Agree Realty Corporation — Q2 2013 Form 10-Q Summary
Business context and reporting period
Agree Realty Corporation is a self-managed REIT focused on acquiring and developing single-tenant, net-leased retail properties. This unaudited quarterly report covers the three and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods.
- Portfolio: 120 properties in 32 states, approximately 3.5 million square feet, 97% leased, with approximately 12 years of weighted-average lease term remaining.
- Annualized base rent concentration: approximately 45% from Walgreens, Kmart, CVS and Walmart; approximately 97% from national and regional tenants.
- As of June 30, 2013, five leases scheduled to expire during the remainder of 2013 represented 79,245 square feet and $368,412 of annualized base rent.
Financial performance and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $10.9 million | $8.6 million | $21.2 million | $17.0 million |
| Income from operations | $6.1 million | $4.6 million | $11.9 million | $9.1 million |
| Income from continuing operations | $4.5 million | $3.5 million | $9.0 million | $6.9 million |
| Net income attributable to Agree | $4.4 million | $4.9 million | $9.7 million | $9.5 million |
| Diluted EPS | $0.34 | $0.44 | $0.75 | $0.87 |
| Cash flow from operations | Not separately provided | Not separately provided | $14.2 million | $8.8 million |
| FFO | $6.8 million | $5.7 million | $13.2 million | $11.2 million |
| AFFO | $7.0 million | $5.9 million | $13.4 million | $11.6 million |
- Q2 operating margin was approximately 55.5%; continuing-operations margin was approximately 41.5%. Six-month operating margin was approximately 56.4%; continuing-operations margin was approximately 42.4%.
- Minimum rents increased 29% in Q2 and 26% for the six-month period, primarily from property acquisitions and completed developments.
- Q2 net income declined 11% because the prior-year period included a $1.2 million gain and income from discontinued operations. Six-month net income increased 1%, despite substantially lower discontinued-operation gains.
- Cash used in investing activities was $44.0 million, including $49.5 million for real estate acquisitions and $5.5 million of net property-sale proceeds.
- Cash provided by financing activities was $29.8 million. Cash and cash equivalents were $1.2 million at June 30, 2013, compared with $1.3 million at December 31, 2012.
Balance sheet, debt and liquidity
- Total assets were $410.9 million, including $375.2 million of net real estate investments, versus $370.1 million and $340.0 million, respectively, at December 31, 2012.
- Total debt consisted of $115.7 million of mortgage debt and $40.6 million outstanding under the unsecured revolving credit facility.
- The $85 million credit facility had $44.4 million available at June 30, 2013, subject to customary borrowing conditions. It matures in October 2015 and may be extended to October 2017.
- Mortgage debt had a weighted-average interest rate of 4.40%. The company reported debt equal to approximately 28% of enterprise value, compared with an intended general ceiling of 65% or less.
- Scheduled mortgage maturities include $12.7 million during the year ending June 30, 2014 and $23.4 million during the year ending June 30, 2017. The revolving facility's $40.6 million balance is included in the July 1, 2014–June 30, 2016 contractual-obligation period.
- Management stated that operating cash flow, the credit facility and additional financing sources should be sufficient for operations and dividends for at least the next 12 months.
Material changes, outlook and unusual items
- The company acquired nine retail assets for approximately $43 million during the first six months, at a weighted-average capitalization rate of 7.58%.
- Three development projects were completed in 2013 at an aggregate cost of approximately $12 million. Construction in progress was approximately $12.5 million, with an estimated $6.3 million needed to complete current projects.
- In January 2013, the company issued 1.725 million common shares for approximately $45 million of net proceeds, used primarily to reduce credit-facility borrowings and for general corporate purposes.
- The company declared a quarterly dividend of $0.41 per share, paid July 9, 2013.
- A single-tenant property was sold in 2013 for approximately $5.6 million, generating a $946,000 gain and approximately $5.5 million of net proceeds.
- Discontinued operations were minimal in 2013 compared with 2012, when property sales generated significant gains and operating income.
- Interest-rate swaps hedged portions of variable-rate debt. A 100-basis-point increase in unhedged variable-rate debt rates would increase annual interest expense by approximately $406,000.
- Key risks include tenant concentration and tenant bankruptcy, lease expirations and re-leasing risk, acquisition and development performance, access to debt or equity financing, interest-rate volatility, property operating costs, real estate market conditions and continued qualification as a REIT.
- Management reported no material changes to previously disclosed risk factors, no material litigation, and compliance with credit-facility covenants.
Investor verification points
- Verify the sustainability of rent growth and FFO/AFFO growth after incorporating the 2013 acquisitions and developments.
- Review Walgreens and other major-tenant concentration, lease expirations, renewal options and tenant credit quality.
- Assess funding plans for the $6.3 million of remaining development costs and the $12.7 million of mortgage maturities due within one year.
- Reconcile reported debt, enterprise value and the 28% debt-to-enterprise-value ratio, including treatment of operating partnership units and construction financing.
- Evaluate the effect of discontinued property sales and the absence of comparable gains on future GAAP earnings.
- Confirm dividend coverage using operating cash flow, FFO and AFFO, noting that these non-GAAP measures may not be comparable with other REITs.