Agree Realty Corporation — Q3 2021 Form 10-Q Summary
Business context and reporting period
Agree Realty is a fully integrated REIT focused on owning, acquiring, developing and managing retail properties under long-term net leases. The filing covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods.
- Portfolio: 1,338 properties in 47 states totaling approximately 27.7 million square feet.
- Occupancy: approximately 99.6% leased; weighted average remaining lease term of approximately 9.5 years.
- Approximately 66.9% of annualized base rent was derived from investment-grade-rated tenants or their parent entities.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $87.5 million | $63.8 million | $247.9 million | $177.2 million |
| Rental income | $87.5 million | $63.7 million | $247.7 million | $177.0 million |
| Income from operations | $50.3 million | $31.9 million | $143.2 million | $97.3 million |
| Net income | $36.8 million | $21.4 million | $89.6 million | $68.2 million |
| Net income attributable to common stockholders | $36.4 million | $21.3 million | $88.8 million | $67.8 million |
| Diluted EPS | $0.52 | $0.39 | $1.34 | $1.32 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $186.0 million | $90.9 million |
| Diluted FFO per share and unit | $0.82 | $0.74 | $2.18 | $2.16 |
| Diluted Core FFO per share and unit | $0.92 | $0.81 | $2.65 | $2.39 |
| Diluted AFFO per share and unit | $0.89 | $0.80 | $2.60 | $2.36 |
Approximate Q3 operating margin was 57.5% and net margin was 42.1%; nine-month operating margin was 57.8% and net margin was 36.1%. These ratios are calculated from reported GAAP revenue and income.
- Q3 2021 acquisitions: 80 retail net lease assets for approximately $340.6 million, with an underwritten weighted-average capitalization rate of approximately 6.2% and weighted average lease term of approximately 10.7 years.
- Nine-month acquisitions: 219 assets for approximately $1.075 billion, with a weighted average lease term of approximately 11.9 years.
- Q3 dispositions: three properties generating $11.5 million of net proceeds and a $3.5 million gain. Nine-month dispositions generated $46.8 million of proceeds and a $13.2 million gain.
- Net real estate investments were $4.11 billion at September 30, 2021, compared with $3.30 billion at December 31, 2020.
- Total assets were $5.00 billion, compared with $3.89 billion at year-end 2020.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $186.0 million, compared with $90.9 million in 2020.
- Investing cash flow was negative $1.069 billion, primarily reflecting $1.083 billion of real estate acquisitions and $32.7 million of development spending.
- Financing cash flow was positive $978.1 million, supported by equity and senior-note offerings.
- Cash, cash equivalents and escrow funds totaled $102.8 million at September 30, 2021, compared with $8.0 million at December 31, 2020.
- Gross debt was approximately $1.543 billion, consisting primarily of $1.510 billion of senior unsecured notes and $32.8 million of mortgage debt. The revolving credit facility had no borrowings outstanding and $500 million of capacity available, subject to covenants.
- Total debt to enterprise value was 24.6%. Management stated that the company was in compliance with all material debt covenants.
- In May 2021, the company issued $350 million of 2.00% notes due 2028 and $300 million of 2.60% notes due 2033, using proceeds to repay $240 million of unsecured term loans and settle related swaps.
- The term-loan repayment and swap settlement generated a $14.6 million charge in the first nine months, including $13.4 million of swap termination costs and $1.2 million of debt-cost write-offs.
Material changes versus the prior comparable period
- Q3 revenue increased 37%, net income increased 72%, and common-stockholder net income increased 71% year over year, primarily due to the substantially larger property portfolio.
- Nine-month revenue increased 40%, while net income increased 31% and common-stockholder net income increased 31%.
- Interest expense increased 29% in Q3 and 32% for the nine-month period because of higher borrowings used to fund acquisitions, partly offset by lower rates on certain debt.
- Depreciation and amortization increased 41% in Q3 and 47% for the nine-month period, reflecting portfolio growth.
- No impairment provision was recorded in 2021, compared with $2.9 million in Q3 2020 and $4.0 million for the first nine months of 2020.
- Common dividends declared were $0.217 per share monthly during Q3, or $2.60 annualized, up 8.3% from the $2.40 annualized rate in Q3 2020.
- In September 2021, the company issued $175 million liquidation value of Series A preferred stock, generating approximately $170.3 million of net proceeds. The preferred dividend rate is 4.25%.
- Common shares outstanding increased to 69.8 million at September 30, 2021 from 60.0 million at December 31, 2020, reflecting equity offerings and other share activity.
Outlook, commentary, risks and unusual items
- Management expects to fund short-term liquidity needs through operating cash flow and the revolving credit facility, and long-term capital needs through operating cash flow, debt, common equity and preferred equity.
- The filing provides no specific quantitative earnings or acquisition guidance.
- Management reported that substantially all rent payments originally contracted for Q3 were collected. COVID-19 rent deferrals had no material impact on Q3 revenue, and deferred COVID-19 rent receivables were $0.8 million at quarter-end.
- Four tenants were being accounted for on a cash basis because collection was no longer considered probable; the impact on Q3 and nine-month rental income and net income was immaterial.
- COVID-19 remains a material uncertainty, with potential effects on tenant credit, rent collections, asset values, debt-covenant compliance and access to capital.
- The company had $300 million of forward-starting interest-rate swaps outstanding at September 30, 2021, related to anticipated future debt issuance. Interest-rate volatility, refinancing risk and counterparty performance remain relevant risks.
- Legal proceedings were described as routine and not expected to have a material adverse effect. Management identified no conditions raising substantial doubt about going concern.
Important facts for investors to verify
- Confirm the sustainability of acquisition-driven revenue and AFFO growth as the enlarged portfolio seasons.
- Review tenant concentration, tenant credit quality, lease expirations and the collectability of straight-line and deferred rent receivables.
- Assess the effect of the $1.543 billion debt balance, upcoming 2023 and 2025 maturities, fixed-rate exposure and debt covenants.
- Evaluate dilution and future capital needs associated with the 2020 and 2021 forward equity agreements and the remaining ATM capacity.
- Reconcile GAAP earnings with FFO, Core FFO and AFFO, particularly the $14.6 million debt-extinguishment and swap-settlement charge.
- Monitor COVID-19 effects, retail tenant performance, interest rates, acquisition capitalization rates and potential real estate impairments.