Agree Realty Corporation — Q3 2020 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 long-term net leases. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
- Portfolio: 1,027 operating properties in 45 states, approximately 21.0 million square feet, 99.8% leased and weighted-average remaining lease term of approximately 9.8 years.
- Approximately 62.2% of annualized base rent came from tenants or parent companies with investment-grade credit ratings.
- The Company held a 99.4% interest in Agree Limited Partnership at September 30, 2020.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $63.8 million | $48.1 million | $177.2 million | $135.3 million |
| Income from operations | $30.9 million | $26.7 million | $89.8 million | $72.6 million |
| Net income | $21.4 million | $20.8 million | $68.2 million | $58.0 million |
| Net income attributable to Agree | $21.3 million | $20.6 million | $67.8 million | $57.5 million |
| Diluted EPS | $0.39 | $0.48 | $1.32 | $1.41 |
| FFO | $40.5 million | $30.0 million | $111.3 million | $83.1 million |
| Core FFO | $44.5 million | $33.4 million | $122.9 million | $92.9 million |
| AFFO | $43.8 million | $32.7 million | $121.7 million | $91.0 million |
- Q3 operating margin was approximately 48.4%; net income attributable to Agree margin was approximately 33.3%.
- Nine-month operating margin was approximately 50.7%; net income attributable to Agree margin was approximately 38.3%.
- Q3 diluted FFO, Core FFO and AFFO per share were $0.74, $0.81 and $0.80, respectively. Nine-month amounts were $2.16, $2.39 and $2.36.
- Net cash provided by operating activities was $90.9 million for the nine months, compared with $88.5 million in 2019.
- Net cash used in investing was $933.7 million, primarily reflecting $965.0 million of property acquisitions. Net cash provided by financing was $816.9 million.
- Cash, cash equivalents and cash held in escrow totaled $16.2 million at September 30, 2020.
Debt, capitalization and liquidity
- Total principal debt was $1.154 billion at September 30, 2020, compared with $876.1 million at December 31, 2019.
- Debt consisted of $860.0 million of senior unsecured notes, $240.0 million of unsecured term loans, $33.6 million of mortgage debt and $20.0 million drawn on the revolving credit facility.
- The Company issued $350.0 million of 2.900% senior unsecured notes due 2030 in August 2020. Including terminated interest-rate swaps, the stated blended all-in rate was 3.49%.
- The $500.0 million revolving facility had $480.0 million of availability, subject to covenant compliance, and matures in January 2024, with extension options to January 2025.
- Total debt to enterprise value was 24.6%. The Company was in compliance with all debt covenants at September 30, 2020.
- Scheduled debt maturities total $1.154 billion, including substantial balloon payments of $67.7 million in 2023, $120.0 million in 2024 and $960.0 million thereafter.
- Quarterly dividend was $0.60 per share, and annualized third-quarter dividend was $2.40 per share, up 5.3% from $2.28 in the third quarter of 2019.
Material changes versus the prior comparable period
- Q3 revenue increased 33% and nine-month revenue increased 31%, primarily from the larger property portfolio and acquisitions.
- Q3 net income increased 3%, while nine-month net income increased 18%. Diluted EPS declined because the weighted-average share count increased substantially following equity offerings.
- Q3 and nine-month interest expense increased 22% and 21%, respectively, due to higher borrowings used to fund acquisitions and development.
- Q3 depreciation and amortization increased 46%, and nine-month depreciation and amortization increased 44%, reflecting portfolio growth.
- Q3 impairment expense was $2.9 million, compared with none in 2019; nine-month impairment expense was $4.0 million versus $1.6 million.
- The Company acquired 91 properties for approximately $458.8 million in Q3 and 217 properties for approximately $958.3 million in the first nine months. It sold two properties in Q3 and 16 properties year-to-date.
- Common shares outstanding increased to 55.4 million at September 30, 2020 from 45.6 million at December 31, 2019. Net proceeds from common stock offerings were $629.6 million for the nine months.
- Accumulated other comprehensive loss increased to $40.1 million, largely reflecting changes in the fair value and settlement of interest-rate swaps.
Guidance, outlook, commentary and risks
- The filing does not provide formal full-year earnings or acquisition guidance. Management states that interim operating results may not be indicative of full-year results.
- COVID-19 remains the principal uncertainty. Approximately 92% of second-quarter and 97% of third-quarter rent payments were collected. Lease modifications deferred 4% of contracted second-quarter rent and 2% of contracted third-quarter rent, net of repayments.
- Rental revenue continued to be recognized for qualifying deferrals, but future collections, rent concessions, tenant defaults, bankruptcies and impairments remain uncertain. Five tenants were being accounted for on a cash basis because collection was no longer considered probable; the impact on Q3 and nine-month rental income and net income was immaterial.
- Key risks include tenant financial deterioration, retail-sector disruption, property impairments, access to debt and equity capital, interest-rate and LIBOR-transition risk, covenant compliance, refinancing needs, dividend capacity, concentration and re-leasing risk, cybersecurity and business-continuity risks, and continued REIT qualification.
- Management identified no conditions raising substantial doubt about going concern and stated that disclosure controls and procedures were effective.
- In October 2020, the Company extended CEO Joel Agree’s employment agreement through September 30, 2023, with automatic two-year renewal provisions unless terminated by notice.
Most important facts for investors to verify
- Whether rent collections, deferrals, concessions and tenant credit quality deteriorated after September 30, 2020 as the pandemic continued.
- The funding plan and refinancing risk for the $1.148 billion of balloon debt maturities, particularly the 2023 and 2024 maturities.
- Whether the acquisition pace and financing activity remain accretive after considering increased debt, equity dilution and interest expense.
- The sustainability of the $2.40 annualized dividend relative to AFFO, cash flow, tenant collections and future capital needs.
- Potential additional property or lease-intangible impairments and changes in the value of interest-rate swaps.
- Remaining equity issuance obligations, including the April 2020 forward offering and 2020 ATM forward sales.