Agree Realty Corporation — Q2 2023 Form 10-Q Summary
Business context and reporting period
Agree Realty is a fully integrated REIT focused on acquiring, developing, owning and managing retail properties under primarily net leases. This unaudited filing covers the three and six months ended June 30, 2023, with comparisons to the same periods in 2022.
- Portfolio at June 30, 2023: 2,004 properties in 49 states, approximately 41.7 million square feet and 99.7% leased.
- Weighted average remaining lease term: approximately 8.6 years.
- Approximately 67.9% of annualized base rent came from tenants or parent entities with investment-grade credit ratings.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Total revenue | $129.9 million | $104.9 million | +24% |
| Rental income | $129.9 million | $104.8 million | +24% |
| Income from operations | $61.6 million | $52.3 million | +18% |
| Net income | $41.0 million | $36.1 million | +14% |
| Net income attributable to common stockholders | $39.0 million | $34.1 million | +14% |
| Diluted EPS | $0.42 | $0.45 | Down from higher share count |
| Diluted FFO per share and OP unit | $0.88 | $0.87 | +1% |
| Diluted Core FFO per share and OP unit | $0.98 | $0.98 | Flat |
| Diluted AFFO per share and OP unit | $0.98 | $0.97 | +1% |
Q2 operating margin was approximately 47.4%, compared with 49.9% in the prior-year quarter, while net margin was approximately 31.6%, compared with 34.4%. Margin comparisons were affected by higher depreciation and amortization, interest expense and impairment charges. For the six months, revenue increased 26% to $256.5 million, net income increased 14% to $82.8 million, and AFFO increased to $180.9 million from $142.9 million.
- Q2 operating expenses increased 31% to $68.6 million, including a 34% increase in depreciation and amortization and a $1.3 million impairment provision.
- Interest expense increased 29% to $19.9 million, primarily because of higher borrowings and higher revolving-credit-facility rates.
- Q2 common dividend was $0.243 per share monthly, or $2.916 annualized, a 3.8% increase from the comparable 2022 annualized dividend.
Cash flow, capital deployment, debt and liquidity
- Six-month operating cash flow was $183.7 million, up from $150.1 million.
- Investing cash flow was negative $663.4 million, including $610.6 million of acquisitions and $55.8 million of development spending.
- Financing cash flow was $463.0 million, including $400.2 million of common-stock offering proceeds and $203.0 million of net revolving-facility borrowings.
- Cash, cash equivalents and escrow funds totaled $12.2 million at June 30, 2023, down from $28.9 million at year-end 2022.
- Total gross debt was $2.16 billion: $1.81 billion of senior unsecured notes, $303.0 million drawn on the revolving facility and $49.9 million of mortgage debt.
- The revolving facility had $697.0 million of remaining availability, subject to covenant compliance, and matured in January 2026 with extension options to January 2027.
- Total debt represented approximately 25.0% of total enterprise value. The company was in compliance with all loan covenants at June 30, 2023.
Material changes versus the prior comparable period
- The company acquired 92 properties for approximately $307.0 million in Q2 and 158 properties for approximately $610.8 million in the first half, below the prior-year acquisition pace of 99 and 205 properties, respectively.
- Net real estate investments increased to $6.3 billion from $5.7 billion at December 31, 2022; the portfolio expanded from 1,839 properties at year-end 2022.
- Rental income growth reflected the larger portfolio and acquisitions completed in 2022 and 2023.
- General and administrative expense increased 10% in Q2 and 13% for the first half, primarily from higher headcount and compensation, although G&A as a percentage of revenue declined.
- The company recorded a $1.3 million Q2 impairment charge, compared with none in Q2 2022.
- Only one property was sold in Q2 2023 for $3.1 million of net proceeds, compared with four properties and $16.3 million of proceeds in Q2 2022.
- Common shares outstanding increased materially, contributing to lower diluted EPS despite higher net income.
Guidance, outlook, risks and unusual items
The filing does not provide specific full-year earnings, acquisition or AFFO guidance. Management expects short-term liquidity needs to be met through operating cash flow, available cash, capital markets activity and revolving-facility borrowings. Twenty-two development or Partner Capital Solutions projects remained under construction, with anticipated total costs of approximately $97.3 million.
- On July 31, 2023, after quarter-end, the company closed a $350 million unsecured term loan maturing in January 2029. Existing swaps are expected to fix the loan rate at 4.52% over its 5.5-year term; the loan includes an accordion option up to $500 million.
- The company had forward equity sales for 2,924,641 shares required to settle between November and December 2023. Approximately $401.4 million remained available under the $750 million ATM program at quarter-end.
- In June 2023, the company entered into $350 million of forward-starting SOFR swaps at a weighted average fixed rate of 3.57%, effective August 1, 2023 through January 2029.
- Key risks include higher interest rates and refinancing risk, tenant defaults or bankruptcies, vacancies and lease renewals, retail-sector disruption, acquisition and development execution, access to capital, covenant restrictions, cybersecurity, environmental liabilities and maintaining REIT qualification.
- Nine leases across seven tenants were being accounted for on a cash basis because collection was no longer considered probable; related Q2 rental-income reductions were less than $0.1 million.
- Management identified no conditions raising substantial doubt about the company’s ability to continue as a going concern and reported effective disclosure controls.
Most important facts for investors to verify
- Reconcile AFFO, Core FFO and dividend growth with the substantially higher common share count and dilution from forward equity sales.
- Assess the effect of the $303 million revolving-facility balance, SOFR-based borrowing costs and the January 2026 maturity on future interest expense and liquidity.
- Monitor settlement timing and pricing for the 2.9 million remaining forward-sale shares due in late 2023.
- Evaluate whether acquisition volume, capitalization rates and development spending remain accretive as financing costs rise.
- Review tenant concentration, investment-grade exposure, the nine cash-basis leases and the collectability of $59.9 million of straight-line rent receivables.
- Confirm funding sources for the approximately $97.3 million of remaining development commitments and future dividend requirements.