Agree Realty Corporation — Form 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a Maryland REIT focused on acquiring, developing and managing retail properties under long-term net leases. The filing covers the unaudited three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
- Portfolio at September 30, 2017: 425 properties in 43 states, approximately 8.3 million square feet, 99.7% leased and approximately 10.5 years of weighted average remaining lease term.
- The Company held a 98.8% interest in Agree Limited Partnership and operated as one reportable segment.
Financial Performance and Key Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenues | $30.4 million | $24.2 million | $85.0 million | $66.2 million |
| Net income | $12.3 million | $14.5 million | $42.1 million | $32.9 million |
| Net income attributable to Agree | $12.2 million | $14.3 million | $41.6 million | $32.4 million |
| Diluted EPS | $0.42 | $0.61 | $1.52 | $1.46 |
| Funds from operations | $20.0 million | $16.2 million | $55.0 million | $42.6 million |
| Diluted FFO per share | $0.69 | $0.68 | $2.00 | $1.90 |
| Adjusted FFO | $19.9 million | $15.8 million | $54.8 million | $42.2 million |
| Diluted AFFO per share | $0.69 | $0.66 | $2.00 | $1.88 |
- Q3 revenue increased 26% year over year; nine-month revenue increased 28%.
- Q3 operating income was $16.4 million versus $14.2 million; the operating margin was approximately 54.1% versus 58.7% in the prior-year quarter.
- Nine-month operating income was $45.3 million versus $37.0 million; the operating margin was approximately 53.3% versus 55.9%.
- Q3 net margin was approximately 40.4% versus 59.9%; nine-month net margin was approximately 49.5% versus 49.7%.
- Q3 minimum rents increased to $27.3 million from $22.3 million. Operating cost reimbursements increased to $2.8 million from $1.8 million.
- Cash provided by operating activities for the nine months was $55.2 million, compared with $45.8 million in 2016.
- Cash used in investing was $241.3 million, including $241.1 million for acquisitions and other real estate investments and $27.2 million for development. Net cash provided by financing was $178.2 million.
Balance Sheet, Debt and Liquidity
- Total assets were $1.367 billion at September 30, 2017, up from $1.142 billion at December 31, 2016. Net real estate investments were $1.121 billion versus $950.3 million.
- Gross indebtedness was $487.7 million: $68.2 million of mortgages, $159.5 million of unsecured term loans and $260.0 million of senior unsecured notes. There were no revolving credit facility borrowings.
- The Company issued $100.0 million of 4.19% senior unsecured notes due September 2029 in September 2017.
- The $250.0 million revolving credit facility was fully available at September 30, 2017, and the Company reported compliance with its covenants.
- Total debt to total market capitalization was 25.2%. Cash and cash equivalents were $25.5 million.
- Significant scheduled debt maturities include a $25.0 million mortgage balloon payment in 2018 and $18.5 million of unsecured term-loan maturities in 2019. Total debt maturities, including scheduled principal and balloon payments, were $487.7 million.
- The Company declared a quarterly dividend of $0.505 per share, paid October 13, 2017.
Material Changes Versus Prior Comparable Period
- Growth was driven primarily by additional acquisitions and development. The Company acquired 61 retail net-lease assets for approximately $239.5 million during the first nine months, compared with the prior-year period’s lower property base.
- Q3 net income declined despite higher operating income because the gain on asset sales fell to $0.5 million from $4.4 million. For the nine months, the gain increased to $10.0 million from $7.1 million.
- Interest expense increased 14% in Q3 and 18% for the nine months, reflecting additional debt issued in 2016 and the $100.0 million notes issued in September 2017.
- Depreciation and amortization rose 34% in Q3 and 36% for the nine months due to the larger property portfolio.
- Common shares outstanding increased materially, including a June follow-on offering of 2.415 million shares and ATM issuance. Shares issued during the nine months generated $136.7 million of net proceeds.
- General and administrative expense increased, but declined as a percentage of revenue to 8.2% in Q3 and 9.0% for the nine months.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific full-year earnings, FFO or revenue guidance.
- Management expects short-term liquidity needs to be funded by operating cash flow and the revolving facility, and long-term needs through operating cash flow, debt issuance, equity issuance and other financing sources.
- Development and Partner Capital Solutions projects under construction or completed during the first nine months had anticipated total costs of approximately $57.3 million; five projects were active in Q3 with anticipated costs of approximately $35.9 million.
- Key risks include tenant bankruptcy or loss, re-leasing risk, property performance, acquisition and development execution, availability and cost of financing, interest-rate volatility, debt refinancing, REIT qualification and economic or real estate market conditions.
- Interest-rate swaps covered approximately $184.5 million of notional debt. A net derivative liability position could have required settlement of approximately $1.5 million upon certain defaults.
- Straight-line rent receivables were $12.0 million. A tenant inability to pay contractual rents could require write-downs and reduce operating income.
- The Company had no material litigation, no material changes to previously disclosed risk factors, and reported effective disclosure controls.
- The Company expects the new revenue standard to have no significant impact because approximately 90% of revenue consists of rental income excluded from the standard. The new lease standard is expected to add right-of-use assets and lease liabilities for land leases where the Company is the lessee; the ultimate impact was still under evaluation.
Most Important Facts for Investors to Verify
- Whether acquisition and development activity continues to produce expected rent growth, occupancy and returns.
- Tenant concentration, credit quality, lease expirations and exposure to retail-sector disruption.
- Ability to refinance or repay the 2018 mortgage balloon and subsequent maturities while maintaining covenant compliance.
- Actual cash available for dividends after acquisitions, development spending, debt service and recurring capital requirements.
- Reconciliation of non-GAAP FFO and AFFO to GAAP results and comparability with other REITs.
- Future interest-rate exposure, swap maturities and the impact of the newly issued 2029 notes on interest expense.