Agree Realty Corporation — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2013, filed May 3, 2013. Agree Realty is a self-managed REIT focused on acquiring and developing single-tenant, net-leased retail properties. At quarter-end, the portfolio comprised 113 properties in 30 states, approximately 3.3 million square feet, and was 97% leased with approximately 12 years of weighted-average lease term remaining.
Approximately 97% of annualized base rent came from national and regional tenants; Walgreens, Kmart, and CVS represented approximately 29%, 7%, and 6%, respectively. The company held a 97.44% interest in its operating partnership.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $10.25 million | $8.39 million | 22% |
| Income from operations | $5.88 million | $4.51 million | 30% |
| Income from continuing operations | $4.44 million | $3.37 million | 32% |
| Net income | $5.39 million | $4.74 million | 14% |
| Net income attributable to Agree | $5.25 million | $4.60 million | 14% |
| Diluted EPS | $0.41 | $0.43 | Down $0.02 |
| Funds from operations | $6.38 million | $5.51 million | 16% |
| Adjusted funds from operations | $6.41 million | $5.71 million | 12% |
| Cash flow from operations | $6.87 million | $3.82 million | 80% |
Operating margin was approximately 57.4%, compared with 53.8% in the prior-year quarter. Net income attributable to Agree represented approximately 51.2% of revenue. The filing does not provide a clear same-property operating metric.
At March 31, 2013, total assets were $380.2 million, including $348.8 million of net real estate investments. Cash and cash equivalents were $1.2 million. Mortgage debt was $116.5 million and the revolving credit facility had $9.0 million outstanding, with $76.0 million available subject to customary conditions. Total indebtedness was approximately $126 million, or approximately 23% of enterprise value. The company was in compliance with credit facility covenants.
Net cash used in investing activities was $11.5 million, including $17.0 million for real estate acquisitions and $5.5 million of net proceeds from asset sales. Financing activities provided $4.6 million. The company issued 1.725 million common shares in January 2013 for approximately $45 million of net proceeds, principally used to repay credit facility borrowings and for general corporate purposes.
Material Changes Versus the Prior Comparable Period
- Minimum rents increased 23% to $9.64 million, primarily from 28 single-tenant properties acquired after December 31, 2011 and two properties completed in 2012.
- The company acquired five retail assets during 2013 for approximately $15 million at a weighted-average capitalization rate of 8.03%. These assets contributed approximately $235,000 of revenue and $198,000 of income before discontinued operations during the quarter.
- Operating expenses increased 13% overall. Depreciation and amortization rose 32% to $1.95 million, while general and administrative expense increased 6% to $1.49 million.
- Interest expense increased 27% to $1.44 million due to higher borrowings associated with property acquisitions.
- Discontinued operations declined to $7,000 from $459,000 because the company sold one property in January 2013 and had sold six properties during 2012. The 2013 disposition generated a $946,000 gain.
- Diluted EPS declined despite higher earnings because the weighted-average diluted share count increased to 12.69 million from 10.75 million following the equity offering and other share issuances.
- During the first quarter, Kmart exercised five-year extension options for two shopping-center stores. Fashion Bug vacated approximately 40,000 square feet across four shopping centers, and the company was seeking replacement tenants.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that it expected adequate cash flow, the revolving credit facility, and additional financing sources to fund operations and dividends for at least the next 12 months. No formal earnings, FFO, revenue, or acquisition guidance was provided in the filing.
The company expected to continue expanding through acquisitions and development of long-term, net-leased retail properties. Construction in progress totaled approximately $21.2 million, and estimated additional funding required to complete current projects was $3.1 million. Two developments were completed in April 2013, and three additional projects remained in development.
The quarterly dividend was $0.41 per share and was paid April 9, 2013. Mortgage debt carried a weighted-average interest rate of 4.41%; the revolving facility carried a weighted-average rate of 1.73%. A 100-basis-point increase in applicable variable interest rates was estimated to increase annual interest expense by approximately $90,000.
Debt maturities include approximately $3.5 million during the year ending March 31, 2014 and $12.7 million during the following year. One mortgage included a $9.2 million balloon payment due in June 2014. The company used interest-rate swaps to hedge specified variable-rate borrowings, with total swap liabilities of approximately $1.09 million at quarter-end.
Principal risks include tenant concentration, tenant bankruptcy or store closures, lease expirations and re-leasing risk, property and development performance, access to debt or equity financing, interest-rate changes, refinancing risk, real estate market conditions, and maintaining REIT qualification. Seven leases representing approximately $476,812 of annualized base rent were scheduled to expire from April through December 2013, assuming no renewal or early termination.
The filing reports no material litigation, no defaults, and no material changes to previously disclosed risk factors. Management concluded that disclosure controls and procedures were effective and that there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the sustainability of rent growth from acquisitions and the effect of future acquisitions on per-share results and dilution.
- Monitor tenant concentration, particularly Walgreens, Kmart, and CVS, and the re-leasing progress for Fashion Bug vacancies.
- Review the June 2014 mortgage balloon obligation and the company’s refinancing or repayment plans.
- Assess development funding needs, completion timing, lease commencement dates, and construction execution risk.
- Reconcile FFO and AFFO to GAAP earnings and compare the company’s non-GAAP methodology with other REITs.
- Evaluate the effect of the January 2013 equity offering on leverage, share count, EPS, and future dividend coverage.
- Confirm subsequent developments, including April 2013 property completions, dividend payments, and any changes in credit facility availability or covenant compliance.