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 Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020, and the balance sheet is compared with December 31, 2020.
- Portfolio at March 31, 2021: 1,213 properties in 46 states, approximately 24.2 million square feet, 99.4% leased and a weighted-average remaining lease term of approximately 9.8 years.
- Approximately 67.2% of annualized base rent was attributable to tenants or parent companies with investment-grade credit ratings.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenues | $77.8 million | $55.8 million | +39% |
| Rental income | $77.8 million | $55.8 million | +39% |
| Income from operations | $39.9 million | $29.7 million | +34% |
| Net income | $30.3 million | $21.4 million | +42% |
| Net income attributable to Agree | $30.1 million | $21.2 million | +42% |
| Diluted EPS | $0.48 | $0.46 | +4% |
| Net cash provided by operating activities | $45.8 million | $28.7 million | +60% |
| Nareit FFO | $48.6 million | $33.7 million | +44% |
| Core FFO | $53.3 million | $37.6 million | +42% |
| AFFO | $52.5 million | $37.2 million | +41% |
Net income margin was approximately 38.9% in Q1 2021 versus 38.3% in Q1 2020. Income from operations margin was approximately 51.2% versus 53.1%, reflecting higher depreciation, general and administrative expense and property-level costs. Diluted Core FFO and AFFO per share were $0.84 and $0.83, respectively, compared with $0.82 and $0.81.
- Real estate taxes increased 21% to $5.7 million; property operating expenses increased 52% to $3.5 million; depreciation and amortization increased 52% to $21.5 million.
- General and administrative expense increased 48% to $6.9 million, primarily from increased headcount and compensation.
- Interest expense increased 21% to $11.7 million due mainly to higher borrowings used to fund acquisitions and development.
- The company declared monthly dividends of $0.207 per common share, or $0.621 for the quarter. Annualized dividend was $2.48 per share, up 6% from $2.34 in Q1 2020.
Cash Flow, Capitalization and Liquidity
- Operating activities provided $45.8 million. Investing activities used $387.2 million, including $397.0 million for real estate acquisitions and other assets. Financing activities provided $340.8 million.
- Cash and cash equivalents were $7.4 million at March 31, 2021, compared with $6.1 million at December 31, 2020; cash plus escrow balances were $7.4 million versus $8.0 million.
- The company acquired 86 retail net lease assets for approximately $387.9 million, with a weighted-average lease term of approximately 12.9 years and an underwritten weighted-average capitalization rate of approximately 6.3%.
- Total gross debt was approximately $1.37 billion, consisting of $33.2 million of mortgage debt, $240.0 million of unsecured term loans, $860.0 million of senior unsecured notes and $238.0 million drawn on the revolving credit facility.
- Revolving credit capacity was $500.0 million, with $262.0 million available subject to covenant compliance. Total debt represented approximately 24.0% of enterprise value.
- Debt maturities include approximately $69.2 million in 2023, $339.0 million in 2024 and $51.0 million in 2025, based on scheduled and balloon payments disclosed in the filing.
- The company issued common stock and received $258.1 million of net proceeds during the quarter, including approximately $221.4 million from a January 2021 follow-on offering.
Material Changes Versus the Prior Comparable Period
- Portfolio growth was the principal driver of higher rental income, operating cash flow and earnings. Gross real estate investment increased from approximately $2.4 billion at March 31, 2020 to approximately $3.6 billion at March 31, 2021.
- Acquisition spending increased by approximately $167.5 million year over year, while net cash used in investing activities increased by approximately $180.6 million.
- Net financing cash inflows increased by approximately $112.9 million, primarily reflecting higher equity proceeds and borrowings used to fund acquisitions.
- Average basic shares outstanding increased to 62.8 million from 45.4 million, limiting per-share earnings growth despite significant growth in total earnings.
- Accumulated other comprehensive income improved by $25.5 million, primarily from changes in the fair value of interest rate swaps.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal full-year earnings or operating guidance. Management expects short-term liquidity needs to be funded by operating cash flow and revolver borrowings and expects long-term capital needs to be funded through operating cash flow, debt, equity and other financing sources.
- COVID-19 remained the most significant stated uncertainty. The company collected more than 99% of rent payments originally contracted for the quarter, and rent deferrals did not materially affect Q1 revenue. Net deferred rent receivables related to COVID-19 concessions were $1.6 million.
- Five tenants were accounted for on a cash basis because collection was no longer considered probable; their impact on Q1 rental income and net income was immaterial. Future tenant defaults, rent concessions, vacancies or impairments could reduce revenue and cash flow.
- The company recorded a $2.9 million net gain on the sale of three properties and a $0.1 million gain on involuntary conversion. No real estate impairment provisions were recorded.
- The company was in compliance with all material debt covenants and identified no conditions raising substantial doubt about going concern. Nevertheless, substantial debt maturities, revolving-credit exposure, interest-rate changes, refinancing risk and covenant restrictions remain relevant.
- Interest-rate swaps had gross assets of $23.0 million and gross liabilities of $12.6 million at March 31, 2021. The company estimates that $4.9 million will be reclassified from accumulated OCI into interest expense over the next twelve months.
- The company had $474.3 million of remaining availability under its 2021 ATM program at March 31, 2021 and had outstanding forward-sale obligations under both the 2020 and 2021 programs.
- Routine legal proceedings were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor Verification Items
- Verify rent collections, deferred rents, tenant credit quality and the extent to which COVID-19 effects could affect future collectability.
- Assess whether acquisition growth and the approximately 6.3% acquisition capitalization rate adequately exceed incremental financing costs and ongoing operating expenses.
- Review 2023 and 2024 debt maturities, revolver utilization, refinancing plans and compliance headroom under financial covenants.
- Reconcile AFFO, Core FFO and other non-GAAP measures with GAAP results and compare definitions with other REITs.
- Monitor dilution from the increased share count, outstanding forward equity sales and future ATM issuances.
- Evaluate interest-rate swap exposures, LIBOR transition provisions and the effect of changing rates on variable-rate debt and future financings.
- Confirm the sustainability of the $2.48 annualized dividend relative to AFFO, operating cash flow and acquisition funding requirements.