Agree Realty Corporation — Q3 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 under primarily net lease arrangements. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
- Portfolio at September 30, 2023: 2,084 properties in 49 states, approximately 43.2 million square feet of GLA.
- Portfolio occupancy: approximately 99.7%; weighted-average remaining lease term: approximately 8.6 years.
- Approximately 68.9% of annualized base rent was derived from tenants or parent entities with investment-grade credit ratings.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Total revenues | $136.8 million | $110.1 million | Up 24% |
| Rental income | $136.8 million | $110.0 million | Up 24% |
| Income from operations | $63.1 million | $57.3 million | Up 10% |
| Net income | $41.7 million | $39.6 million | Up 5% |
| Net income attributable to common stockholders | $39.7 million | $37.6 million | Up 6% |
| Diluted EPS | $0.41 | $0.46 | Down $0.05 |
| Diluted AFFO per share and OP unit | $1.00 | $0.96 | Up 4% |
| Diluted Core FFO per share and OP unit | $0.99 | $0.97 | Up 2% |
Calculated operating margin was approximately 46.1% in Q3 2023 versus 52.1% in Q3 2022, while net margin was approximately 30.5% versus 35.9%. Margin pressure reflected higher depreciation and amortization, interest expense, general and administrative costs, and a $3.2 million impairment charge.
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|---|---|---|
| Total revenues | $393.3 million | $313.3 million | Up 26% |
| Income from operations | $185.2 million | $160.6 million | Up 15% |
| Net income | $124.4 million | $112.0 million | Up 11% |
| Net income attributable to common stockholders | $118.4 million | $105.9 million | Up 12% |
| Diluted EPS | $1.26 | $1.39 | Down $0.13 |
| Net cash provided by operating activities | $293.6 million | $268.9 million | Up $24.7 million |
| FFO attributable to OP common unitholders | $250.9 million | $197.4 million | Up 27% |
| Core FFO attributable to OP common unitholders | $276.8 million | $222.4 million | Up 24% |
| AFFO attributable to OP common unitholders | $278.4 million | $220.5 million | Up 26% |
Cash flow, capital deployment, debt and liquidity
- Operating cash flow was $293.6 million for the first nine months, compared with $268.9 million in 2022.
- Investing cash outflows were $1.08 billion, including $1.01 billion for acquisitions and $76.6 million for development and other real estate investments.
- The Company acquired 232 retail net lease assets for approximately $1.01 billion during the first nine months, at an underwritten weighted-average capitalization rate of 6.8% and an approximately 11.5-year weighted-average lease term.
- Financing cash inflows were $767.6 million, including $690.0 million of common equity offering proceeds and $350.0 million from the new term loan, partially offset by net revolving credit facility repayments and dividends.
- Cash and cash equivalents, including cash held in escrow, were $6.4 million at September 30, 2023, compared with $28.9 million at December 31, 2022.
- Total gross debt was approximately $2.25 billion, consisting of $1.81 billion of senior unsecured notes, $350.0 million of unsecured term debt, $49.0 million drawn on the revolving facility and $45.1 million of mortgage debt.
- The July 2023 unsecured term loan matures in January 2029, bears interest at SOFR plus 95 basis points based on current pricing, and is hedged to a weighted-average fixed rate of 3.57% through January 2029.
- The $1.0 billion revolving credit facility had $951.0 million of availability at September 30, 2023, subject to covenant compliance, and matures in January 2026 with extension options to January 2027.
- Total debt represented approximately 28.2% of total enterprise value. Management reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue and net income increased primarily because of substantial portfolio growth and acquisitions. Net real estate investments increased to $6.61 billion from $5.74 billion at December 31, 2022, while the property count increased from 1,839 at December 31, 2022 to 2,084.
- Interest expense increased 21% in Q3 and 26% for the first nine months, reflecting higher borrowings and higher revolving facility interest rates.
- Depreciation and amortization increased 30% in Q3 and 35% for the first nine months due to the larger property base.
- Q3 included a $3.2 million impairment charge, compared with none in Q3 2022; nine-month impairment charges increased to $4.5 million from $1.0 million.
- Asset-sale gains declined to less than $0.1 million in Q3 and $0.3 million for the first nine months, compared with $3.0 million and $5.3 million, respectively, in the prior-year periods.
- Weighted-average diluted shares increased materially, contributing to lower GAAP diluted EPS despite higher net income. Shares issued and outstanding were 100.5 million at September 30, 2023 versus 90.2 million at December 31, 2022.
- The annualized common dividend declared in Q3 was $2.916 per share, up 3.8% from $2.808 in Q3 2022. Monthly common dividends were $0.243 per share.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific full-year 2023 earnings or AFFO guidance. Management expects short-term liquidity needs to be funded through cash, operating cash flow and the revolving facility, and expects longer-term capital needs to be funded through operating cash flow, debt, equity and other financing sources. Management stated that additional financing may not be available on acceptable terms.
- Sixteen development or Developer Funding Platform projects remained under construction at September 30, 2023, with anticipated total costs of approximately $67.0 million.
- Key risks include tenant defaults or bankruptcies, retail-sector disruption, inflation, interest-rate volatility, refinancing and capital-market access, acquisition and development execution, lease renewals, cybersecurity, environmental liabilities, debt covenants and maintenance of REIT qualification.
- Four leases across four tenants were being accounted for on a cash basis because collectability was not considered probable. The Company had no general allowance for operating lease receivables.
- The Company entered into a new reimbursement agreement with Executive Chairman Richard Agree on October 3, 2023. The agreement provides reimbursement for his proportionate share of certain revolving facility losses, with the amount determined by the facts and circumstances at the time of loss.
- Interest-rate swaps had a fair value asset of approximately $11.7 million at September 30, 2023. The Company does not use derivatives for trading or speculative purposes.
- Management identified no conditions raising substantial doubt about the Company’s ability to continue as a going concern. No material litigation or reportable subsequent events were disclosed.
- Disclosure controls and procedures were assessed as effective, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile AFFO, Core FFO and FFO growth with the increase in shares outstanding and assess dividend coverage using the Company’s non-GAAP definitions.
- Review the $50.0 million senior note maturity in 2025 and the $49.0 million revolving facility maturity in 2026, including extension options and refinancing assumptions.
- Assess exposure to higher interest rates, variable-rate debt, tenant credit quality and the effectiveness of the term-loan interest-rate hedge.
- Evaluate the sustainability of acquisition and development activity given only $6.4 million of cash and the Company’s reliance on equity and debt markets.
- Monitor the four tenants on cash-basis rent recognition, impairment charges, straight-line rent receivables of $62.7 million and the $67.0 million remaining development commitments.
- Confirm the effect of future equity issuance, ATM availability of approximately $313.4 million, and related dilution on per-share performance.