Business Context and Reporting Period
Agree Realty Corporation is a fully integrated REIT focused on acquiring, developing, owning and managing retail properties leased primarily under net leases to national tenants. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the same periods in 2018.
- Portfolio at June 30, 2019: 722 properties in 46 states, approximately 13.1 million square feet, 99.7% leased and a 10.1-year weighted-average remaining lease term.
- Approximately 54.2% of annualized base rent was from tenants or parent companies with investment-grade credit ratings.
- During the six months, the Company acquired 79 retail net lease assets for approximately $318.6 million and sold six properties for net proceeds of $26.8 million.
Financial Performance and Position
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Rental income | $44.9 million | $33.1 million | $87.2 million | $65.3 million |
| Total revenue | $44.9 million | $33.2 million | $87.3 million | $65.4 million |
| Income from operations | $23.4 million | $16.8 million | $45.9 million | $34.4 million |
| Net income | $18.7 million | $13.1 million | $37.2 million | $29.7 million |
| Net income attributable to Agree | $18.6 million | $12.9 million | $36.9 million | $29.4 million |
| Diluted EPS | $0.45 | $0.41 | $0.92 | $0.94 |
| FFO | $27.7 million | $19.8 million | $53.0 million | $39.6 million |
| Core FFO | $31.0 million | $22.3 million | $59.5 million | $44.4 million |
| AFFO | $30.6 million | $22.2 million | $58.3 million | $44.0 million |
- Q2 operating margin, calculated as income from operations divided by total revenue, was approximately 52.1%, compared with 50.7% in the prior-year quarter. Six-month operating margin was approximately 52.6%, compared with 52.5%.
- Q2 diluted EPS increased despite significant share issuance; six-month diluted EPS declined because the increase in earnings was more than offset by higher weighted-average shares outstanding.
- Net cash provided by operating activities was $57.6 million for the six months, compared with $37.0 million in 2018.
- Investing cash outflow was $304.7 million, principally reflecting $320.9 million of property acquisitions and $10.4 million of development spending.
- Financing cash inflow was $215.6 million, including $244.5 million of net common-stock offering proceeds and $35.0 million of net revolver borrowings.
- Cash and cash equivalents were $5.5 million at June 30, 2019; cash plus cash held in escrow totaled $22.4 million.
- Net real estate investments increased to $1.9 billion from $1.7 billion at December 31, 2018. Total assets were $2.3 billion, versus $2.0 billion at year-end.
Debt, Liquidity and Capitalization
- Gross debt was $739.2 million at June 30, 2019, consisting of $60.2 million of mortgages, $240.0 million of unsecured term loans, $385.0 million of senior unsecured notes and $54.0 million drawn on the revolving credit facility.
- The $325.0 million revolving credit facility had $271.0 million available and matures in January 2021, with an option to extend to January 2022, subject to conditions.
- Total debt to total market capitalization was 21.6%; total net debt was approximately $716.8 million.
- Near-term debt maturities include a $21.5 million mortgage balloon payment in October 2019, approximately $2.8 million of mortgage maturities in early 2020, and the revolving facility balance in January 2021.
- Management expected to fund the near-term mortgage maturities with the revolving credit facility and stated that it expected to meet short-term liquidity needs through operating cash flow and revolver borrowings.
- The Company was in compliance with all loan covenants at June 30, 2019.
- The Company entered into an agreement for a $125.0 million private placement of 4.47% senior unsecured notes due October 2031; issuance was scheduled to occur by October 30, 2019. The filing states that the expected blended all-in rate was approximately 4.42% after considering terminated interest-rate swaps.
Material Changes Versus Prior Comparable Period
- Q2 rental income increased 36.0% and six-month rental income increased 34.0%, primarily from the larger property portfolio and acquisitions completed in 2018 and 2019.
- Q2 net income increased 43% to $18.7 million; six-month net income increased 25% to $37.2 million.
- Q2 FFO increased approximately 40% and six-month FFO increased approximately 34%. Six-month Core FFO per diluted share increased to $1.49 from $1.41, while AFFO per diluted share increased to $1.45 from $1.40.
- Interest expense rose 25% in Q2 and 31% for the six months because of higher borrowings used to fund acquisition and development activity.
- Q2 general and administrative expense increased 25%, while G&A as a percentage of revenue improved to 8.6% from 9.6%. Six-month G&A increased 32%, with the ratio declining modestly to 9.1% from 9.2%.
- Common shares issued and outstanding increased to approximately 42.0 million from 37.5 million at December 31, 2018, principally reflecting equity offerings.
- The quarterly dividend increased to $0.570 per share from $0.540, representing a 5.6% increase in the annualized dividend to $2.28.
- The Company adopted ASC 842 leases on January 1, 2019. The adoption resulted in approximately $7.5 million of right-of-use assets and lease liabilities, with no cumulative-effect adjustment to opening retained earnings.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide explicit quantitative earnings or acquisition guidance for 2019.
- Management stated that future growth and capital needs would be funded through operating cash flow, revolver borrowings, debt issuance, common or preferred equity and other financing alternatives, but cautioned that financing may not be available on acceptable terms.
- Key risks include tenant credit deterioration or bankruptcy, lease expirations and re-leasing risk, real estate market conditions, interest-rate volatility, refinancing risk, access to capital, capital expenditures, and maintaining REIT qualification.
- Interest-rate swaps had a net liability fair value of approximately $6.6 million at June 30, 2019, and accumulated other comprehensive loss included a $7.2 million six-month loss from changes in swap fair values and settlement activity.
- The Company had approximately $19.4 million of straight-line rental receivables. Tenant inability to pay contractual rent could require a write-off and reduce rental income.
- The six-month tax expense benefited from a $0.5 million reversal of a previously accrued deferred tax liability related to a taxable REIT subsidiary.
- Impairment provisions were $1.2 million in Q2 and $1.6 million for the six months. Q2 and six-month gains on property sales were $2.9 million and $6.4 million, respectively.
- The filing reported no material litigation, no material changes to previously disclosed risk factors, no covenant defaults and no conditions raising substantial doubt about the Company’s ability to continue as a going concern.
Important Facts for Investors to Verify
- Completion and final terms of the planned $125.0 million 2031 senior unsecured note issuance.
- Refinancing or repayment of the October 2019 and early-2020 mortgage maturities and the January 2021 revolving credit facility maturity.
- Actual settlement timing and proceeds of the April 2019 forward equity sale, which was required to be settled by May 1, 2020.
- Whether acquisition volume, portfolio occupancy and tenant credit quality remain consistent with the reported growth profile.
- The effect of higher debt balances, interest expense, interest-rate swap valuations and potential LIBOR transition on future cash flows.
- Reconciliation and comparability of FFO, Core FFO and AFFO, which are non-GAAP measures and may differ from similarly titled measures reported by other REITs.