Agree Realty Corporation — Q3 2016 Form 10-Q Summary
Business Context and Reporting Period
Agree Realty is an integrated REIT focused on owning, acquiring, developing and managing retail properties under predominantly net lease agreements. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, with comparisons to the same periods in 2015.
- Portfolio: 341 properties in 43 states, approximately 6.7 million square feet, 99.6% leased, and weighted average remaining lease term of approximately 10.8 years.
- The Company held a 98.6% interest in Agree Limited Partnership at September 30, 2016.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenue | $24.2 million, up from $17.9 million | $66.2 million, up from $50.8 million |
| Income from operations | $14.2 million, up from $9.8 million | $37.0 million, up from $28.8 million |
| Net income attributable to Agree | $14.3 million, versus $14.6 million | $32.4 million, versus $31.2 million |
| Basic/diluted EPS | $0.61 / $0.61, versus $0.81 / $0.81 | $1.47 / $1.46, versus $1.77 / $1.76 |
| Funds from operations | $16.2 million; $0.68 per diluted share | $42.6 million; $1.90 per diluted share |
| Adjusted FFO | $15.8 million; $0.66 per diluted share | $42.2 million; $1.88 per diluted share |
| Net cash provided by operating activities | Not separately reported | $33.5 million, versus $34.3 million |
Reported operating margins were approximately 58.7% for the quarter and 55.9% for the nine-month period, compared with approximately 54.8% and 56.6%, respectively, in the prior-year periods. Net income margins were approximately 59.9% for the quarter and 49.7% year to date. Results include substantial non-cash depreciation and amortization and gains on property sales; FFO and AFFO are supplemental non-GAAP measures.
- Minimum rents increased to $22.3 million for the quarter and $60.7 million year to date, primarily from acquired properties.
- Interest expense increased to $4.1 million for the quarter and $11.2 million year to date, reflecting additional debt issued to fund growth.
- No impairment charges were recorded during the quarter or first nine months.
- Total assets were $1.04 billion at September 30, 2016, compared with $789.9 million at December 31, 2015.
- Cash and cash equivalents were $11.5 million, with an additional $12.3 million held in escrows.
- The Company declared a quarterly dividend of $0.48 per share, paid October 14, 2016.
Debt, Liquidity and Capital Resources
- Total gross indebtedness was $437.8 million, consisting of $70.6 million of mortgage debt, $160.2 million of unsecured term loans, $160.0 million of senior unsecured notes and $47.0 million drawn on the revolving credit facility.
- Debt-to-total-market-capitalization was 26.8% at September 30, 2016.
- The $150.0 million unsecured revolving credit facility had $103.0 million available and matures in July 2018, with a potential one-year extension subject to conditions.
- Scheduled debt principal repayments total $437.8 million, including $75.3 million in 2018, $21.3 million in 2019, $38.9 million in 2020 and $298.4 million thereafter.
- The Company was in compliance with its debt covenants at September 30, 2016.
- Five interest-rate swaps hedged approximately $185.3 million of notional debt. A 100-basis-point increase in variable interest rates was estimated to increase annual interest expense by approximately $0.5 million.
Material Changes Versus Prior Comparable Period
- The Company acquired 14 retail net lease assets for approximately $49.5 million during the quarter and 60 assets for approximately $234.0 million during the first nine months. Year-to-date acquisitions had an underwritten weighted average capitalization rate of approximately 7.8% and a weighted average lease term of approximately 10.7 years.
- Two properties were sold in the quarter for $15.0 million of net proceeds, generating a $4.4 million gain. Three properties were sold year to date for $22.1 million of net proceeds and a $7.1 million gain.
- The Company completed a May 2016 follow-on offering of 2.875 million common shares, generating approximately $109.7 million of net proceeds. It also issued shares under its ATM program, with approximately $45.8 million remaining available at quarter-end.
- Debt increased materially to fund acquisitions, including a $40.0 million 2023 term loan and $60.0 million of 2028 senior unsecured notes issued in 2016. Mortgage debt declined following repayment of a $20.3 million loan in August and an $8.6 million loan in March.
- Quarterly net income attributable to Agree declined modestly despite higher rental income because the prior-year quarter included a larger gain on asset sales. Year-to-date net income increased because rental growth more than offset the lower property-sale gains and higher interest expense.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide explicit earnings or acquisition guidance. Management expects short-term liquidity needs to be met through operating cash flow and the revolving credit facility, and long-term capital needs through operating cash flow, debt and equity financing. Management stated that it continually evaluates financing alternatives but noted that future financing may not be available on acceptable terms.
- Key risks include economic and real estate market conditions, acquisition and development performance, access to debt or equity financing, interest-rate volatility, lease renewals and re-leasing, tenant bankruptcies, operating-cost increases and maintaining REIT qualification.
- Substantially all properties are subject to long-term net leases, which generally shift property taxes, insurance and maintenance costs to tenants; inflation could nevertheless adversely affect tenants and rent growth may not fully offset inflation.
- Derivative agreements include default-related provisions. The fair value of derivatives in a net liability position was approximately $6.2 million, which could have been payable upon a qualifying default.
- The Company had no material litigation beyond routine insured matters, no material changes to previously disclosed risk factors and no reportable subsequent events through the financial statement issuance date.
- New accounting standards concerning leases, revenue recognition, credit losses and cash-flow classification were identified; the filing states that the impact of several standards remained under evaluation. ASU 2015-03 was adopted, reclassifying debt issuance costs as deductions from debt balances.
Most Important Facts for Investors to Verify
- Whether the 99.6% leased portfolio and long weighted average lease term remain stable as the property base expands.
- The ability to refinance or repay the significant 2018 debt maturities, including the revolving facility, on acceptable terms.
- Whether acquisition volume and capitalization rates remain attractive without causing leverage or tenant-concentration risk.
- The sustainability of the $0.48 quarterly dividend relative to AFFO, operating cash flow and scheduled debt repayments.
- The effect of higher interest expense, interest-rate movements and the $6.4 million interest-rate-swap liability on future results.
- The comparability of reported net income and EPS, given gains on property sales, equity issuance and substantial non-cash depreciation and amortization.