Agree Realty Corporation: Q2 2012 Form 10-Q Summary
Business context and reporting period
Agree Realty Corporation is a self-managed REIT focused primarily on acquiring and developing single-tenant, net-leased retail properties. This filing covers the three and six months ended June 30, 2012. At quarter-end, the portfolio comprised 88 properties in 23 states, approximately 3.4 million square feet of gross leasable area, and was 97% leased with approximately 12 years of weighted-average lease term remaining. Approximately 50% of annualized base rent came from Walgreens, Kmart, and CVS.
Financial performance and key metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Total revenues | $9.2 million | $8.5 million | $18.2 million | $17.4 million |
| Income from operations | $4.9 million | $4.5 million | $9.8 million | $9.4 million |
| Net income | $5.1 million | $3.8 million | $9.8 million | $8.5 million |
| Net income attributable to Agree | $4.9 million | $3.7 million | $9.5 million | $8.2 million |
| FFO | $5.7 million | $5.4 million | $11.2 million | $11.7 million |
| Diluted EPS | $0.44 | $0.38 | $0.87 | $0.85 |
| Diluted FFO per share | $0.50 | $0.54 | $0.99 | $1.17 |
Reported operating margins were approximately 53.5% for the quarter and 53.6% for the six-month period. Net margins were approximately 55.1% and 53.9%, respectively, benefiting from gains on property dispositions. The quarterly dividend declared was $0.40 per share, unchanged from the prior-year quarter.
Six-month operating cash flow was $8.8 million, compared with $11.3 million in the prior-year period. Investing cash flow was negative $22.3 million, reflecting $25.6 million of real estate acquisitions and $3.3 million placed in restricted cash, partially offset by $6.5 million of asset-sale proceeds. Financing cash flow was $12.2 million, including approximately $35.0 million of net equity offering proceeds.
At June 30, 2012, total assets were $315.1 million, cash and cash equivalents were $0.6 million, and restricted cash was $3.3 million. Mortgage debt was $61.8 million and revolving credit-facility borrowings were $44.4 million. The company reported $40.6 million of remaining availability under its $85 million facility and compliance with its financial covenants. Debt to total enterprise value was approximately 29%.
Material changes versus the prior comparable period
- Quarterly revenue increased 8%, primarily from acquisitions and higher minimum rents. Six-month revenue increased 5%.
- Minimum rent increased 17% in the quarter and 12% for the six-month period, driven principally by acquired properties; Borders-related rent reductions partially offset the increase.
- Development fee income declined to zero from $0.5 million in the quarter and $0.9 million for the six-month period. Management stated that no additional development-fee projects were currently anticipated.
- Quarterly net income increased 33%, and six-month net income increased 15%, aided by gains on asset dispositions of $1.2 million and $2.1 million, respectively.
- FFO declined 5% for the six-month period and diluted FFO per share declined to $0.99 from $1.17, reflecting higher share count and the absence of prior-period operating contributions from disposed properties.
- The company issued 1.495 million common shares in January and February for approximately $35 million of net proceeds, primarily used to reduce credit-facility borrowings and for general corporate purposes.
- During 2012, the company acquired seven retail assets for approximately $28 million at a weighted-average capitalization rate of 8.59% and assumed approximately $9.6 million of debt in one acquisition.
- Four former Borders properties securing approximately $9.2 million of defaulted debt were conveyed to the lender through a consensual deed-in-lieu-of-foreclosure process in March 2012.
Guidance, outlook, commentary, and risks
Management stated that cash flow from operations, the credit facility, and additional financing sources should provide adequate liquidity for operations and dividends for at least the next 12 months. The company intends to continue acquiring and developing pre-leased, single-tenant retail properties and diversifying its tenant base. Subsequent to quarter-end, it acquired a three-property convenience and fuel-store portfolio for approximately $14.2 million, including assumed debt of $8.6 million, and an auto-service store for approximately $2.4 million.
Management identified risks relating to economic and real estate conditions, tenant bankruptcies or concentration, lease expirations and re-leasing, development and acquisition performance, access to debt or equity financing, interest-rate volatility, capital expenditures, refinancing requirements, and continued qualification as a REIT. A 100-basis-point increase in variable interest rates would have increased annual interest expense by approximately $0.4 million based on quarter-end exposures.
The company entered into a forward-starting interest-rate swap that fixes the rate on approximately $22.3 million of variable-rate borrowings at 3.62% from July 2013 through May 2019. Contractual obligations totaled approximately $134.9 million, including $61.8 million of mortgage principal, $44.4 million of revolving debt, $10.9 million of land-lease obligations, and $17.8 million of estimated interest payments.
Legal proceedings were limited to routine matters expected to be covered by insurance. Management reported no material changes to previously disclosed risk factors, and disclosure controls and procedures were considered effective.
Important facts for investors to verify
- Reconcile FFO and FFO per share with GAAP results and assess the effect of property sales and the 2012 equity issuance.
- Review tenant concentration, particularly Walgreens, Kmart, and CVS, and the continuing effects of Borders-related vacancies and rent reductions.
- Verify the timing and funding requirements for mortgage maturities, including approximately $12.7 million due in 2014 and approximately $23.4 million due in 2017.
- Assess the company’s ability to fund acquisitions, development, dividends, and capital expenditures while maintaining credit-facility covenant compliance.
- Evaluate the sustainability of reported earnings after excluding the $2.1 million six-month gain on asset dispositions and other discontinued-operation effects.
- Confirm the performance and final purchase-price allocations of the post-quarter-end acquisitions.