Agree Realty Corporation — FY2015 Form 10-K Summary
Business Context and Reporting Period
Agree Realty Corporation is a fully integrated Maryland REIT focused on owning, acquiring, developing and managing retail properties primarily under long-term net leases. The filing covers the fiscal year ended December 31, 2015; it is an annual filing rather than a standalone fourth-quarter filing. The fourth quarter of 2015 generated revenue of $19.2 million, net income of $7.9 million and diluted EPS of $0.41.
At December 31, 2015, the portfolio comprised 278 properties in 41 states totaling approximately 5.2 million square feet. Approximately 99.5% was leased, with a weighted-average remaining lease term of 11.4 years. Net lease properties represented 97.6% of annualized base rent, and tenants with investment-grade ratings represented 51.9% of annualized base rent.
Financial Performance and Key Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $70.0 million | $53.6 million | +30.6% |
| Income from operations | $40.1 million | $27.9 million | +43.8% |
| Net income | $39.8 million | $18.9 million | +110.2% |
| Net income attributable to Agree Realty | $39.0 million | $18.5 million | +110.0% |
| Diluted EPS | $2.16 | $1.24 | +74.2% |
| Funds from operations | $44.0 million; $2.39 per diluted share | $33.3 million; $2.18 per diluted share | FFO +32.2%; per share +9.6% |
| Adjusted funds from operations | $43.9 million | $33.9 million | +29.2% |
| Net cash provided by operating activities | $44.7 million | $35.0 million | +27.8% |
| Total assets | $792.5 million | $593.6 million | +33.5% |
| Total debt, including accrued interest | $320.5 million | $222.5 million | +44.1% |
Income from operations represented approximately 57.3% of revenue. Net margin was approximately 56.8%, but was materially affected by a $12.1 million gain on asset sales. The filing does not present a comparable recurring operating margin excluding gains on dispositions.
- Minimum rental income increased 30% to $64.3 million, driven principally by acquisitions and the full-year contribution of prior acquisitions.
- Interest expense increased 43% to $12.3 million as borrowings increased to fund portfolio expansion.
- General and administrative expense increased 5%, while G&A as a percentage of revenue declined to 10.0% from 12.4%.
- No impairment charges were recorded in 2015, compared with $3.0 million in 2014.
- Cash and cash equivalents totaled $2.7 million at year-end. The revolving credit facility had $18.0 million outstanding and $132.0 million available, subject to covenants.
- Annual dividends increased to $1.845 per share from $1.74 in 2014. The quarterly dividend was $0.465 per share at year-end, with a subsequent March 2016 declaration at the same rate.
Material Changes Versus the Prior Comparable Period
- The Company invested approximately $226.4 million in net-leased retail real estate, including 73 acquisitions totaling approximately $220.6 million and one completed development costing approximately $5.8 million. The investments were 100% leased, had a weighted-average lease term of approximately 12.2 years and an underwritten capitalization rate of approximately 8.0%.
- The portfolio expanded from 209 to 278 properties and from approximately 4.3 million to 5.2 million square feet. Gross real estate investments increased from $589.1 million to $755.8 million.
- The Company sold eight properties for gross proceeds of approximately $29.0 million and recognized a $12.1 million gain, compared with a $0.5 million loss on asset sales in 2014.
- In May 2015, the Company issued $100.0 million of senior unsecured notes: $50.0 million at 4.16% due 2025 and $50.0 million at 4.26% due 2027.
- The Company issued 1.32 million shares under its ATM program for approximately $40.0 million gross proceeds and completed a December 2015 offering of 1.725 million shares, generating approximately $53.0 million net proceeds. The ATM program had approximately $60.0 million remaining at year-end.
- Walgreens remained the largest tenant, representing 17.2% of annualized base rent, down from 21.9% in 2014 and 26.8% in 2013. Walmart represented 5.5%.
Debt, Liquidity and Capital Commitments
Total debt was approximately $319.6 million, consisting of $101.6 million of mortgage debt, $100.0 million of unsecured term loans, $100.0 million of senior unsecured notes and $18.0 million drawn on the revolving facility. Debt represented approximately 30.9% of total market capitalization and 37.6% of gross assets before accumulated depreciation.
Near-term scheduled debt principal payments totaled approximately $11.5 million in 2016, $22.5 million in 2017 and $45.6 million in 2018, including the revolving facility balance. The Company was in compliance with its debt covenants at December 31, 2015. Interest-rate swaps fixed significant portions of variable-rate debt; management estimated that a 100-basis-point increase in variable-rate interest rates would increase annual interest expense by approximately $180,000.
Cash flow from operations was insufficient by itself to fund the $202.8 million of investing cash outflows, primarily property acquisitions and development. Financing activities provided $155.4 million, including equity issuance and debt proceeds. The filing states that future capital needs are expected to be funded through operating cash flow, the credit facility, additional debt and equity offerings.
Outlook, Commentary, Risks and Unusual Items
- No specific earnings, FFO or acquisition guidance was provided. Management stated that it intends to continue acquiring, developing and actively managing net-leased retail properties and expects to continue quarterly dividend payments, but cannot guarantee dividend levels or future increases.
- The $12.1 million disposition gain and absence of impairment charges were significant contributors to the year-over-year increase in GAAP earnings.
- Revenue concentration is material: Walgreens and Walmart together represented 22.7% of annualized base rent. Pharmacy-related tenants represented 23.2% of annualized base rent.
- Key risks include tenant defaults or bankruptcies, e-commerce pressure on retailers, lease renewal and re-leasing risk, geographic concentration, competition for properties and financing, interest-rate and refinancing risk, development and acquisition execution risk, environmental liabilities, cybersecurity incidents and the ability to maintain REIT qualification.
- Michigan accounted for 20.0% of annualized base rent. The Company carried $11.6 million of future land-lease obligations, and certain mortgage debt included cross-default and cross-collateralization provisions.
- The Company reported no material litigation, no unresolved SEC staff comments and effective disclosure controls and internal control over financial reporting. Grant Thornton issued unqualified audit opinions.
Important Facts for Investors to Verify
- Reconcile recurring FFO and AFFO growth with GAAP earnings growth, particularly the effect of the $12.1 million disposition gain and the 2014 impairment charges.
- Assess tenant concentration and credit exposure, especially Walgreens, Walmart and the pharmacy sector, including the implications of Walgreens’ announced agreement to acquire Rite Aid.
- Review the timing and refinancing plan for debt maturities in 2016–2020, including the $8.6 million mortgage maturity in June 2016, the 2017 mortgage maturity and the 2018 credit facility maturity.
- Evaluate whether acquisition volume, capitalization rates and financing costs can be sustained without excessive equity dilution or increased leverage.
- Confirm dividend coverage using recurring operating cash flow, FFO and AFFO rather than GAAP net income, and monitor the portion of distributions classified as return of capital.
- Review the complete lease-expiration schedule, property-level concentration, ground leases, environmental disclosures and debt covenant requirements.