Agree Realty Corporation — Q3 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 long-term net leases. This unaudited quarterly report covers the three and nine months ended September 30, 2015, with comparisons to the same 2014 periods.
- Portfolio: 263 properties in 41 states, approximately 4.8 million square feet, 99.5% leased.
- Weighted-average remaining lease term: approximately 11.8 years.
- During the first nine months, the Company acquired 59 properties for approximately $160.6 million and sold eight assets for gross proceeds of approximately $29.0 million.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $17.8 million | $13.8 million | $50.8 million | $39.2 million |
| Income from operations | $9.2 million | $7.7 million | $28.2 million | $19.5 million |
| Net income attributable to Agree | $14.6 million | $4.9 million | $31.2 million | $12.9 million |
| Diluted EPS | $0.81 | $0.33 | $1.76 | $0.87 |
| Funds from operations | $11.2 million | $8.3 million | $32.3 million | $24.3 million |
| Adjusted FFO | $11.1 million | $8.4 million | $32.2 million | $24.8 million |
| Diluted FFO per share | $0.61 | $0.55 | $1.79 | $1.61 |
Q3 operating margin was approximately 51.8%, compared with approximately 56.0% in Q3 2014. The lower margin reflects substantially higher depreciation and amortization from acquisitions and development. Net income and GAAP margins were materially affected by an $8.6 million gain on asset sales.
- Minimum rents increased 33% in Q3 and 31% for the nine-month period, primarily from acquired and developed properties.
- Net cash provided by operating activities was $34.4 million for the nine months, compared with $25.3 million in 2014.
- Investing activities used $139.0 million, including $161.7 million for real estate acquisitions and development spending.
- Financing activities provided $120.6 million, including $100.0 million of senior unsecured notes and $38.8 million of net common-stock offering proceeds.
- Cash and cash equivalents were $21.4 million at September 30, 2015, compared with $5.4 million at December 31, 2014.
Balance Sheet, Debt and Liquidity
- Total assets increased to $749.2 million from $593.6 million at December 31, 2014; net real estate investments increased to $650.3 million from $530.1 million.
- Total indebtedness was approximately $329.3 million, consisting of $102.3 million of mortgage debt, $100.0 million of unsecured term loans, $100.0 million of senior unsecured notes and $27.0 million drawn on the revolving facility.
- The revolving credit facility had $123.0 million available at September 30, 2015. The Company was in compliance with its debt covenants.
- Total debt represented approximately 36.45% of total market capitalization.
- The $100.0 million senior unsecured notes issued in May 2015 comprise $50.0 million of 4.16% notes due 2025 and $50.0 million of 4.26% notes due 2027.
- Mortgage debt carried a weighted-average interest rate of approximately 4.19%. Interest-rate swaps fixed significant portions of variable-rate debt.
- The Company estimated that a 100-basis-point increase in variable-rate debt interest rates would increase annual interest expense by approximately $270,000.
Material Changes Versus the Prior Comparable Period
- Revenue rose $4.1 million, or 30%, in Q3 and $11.6 million, or 29%, for the nine months, driven mainly by portfolio expansion.
- Interest expense increased 22% in Q3 and 37% year to date because of higher borrowings, including the 2014 term loan and 2015 senior notes.
- Depreciation and amortization increased 94% in Q3 and 66% year to date due to acquisition and development activity.
- No impairment charges were recorded in 2015, compared with $220,000 in Q3 2014 and $3.0 million for the first nine months of 2014.
- Q3 2015 included an $8.6 million gain on asset sales, compared with a $293,000 loss in Q3 2014. Year-to-date gains on asset sales were $12.1 million versus a $293,000 loss in 2014.
- Common shares outstanding increased to 18.9 million at September 30, 2015 from 17.5 million at December 31, 2014, primarily through the ATM equity program.
- The quarterly dividend was $0.465 per share, declared for the quarter ended September 30 and paid October 13, 2015.
Outlook, Commentary, Risks and Unusual Items
Management expects short-term liquidity needs to be funded through operating cash flow and the revolving credit facility, and longer-term needs through operating cash flow, debt, equity or other financing. The filing does not provide formal earnings or FFO guidance.
- Development projects included a Cash & Carry Smart Foodservice property in Salem, Oregon, with rent anticipated to commence in the first quarter of 2016, and a Hobby Lobby project in Springfield, Ohio, expected to be completed by the end of the second quarter of 2016.
- Key risks include tenant financial weakness or bankruptcy, re-leasing risk, acquisition and development execution, access to capital, refinancing and interest-rate risk, changes in real estate markets, and maintaining REIT qualification.
- Debt maturities include approximately $11.5 million in 2016, $22.5 million in 2017 and $54.6 million in 2018, including the revolving facility balance and scheduled mortgage maturities.
- Mortgage loans are generally non-recourse but may contain guaranty, cross-default and cross-collateralization provisions.
- The Company had a $5.0 million interest-rate swap liability and recorded a $2.9 million year-to-date reduction in other comprehensive income from swap fair-value changes.
- The Company reported no material litigation, no material changes to previously disclosed risk factors and no subsequent events requiring recognition or disclosure.
Important Facts for Investors to Verify
- Whether acquisition-driven rent growth and the 99.5% leased rate are sustained without increased tenant or geographic concentration risk.
- The recurring operating earnings and FFO contribution excluding the $12.1 million year-to-date gain on property sales.
- Funding plans for the substantial 2016–2018 debt maturities and the continued availability of the revolving facility.
- The effect of rising interest rates on variable-rate debt, refinancing costs and property valuations despite the Company’s hedging program.
- Whether the Salem and Springfield development projects are completed on schedule and achieve expected rent commencement and returns.
- The Company’s calculation of FFO and AFFO, which are non-GAAP measures and may not be comparable with similarly titled measures reported by other REITs.