Agree Realty Corporation — Form 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a fully integrated Maryland REIT focused on owning, acquiring, developing and managing retail properties under net leases. The report covers the quarter and six months ended June 30, 2015. At quarter-end, the portfolio comprised 250 properties in 41 states, approximately 4.9 million square feet, 99.4% leased, with a weighted average remaining lease term of approximately 11.8 years. The Company held a 98.11% interest in Agree Limited Partnership.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $17.2 million, versus $12.9 million | $33.0 million, versus $25.5 million |
| Income from operations | $9.9 million, versus $4.6 million | $19.0 million, versus $11.8 million |
| Net income attributable to Agree | $10.3 million, versus $2.7 million | $16.6 million, versus $8.0 million |
| Diluted EPS | $0.58, versus $0.18 | $0.95, versus $0.54 |
| Funds from operations | $11.1 million; $0.62 per diluted share | $21.1 million; $1.18 per diluted share |
| Adjusted funds from operations | $11.0 million | $21.1 million |
| Net cash provided by operating activities | Not separately provided | $21.2 million, versus $16.7 million |
Second-quarter operating margin was approximately 57.7%, compared with 35.6% in the prior-year quarter. Net income attributable to Agree represented approximately 59.6% of revenue, compared with 20.6% in the prior-year quarter; the comparison was materially affected by a $3.5 million gain on asset sales and the absence of a prior-year impairment charge.
- Minimum rents increased 35% in the quarter and 31% in the first six months, primarily from acquired properties.
- Depreciation and amortization increased 59% in the quarter and 50% year to date because of acquisition and development activity.
- Interest expense increased 56% in the quarter and 47% year to date because of higher borrowings.
- Cash and cash equivalents were $2.9 million at June 30, 2015, compared with $5.4 million at December 31, 2014.
- Net real estate investments were $628.1 million, compared with $530.1 million at year-end 2014; total assets were $705.1 million.
Debt, Liquidity and Capital Allocation
- Total debt was approximately $318.0 million, consisting of $103.0 million of mortgage debt, $100.0 million of unsecured term loans, $100.0 million of senior unsecured notes and $15.0 million drawn on the revolving credit facility.
- The $150.0 million revolving credit facility had $135.0 million available and bore an interest rate of approximately 1.6% at quarter-end. The Company was in compliance with applicable debt covenants.
- The 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.
- Total debt represented 37.2% of total market capitalization as of June 30, 2015. A 100-basis-point increase in variable interest rates was estimated to increase annual interest expense by approximately $150,000.
- Debt maturities and balloon payments total $11.5 million in 2016, $22.5 million in 2017 and $42.6 million in 2018. The Company identifies refinancing and access to capital as important to meeting long-term requirements.
- Capital expenditures included $124.4 million for real estate acquisitions during the first six months, funded primarily through debt and equity financing. The Company issued 454,514 shares under its $100.0 million ATM program for approximately $13.9 million of gross proceeds, with approximately $86.1 million remaining.
- The Company declared a quarterly dividend of $0.465 per share, paid July 14, 2015.
Material Changes Versus Prior Comparable Period
- The Company acquired 19 retail net lease assets for approximately $63.6 million during the quarter and 44 assets for approximately $124.4 million year to date. The six-month acquisitions were 100% leased, had a weighted average lease term of approximately 12.7 years and an underwritten weighted average capitalization rate of approximately 8.0%.
- The Company sold three assets during the quarter for gross proceeds of $8.2 million and recorded a $3.5 million net gain. Four assets were sold year to date for gross proceeds of $9.2 million and a $3.5 million net gain.
- No impairment charge was recorded in 2015, compared with a $2.8 million impairment charge in the second quarter and first six months of 2014 related to Chippewa Commons.
- Revenue growth and higher operating income were partially offset by increased depreciation, amortization and interest expense associated with portfolio expansion and financing activity.
- The Company prepaid a $2.4 million mortgage in January 2015 and recorded a $180,000 loss on debt extinguishment.
- Operating cash flow increased to $21.2 million from $16.7 million, while investing cash outflows increased substantially to $116.4 million from $39.5 million because of acquisitions.
Outlook, Commentary, Risks and Unusual Items
Management expects short-term liquidity needs to be met through operating cash flow and the revolving credit facility, and expects long-term capital needs to be funded through operating cash flow, debt, equity or other financing. No formal earnings guidance is provided in the filing.
- Results may be affected by economic and real estate market conditions, tenant bankruptcies or losses, lease expirations and re-leasing risk, property performance, operating costs and acquisition execution.
- Future financing may not be available on acceptable terms. The Company faces refinancing risk as mortgage and unsecured debt matures, including significant balloon payments in 2016 through 2018.
- Interest-rate increases could raise borrowing costs, although interest-rate swaps fixed portions of term-loan and mortgage exposure. Swaps also create counterparty, settlement and hedge-accounting risks.
- Maintaining REIT qualification requires compliance with income, asset, distribution and ownership tests. Changes in REIT laws or other regulations could affect results.
- Reported earnings benefited from the $3.5 million asset-sale gain and the absence of the prior-year impairment. FFO and AFFO are non-GAAP measures and may not be comparable with similarly titled measures reported by other REITs.
- The filing reports 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 growth continues to generate rent and cash flow sufficient to offset higher depreciation, amortization and interest costs.
- The timing and refinancing plans for the $11.5 million, $22.5 million and $42.6 million of scheduled or balloon debt obligations due in 2016, 2017 and 2018, respectively.
- Remaining capacity and future dilution under the $100.0 million ATM equity program.
- Tenant concentration, lease rollover exposure and the sustainability of the 99.4% portfolio leasing level.
- The recurring portion of earnings and FFO after excluding asset-sale gains, debt-extinguishment costs and other non-recurring items.
- Compliance with debt covenants, availability under the revolving facility and continued access to debt and equity markets.