 million | $85.0 million |
| Income from operations | $18.9 million | $16.5 million | $54.5 million | $45.7 million |
| Net income | $15.8 million | $12.3 million | $45.5 million | $42.1 million |
| Net income attributable to Agree | $15.6 million | $12.2 million | $45.0 million | $41.6 million |
| Diluted EPS | $0.48 | $0.42 | $1.42 | $1.52 |
| FFO | $23.5 million | $20.0 million | $67.8 million | $55.0 million |
| Diluted FFO per share | $0.72 | $0.69 | $2.13 | $2.00 |
| AFFO | $23.4 million | $19.9 million | $67.4 million | $54.8 million |
| Diluted AFFO per share | $0.72 | $0.69 | $2.12 | $2.00 |
Q3 revenue increased 22.8% and nine-month revenue increased 26.4%, primarily from acquisitions and development. Q3 net income increased 28.3%, while nine-month net income increased 7.9%. Approximate operating margins were 50.8% in Q3 2018 versus 54.2% in Q3 2017 and 50.7% for the nine months versus 53.7%; the decline reflects higher depreciation, amortization and interest expense. Net margins were approximately 42.2% and 42.3% in 2018, compared with 40.4% and 49.5% in the comparable periods.
Net cash provided by operating activities was $64.3 million for the first nine months, compared with $55.2 million in 2017. Investing activities used $310.6 million, including $352.1 million for acquisitions and development, partly offset by $60.0 million of asset-sale proceeds. Financing activities provided $205.8 million. Cash and cash equivalents were $16.8 million at September 30, 2018, with cash and restricted deposits totaling $18.2 million.
Total assets were $1.75 billion, compared with $1.49 billion at December 31, 2017. Net real estate investments were $1.42 billion versus $1.21 billion. Total debt was $619.9 million, including $62.2 million of mortgages, $158.7 million of unsecured term loans, $385.0 million of senior unsecured notes and $14.0 million drawn on the revolving facility. The company reported a 25.1% debt-to-total-market-capitalization ratio, $311.0 million of available revolver capacity and compliance with debt covenants.
Material Changes Versus Prior Comparable Period
- The company acquired 43 properties for approximately $150.0 million in Q3 and 96 properties for approximately $349.9 million in the first nine months.
- Six properties were sold in Q3 for $29.6 million of net proceeds and a $3.9 million gain. Sixteen properties were sold during the first nine months for $56.4 million of net proceeds and a $9.9 million gain, plus a $1.0 million gain on a tenant purchase option.
- The portfolio expanded from 436 properties and approximately 8.7 million square feet at December 31, 2017 to 520 properties and approximately 10.0 million square feet at September 30, 2018.
- Interest expense rose 40% in Q3 and 36% for the first nine months due primarily to higher borrowings used to fund growth.
- Depreciation and amortization rose 36% in Q3 and 38% for the first nine months, primarily due to the larger property base.
- The company issued 3.45 million common shares under a forward sale agreement and received $160.2 million of net proceeds. It also entered into a separate forward sale agreement for 3.5 million shares, expected to generate approximately $190.0 million when settled no later than September 3, 2019.
- Senior unsecured notes increased by $125.0 million through a private placement of 4.32% notes due 2030. Revolving credit commitments increased from $250.0 million to $325.0 million.
Outlook, Risks, Contingencies and Unusual Items
Management expects short-term liquidity needs to be met through operating cash flow and revolver borrowings, and expects long-term capital needs to be funded with operating cash flow, debt and equity financing. The filing does not provide explicit earnings or FFO guidance.
The company declared a quarterly dividend of $0.540 per share, paid October 12, 2018. It expects to maintain REIT qualification but remains subject to state and local taxes and certain taxable REIT subsidiary taxes.
- Impairment provisions were $0.5 million in Q3 and $1.7 million for the first nine months; no impairment was recorded in the comparable 2017 periods.
- Debt maturities include approximately $42.8 million in 2019, including $39.8 million of balloon payments, and $15.0 million in 2021, including the revolver balance. The company must refinance or repay these obligations as they mature.
- Interest-rate risk remains relevant because of variable-rate debt and refinancing exposure, although interest-rate swaps hedged $158.7 million of notional borrowings at quarter-end.
- Key stated risks include economic and real estate market conditions, interest-rate volatility, financing availability, tenant bankruptcies or defaults, lease expirations and re-leasing risk, capital expenditure requirements and maintaining REIT status.
- Straight-line rent receivables were $15.5 million, and management notes that tenant payment problems could require write-downs and reduce operating income.
- The company reported no material litigation, no defaults, no material changes to previously disclosed risk factors and no reportable subsequent events.
Investor Verification Checklist
- Verify acquisition underwriting, tenant concentration, lease expirations and the sustainability of the 99.7% occupancy rate.
- Reconcile GAAP net income with FFO and AFFO, including gains on asset sales, impairment charges and non-cash rent adjustments.
- Assess the effect of share issuance and the unsettled 3.5 million-share forward sale on per-share results and future dilution.
- Review 2019 mortgage and term-loan maturities, revolver maturity terms, covenant compliance and refinancing capacity.
- Confirm the timing and actual proceeds from the forward equity sale expected to settle by September 3, 2019.
- Evaluate whether operating cash flow and AFFO adequately cover dividends, acquisitions, development commitments and debt service.