Agree Realty Corporation: 2020 Q1 Form 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a fully integrated REIT focused on owning, acquiring, developing and managing retail properties under long-term net leases. The filing covers the three months ended March 31, 2020, with comparative results for the three months ended March 31, 2019.
- Portfolio at March 31, 2020: 868 properties in 46 states, approximately 16.3 million square feet of gross leasable area.
- Portfolio occupancy: approximately 99.3%; weighted-average remaining lease term: approximately 9.8 years.
- Approximately 59.6% of annualized base rent came from tenants or parent companies with investment-grade credit ratings.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $55.8 million | $42.3 million | Up 31.8% |
| Rental income | $55.8 million | $42.3 million | Up 32% |
| Income from operations | $29.7 million | $22.5 million | Up 32% |
| Net income | $21.4 million | $18.5 million | Up 15% |
| Net income attributable to Agree | $21.2 million | $18.3 million | Up 16% |
| Diluted EPS | $0.46 | $0.48 | Down $0.02 |
| Operating cash flow | $28.7 million | $23.5 million | Up 22% |
| FFO | $33.7 million | $25.3 million | Up 33% |
| Core FFO | $37.6 million | $28.6 million | Up 31% |
| AFFO | $37.2 million | $27.7 million | Up 34% |
| Diluted AFFO per share | $0.81 | $0.72 | Up 13% |
Operating margin was approximately 53.1% in both periods. Net margin declined to approximately 38.3% from 43.7%, primarily reflecting higher interest expense, lower gains on asset sales and a swing from a tax benefit to tax expense.
- Net real estate investments increased to $2.4 billion from $2.2 billion at December 31, 2019.
- Total assets increased to $2.9 billion from $2.7 billion at year-end 2019.
- Cash and cash equivalents were $72.1 million; cash and cash held in escrows totaled $92.1 million.
- Net cash used in investing activities was $206.6 million, including $229.6 million for acquisitions and development.
- Net cash provided by financing activities was $227.9 million, including $104.6 million of common-stock proceeds and $153.0 million of net revolving-credit borrowings.
- The quarterly dividend was $0.585 per share, equivalent to an annualized $2.34, up 5.4% from the comparable 2019 quarterly dividend.
Debt and Liquidity
- Total gross indebtedness was approximately $1.0 billion, including $242.0 million drawn on the revolving credit facility, $240.0 million of unsecured term loans, $510.0 million of senior unsecured notes and $34.1 million of mortgage debt.
- Revolving credit availability was $258.0 million, subject to covenant compliance.
- Total debt to total market capitalization was 26.5% at March 31, 2020.
- Debt maturities include approximately $68.7 million in 2023 and $343.0 million in 2024, including the revolving facility balance; approximately $611.7 million matures thereafter.
- The Company was in compliance with all debt covenants at March 31, 2020 and reported no conditions raising substantial doubt about its ability to continue as a going concern.
Material Changes Versus the Prior Comparable Period
- The Company acquired 51 retail net-lease assets for approximately $227.0 million, compared with approximately $142.3 million of acquisition spending in Q1 2019.
- The Company sold six properties for net proceeds of $24.4 million and recorded a $1.6 million gain, versus a $3.4 million gain in Q1 2019.
- Revenue, operating income, net income, FFO, Core FFO and AFFO increased primarily because of portfolio growth and acquisitions.
- Interest expense increased 28% to $9.7 million because of higher borrowings used to fund acquisitions and development.
- Depreciation and amortization increased 43% to $14.1 million, while general and administrative expense increased 15% to $4.7 million.
- No impairment provision was recorded in Q1 2020, compared with $0.4 million in Q1 2019.
- Shares outstanding increased materially, contributing to lower diluted GAAP EPS despite higher net income.
- Interest-rate swap liabilities increased to $40.4 million from $7.9 million at December 31, 2019, producing a $33.0 million adverse effect in other comprehensive income.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal full-year earnings or operating guidance. Management stated that operating results for the quarter may not be indicative of full-year results.
- COVID-19 had not caused significant disruption during Q1, but management identified substantial uncertainty regarding tenant rent payments, rent deferrals, abatements, asset impairments, debt covenant compliance, access to capital and future cash flows.
- As of April 17, 2020, the Company had received April rent from approximately 87% of its portfolio. Rent relief or further-discussion requests represented approximately 33% of the portfolio as measured by annualized base rent. Management cautioned that these early figures may not predict future collections.
- Tenants had announced store closures and requested rent relief. The Company was evaluating requests individually and stated it was not waiving contractual rights.
- In April 2020, the Company issued 2.875 million common shares and received net proceeds of $170.4 million.
- The Company maintained a $400 million 2020 ATM program, with approximately $387.3 million of availability at March 31, 2020, and had additional unsettled forward equity-sale obligations.
- Key risks include tenant defaults or bankruptcies, prolonged retail-sector weakness, reduced consumer spending, impairment charges, financing and refinancing risk, interest-rate volatility, derivative-counterparty risk, debt covenant compliance, capital-market access and REIT qualification.
- The Company reported no material litigation and no defaults under senior securities.
Investor Verification Points
- Verify subsequent-quarter rent collections, deferrals, abatements, tenant bankruptcies and any changes to lease receivables or revenue recognition.
- Assess whether COVID-19 affected property valuations, impairment testing, portfolio occupancy and acquisition activity.
- Review the timing and funding plan for the 2023 and 2024 debt maturities, including the revolving-credit balance.
- Monitor compliance with debt covenants and the availability and pricing of debt and equity financing.
- Reconcile AFFO and dividend coverage using the Company’s non-GAAP definitions and confirm comparability with other REITs.
- Evaluate dilution from outstanding forward equity-sale agreements and the April 2020 equity issuance.
- Review the economic exposure associated with $40.4 million of interest-rate swap liabilities and the planned reclassification of approximately $5.8 million from accumulated other comprehensive income to interest expense over the following twelve months.