Agree Realty Corporation — Q1 2014 Form 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a self-managed REIT focused on acquiring and developing long-term net-leased retail properties. The filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. At March 31, 2014, the portfolio comprised 139 properties in 34 states, totaling approximately 3.8 million square feet, with 97% aggregate occupancy and an approximately 11-year weighted average remaining lease term.
- 131 freestanding net-leased properties and eight community shopping centers.
- Approximately 88% of annualized base rent came from national tenants.
- The ten largest tenants represented 62.6% of annualized base rent; Walgreens represented 26.4%.
Financial Performance and Key Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $12.575 million | $9.928 million | +27% |
| Income from operations | $7.167 million | $5.698 million | +26% |
| Net income | $5.510 million | $5.392 million | +2% |
| Net income attributable to Agree | $5.384 million | $5.251 million | +3% |
| Diluted EPS | $0.37 | $0.41 | Down $0.04 |
| Funds from operations | $7.886 million | $6.383 million | +24% |
| Adjusted funds from operations | $8.101 million | $6.412 million | +26% |
| Diluted FFO per share | $0.52 | $0.49 | +6% |
| Net cash from operating activities | $8.170 million | $6.867 million | +19% |
Operating margin was approximately 57.0% in Q1 2014 versus 57.4% in Q1 2013. Net margin was approximately 43.8% versus 54.3%, primarily reflecting the substantially lower gain from asset sales in 2014. Interest expense increased 25% to $1.794 million, while depreciation and amortization increased 33% to $2.514 million.
At March 31, 2014, total assets were $466.5 million, including $428.0 million of net real estate investments. Cash and cash equivalents were $0.8 million, compared with $14.5 million at December 31, 2013. Total debt was $164.0 million, consisting of $113.0 million of mortgage debt, $16.0 million drawn on the revolving credit facility and a $35.0 million unsecured term loan. Management reported approximately 26% debt to total market capitalization and compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by property acquisitions and completed developments. Operating cost reimbursements increased 91% to $1.023 million.
- The Company acquired nine retail assets for approximately $22.0 million, at a weighted average capitalization rate of 8.4%. These acquisitions contributed approximately $0.246 million of revenue and $0.059 million of continuing-operations income during the quarter.
- Acquisition spending increased to $21.959 million from $14.948 million, and development spending increased to $4.074 million from $2.020 million.
- Cash flow from investing activities was negative $21.059 million, compared with negative $11.506 million in the prior-year quarter.
- Financing activities used $0.821 million of cash, compared with providing $4.568 million in Q1 2013. The prior-year period included a substantially larger common stock offering and significant debt repayments.
- The Company sold one non-core Kmart-anchored shopping center for approximately $5.0 million, recognizing a $0.123 million gain. Q1 2013 included a $0.946 million gain on the sale of a Walgreens property.
- Diluted EPS declined despite higher net income because the weighted average diluted share count increased to 14.745 million from 12.693 million.
- The Company declared a $0.43 per-share quarterly dividend, paid April 8, 2014.
Liquidity, Debt, Outlook, and Risks
Management stated that operating cash flow, the revolving credit facility and additional financing sources should provide sufficient liquidity for operations and dividends for at least the next 12 months. The $85 million revolving facility had $15.988 million outstanding and $69.012 million available at March 31, 2014; it matures October 26, 2015 and may be extended, subject to conditions. The unsecured term loan matures September 29, 2020. Scheduled debt maturities include approximately $12.7 million during the year ending March 31, 2015 and approximately $19.7 million during the following period, including the revolving facility balance.
The Company expects to continue growing through acquisitions and development of net-leased retail properties. A pre-leased McDonald’s development in Florida was expected to be completed in the third quarter of 2014; a Wawa development had rent commencement expected in Q2 2014; and a $8 million joint venture project in New Lenox, Illinois was expected to be completed in late 2014. Construction in progress was approximately $9.2 million at quarter-end. No formal earnings guidance was provided.
- Interest-rate risk remains relevant; a 100-basis-point increase on unhedged variable-rate debt was estimated to increase annual interest expense by approximately $0.160 million.
- Interest-rate swaps hedged portions of variable-rate debt, but their fair values included both assets and liabilities and expose the Company to counterparty and hedge-effectiveness risks.
- Key business risks include tenant concentration, tenant bankruptcies, lease renewal and re-leasing risk, property-level operating costs, acquisition and development execution, financing availability, refinancing risk and interest-rate volatility.
- The Company early adopted ASU 2014-08 on discontinued operations prospectively, which may affect comparability of future disposal reporting.
- No material litigation, defaults or changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective.
Important Facts for Investors to Verify
- Confirm the sustainability of acquisition-driven revenue and FFO growth after incorporating the higher share count and interest expense.
- Review tenant concentration, particularly Walgreens and the ten largest tenants, and assess lease expirations and renewal economics.
- Assess liquidity against scheduled maturities, including the revolving facility maturity and the mortgage balloon payment due in June 2014.
- Verify that acquisition and development projects achieve expected capitalization rates, lease commencements and completion dates.
- Reconcile the filing’s reported rental revenue figures: the income statement reports minimum rents of $11.523 million for Q1 2014, while MD&A describes minimum rental revenue of approximately $11.577 million.
- Evaluate dividend coverage using operating cash flow, FFO and AFFO rather than GAAP net income alone.