Agree Realty Corporation: Q1 2015 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 net leases. The filing covers the three months ended March 31, 2015, compared primarily with the three months ended March 31, 2014. At March 31, 2015, the portfolio included 233 properties in 39 states, approximately 4.7 million square feet of gross leasable area, 98.6% occupancy, and a weighted average remaining lease term of approximately 11.8 years.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues | $15.743 million | $12.575 million | +25% |
| Income from operations | $9.056 million | $7.167 million | +26% |
| Operating margin | 57.5% | 57.0% | Approximately stable |
| Net income | $6.494 million | $5.510 million | +18% |
| Net income attributable to Agree | $6.368 million | $5.384 million | +18% |
| Diluted EPS | $0.37 | $0.37 | Flat |
| Funds from operations | $9.953 million | $7.886 million | +26% |
| Diluted FFO per share | $0.56 | $0.52 | +8% |
| Adjusted FFO | $10.068 million | $8.116 million | +24% |
| Cash flow from operations | $9.006 million | $8.170 million | +10% |
Cash and cash equivalents were $7.919 million at March 31, 2015, compared with $5.399 million at December 31, 2014. Net real estate investments increased to $576.925 million from $530.057 million. Total assets were $653.047 million, versus $593.581 million at year-end 2014.
Total debt was $283.179 million, consisting of $103.679 million of mortgage notes, $100.000 million of unsecured term loans and $79.500 million drawn on the unsecured revolving credit facility. The facility had $70.500 million available. Debt represented 32.4% of total market capitalization. The company reported compliance with its debt covenants.
Net cash used in investing activities was $59.559 million, primarily reflecting $60.263 million of real estate acquisitions. Financing activities provided $53.073 million, including $64.500 million of revolving-facility borrowings. The company declared a quarterly dividend of $0.45 per share, paid April 14, 2015.
Material Changes Versus the Prior Comparable Period
- Minimum rents increased 26% to $14.554 million, primarily from acquired and developed properties.
- The company acquired 25 retail net lease assets for approximately $59.824 million. The properties were 100% leased to 15 tenants, had a weighted average lease term of approximately 13.0 years, and an underwritten capitalization rate of approximately 8.1%.
- One retail asset was sold for gross proceeds of approximately $1.038 million, producing a gain of approximately $99,000.
- Depreciation and amortization increased 41% to $3.554 million, reflecting acquisition and development activity.
- Interest expense increased 37% to $2.461 million because of higher borrowings, including the $65 million unsecured term loan entered into in July 2014.
- Weighted average diluted shares increased to 17.416 million from 14.745 million, which contributed to diluted EPS remaining at $0.37 despite higher earnings.
- Q1 2015 included an approximately $180,000 loss on debt extinguishment from prepaying a $2.406 million mortgage. Q1 2014 included approximately $123,000 of gain and $15,000 of income from discontinued operations; no discontinued-operation income was recorded in 2015.
- Other comprehensive loss increased to $2.012 million, primarily from changes in the fair value of interest-rate swaps.
Guidance, Outlook, Risks and Unusual Items
Management expects short-term liquidity needs to be funded through operating cash flow and the revolving credit facility. Long-term capital needs may be funded through operating cash flow, additional debt, equity offerings or other securities. The filing provides no specific earnings or acquisition guidance.
Debt maturities include approximately $107.075 million in 2018, including the $79.5 million revolving-facility balance. The company may extend the credit facility for one year, subject to conditions, and may extend a $21.239 million mortgage maturity from 2017 to 2019, also subject to conditions. A 100-basis-point increase in variable interest rates would increase annual interest expense by approximately $795,000.
Interest-rate swaps fixed portions of the company’s debt, but their aggregate carrying value was a net liability of approximately $4.121 million at March 31, 2015. Key risks include refinancing and interest-rate risk, availability and terms of future financing, tenant defaults or bankruptcies, re-leasing risk, property and acquisition performance, operating-cost increases, economic and real estate market conditions, and continued qualification as a REIT.
The company stated that there were no material changes to previously disclosed risk factors, no material litigation beyond routine matters, no defaults upon senior securities, and no reportable subsequent events through the filing date. Management concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Reconcile acquisition spending, revolving-facility borrowings and future capital needs with the company’s liquidity position.
- Review the 2018 refinancing exposure, including the revolving-facility maturity and related extension conditions.
- Assess whether portfolio occupancy, tenant credit quality and long-term lease terms support continued rent growth.
- Review the impact of higher interest expense and the sensitivity of cash flows to variable-rate debt.
- Confirm dividend coverage using operating cash flow, FFO and AFFO, while considering required debt amortization and acquisitions.
- Evaluate the effect of dilution from increased common shares and potential OP-unit exchanges.
- Compare FFO and AFFO definitions with those used by other REITs before drawing valuation conclusions.