Agree Realty Corporation — Q3 2012 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 Form 10-Q covers the three and nine months ended September 30, 2012, with comparisons to the corresponding 2011 periods.
- Portfolio: 96 properties in 25 states, approximately 3.1 million square feet, and 98% aggregate occupancy.
- Weighted average remaining lease term: approximately 12 years.
- Tenant concentration: approximately 47% of annualized base rent came from Walgreens (32%), Kmart (8%), and CVS (7%).
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Change |
|---|---|---|---|
| Total revenues | $9.3 million | $7.7 million | Up 20% |
| Income from operations | $5.5 million | $3.5 million | Up 58% |
| Net income | $4.0 million | $(1.9) million | Improved |
| Net income attributable to Agree | $3.9 million | $(1.8) million | Improved |
| Diluted EPS | $0.35 | $(0.19) | Improved |
| FFO, as adjusted | $6.1 million | $5.5 million | Up 10% |
| Adjusted FFO, as adjusted | $6.2 million | $5.5 million | Up 13% |
| Metric | Nine months 2012 | Nine months 2011 | Change |
|---|---|---|---|
| Total revenues | $26.5 million | $23.9 million | Up 11% |
| Income from operations | $14.8 million | $12.3 million | Up 21% |
| Net income | $13.9 million | $6.7 million | Up 108% |
| Net income attributable to Agree | $13.4 million | $6.4 million | Up 109% |
| Diluted EPS | $1.21 | $0.67 | Up 81% |
| FFO, as adjusted | $17.3 million | $17.2 million | Comparable |
| Adjusted FFO, as adjusted | $17.9 million | $17.6 million | Up 1% |
Q3 minimum rents increased 22% to $8.7 million, primarily because of 22 single-tenant properties acquired after June 30, 2011. Nine-month minimum rents increased 16% to $24.7 million, primarily from 24 properties acquired after January 1, 2011.
Operating expenses were $3.7 million in Q3 and $11.6 million for the nine months. General and administrative expense increased 21% in Q3, and G&A as a percentage of rental income increased to 14.78% from 12.73%. Depreciation and amortization increased because of the expanded property portfolio.
Net real estate investments increased to $301.0 million at September 30, 2012, from $271.5 million at December 31, 2011. Total assets increased to $332.7 million from $293.9 million. Stockholders’ equity increased to $197.5 million from $162.2 million.
Operating cash flow was $14.3 million for the first nine months, compared with $16.6 million in 2011. Investing cash flow was $(32.8) million, including $44.8 million of real estate acquisitions, partially offset by $15.3 million of asset-sale proceeds. Financing cash flow was $17.0 million, including $35.0 million of net equity-offering proceeds.
Cash and cash equivalents were $0.5 million at September 30, 2012, supplemented by $3.3 million of restricted cash held in escrow for a real estate acquisition.
Debt, liquidity, and distributions
- Mortgage debt: $69.6 million, including $46.8 million fixed-rate debt and $22.7 million variable-rate debt.
- Revolving credit facility: $85 million commitment, $54.8 million outstanding, and $30.2 million available at September 30, 2012; weighted average borrowing rate was 2.18%.
- Total debt to enterprise value: approximately 29%, compared with management’s stated target of 45% or less.
- Management reported compliance with credit-facility covenants.
- Debt maturities include $3.4 million during the year ending September 30, 2013, $12.7 million in 2014, and $22.9 million in 2017 based on the mortgage maturity schedule.
- The company declared a quarterly dividend of $0.40 per share, consistent with the 2011 comparable period; the dividend was paid October 9, 2012.
Material changes versus the prior comparable period
- Revenue and operating income increased because of property acquisitions, while interest expense rose 26% for the first nine months because of higher borrowings.
- 2011 included a $13.5 million impairment charge in the FFO reconciliation and a $2.36 million gain on debt extinguishment; these items did not recur in 2012.
- Discontinued operations improved from a $5.1 million loss in the first nine months of 2011 to $0.9 million of income in 2012. The 2012 results reflected sales of six non-core properties and the transfer of four former Borders properties to lenders through a deed-in-lieu-of-foreclosure process.
- The company purchased 14 retail assets during 2012 for approximately $50 million at a weighted average capitalization rate of 8.43%; two acquisitions included assumed debt of approximately $9.6 million and $8.6 million.
- The company issued 1.495 million common shares in January and February 2012 for approximately $35 million of net proceeds, used principally to reduce credit-facility borrowings and for general corporate purposes.
Guidance, outlook, risks, and unusual items
Management stated that operating cash flow, the credit facility, and additional financings should provide sufficient liquidity for operations and dividends for at least the next 12 months. The company anticipated securing term-loan or 10-year financing during the fourth quarter of 2012 to enhance liquidity and take advantage of low interest rates. It also expected to continue acquiring and developing long-term, net-leased retail properties.
Additional funding required to complete ongoing projects was estimated at $4.5 million. The company had announced developments for Walgreens, Wawa, and JPMorgan Chase and completed projects for McDonald’s and Miner’s Super One Foods during 2012.
- Key risks include tenant concentration and tenant bankruptcy, lease expirations and re-leasing risk, property and development performance, access to debt or equity financing, refinancing risk, interest-rate volatility, real estate market conditions, and maintenance of REIT status.
- A 100-basis-point increase in variable-rate debt interest rates was estimated to increase annual interest expense by approximately $548,000.
- Interest-rate swaps hedged approximately $24.5 million of variable-rate borrowings through June 2013 and approximately $22.3 million from July 2013 through May 2019.
- The former Borders-related defaults were resolved through property conveyances that satisfied approximately $9.2 million of mortgage debt.
- Management reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls.
Investor verification checklist
- Verify the sustainability of the $0.40 quarterly dividend against adjusted FFO, operating cash flow, capital expenditures, and scheduled debt repayments.
- Review the terms and refinancing plan for the $54.8 million credit-facility balance and mortgage maturities, particularly 2014 and 2017 obligations.
- Assess tenant concentration, especially Walgreens, Kmart, and CVS exposure, and monitor tenant credit quality and lease renewals.
- Evaluate the operating contribution and financing needs of the 2012 acquisitions and development pipeline.
- Reconcile GAAP earnings with FFO and adjusted FFO, including the effects of asset sales, discontinued operations, depreciation, stock compensation, and other non-cash items.
- Confirm the company’s stated liquidity outlook and compliance with debt covenants in subsequent filings.