Agree Realty Corporation — Q3 2022 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 leased primarily under long-term net leases. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, with comparisons to the same periods in 2021.
At September 30, 2022, the portfolio included 1,707 properties in 48 states totaling approximately 35.8 million square feet. The portfolio was 99.7% leased, had a weighted average remaining lease term of approximately 8.9 years, and approximately 67.5% of annualized base rent was attributable to investment-grade-rated tenants or their parent companies.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Rental income | $110.0 million | $87.5 million | $313.1 million | $247.7 million |
| Total revenues | $110.1 million | $87.5 million | $313.3 million | $247.9 million |
| Net income | $39.6 million | $36.8 million | $112.0 million | $89.6 million |
| Net income attributable to common stockholders | $37.6 million | $36.4 million | $105.9 million | $88.8 million |
| Diluted EPS | $0.46 | $0.52 | $1.39 | $1.34 |
| Operating margin | 52.1% | 57.5% | 51.3% | 57.8% |
| Net margin | 35.9% | 42.1% | 35.8% | 36.1% |
| Core FFO per diluted share and unit | $0.97 | $0.92 | $2.92 | $2.65 |
| AFFO per diluted share and unit | $0.96 | $0.89 | $2.89 | $2.60 |
Net cash provided by operating activities was $268.9 million for the first nine months of 2022, compared with $186.0 million in 2021. Investing cash flow was $(1.184) billion, primarily reflecting $1.166 billion of acquisitions and $61.0 million of development spending. Financing cash flow was $1.121 billion, largely supported by common equity issuance and debt financing. Ending cash and cash equivalents, including escrow cash, were $251.5 million.
Net real estate investments increased to $5.391 billion from $4.367 billion at December 31, 2021. Total assets were $6.556 billion, versus $5.227 billion at year-end 2021. Total equity was $4.549 billion.
Debt, liquidity and capitalization
- Total gross indebtedness was approximately $1.884 billion, consisting of $1.810 billion of senior unsecured notes and $74.3 million of mortgage debt.
- The $1.0 billion unsecured revolving credit facility had no balance outstanding at September 30, 2022, leaving $1.0 billion available, subject to covenant compliance. The facility includes an accordion option up to $1.75 billion.
- Debt to enterprise value was 24.1%. Net debt, after cash and escrow balances, was approximately $1.63 billion.
- The Company issued $300 million of 2032 senior unsecured notes in August 2022. The all-in rate, including the effect of terminated swaps, was 3.96%.
- Near-term mortgage balloon maturities included $23.6 million due in January 2023 and $4.6 million due in September 2023. The Company reported compliance with all loan covenants.
- Common dividends declared during the quarter were $0.234 per share monthly, or an annualized $2.808 per share, up 7.8% from the comparable 2021 annualized rate. Series A preferred dividends were $0.08854 per depositary share monthly.
Material changes versus the prior comparable period
- Rental income increased 26% in both the quarter and year-to-date period, primarily from portfolio expansion and acquisitions.
- Net income increased 7% in Q3 and 25% for the first nine months. Common-stockholder net income increased 3% in Q3 and 19% year to date.
- Diluted EPS declined in Q3 despite higher earnings because of substantial common share issuance and the allocation of income to preferred stockholders. Year-to-date diluted EPS increased modestly.
- Interest expense increased 31% in Q3 and 25% year to date because of higher borrowings and higher revolving-facility rates.
- Depreciation and amortization increased 44% in Q3 and 38% year to date, reflecting the larger asset base. General and administrative expense increased 23% in Q3 and 18% year to date.
- The Company acquired 98 properties for approximately $361.5 million in Q3 and 303 properties for approximately $1.20 billion in the first nine months. It sold one property in Q3 and six year to date.
- The 2022 ATM program was established at $750 million. Approximately $18.1 million had been realized by September 30, 2022, with approximately $731.8 million of availability remaining. Common shares outstanding increased to 88.6 million from 71.3 million at December 31, 2021.
Outlook, commentary, risks and unusual items
Management did not provide a formal earnings or acquisition outlook in the filing. It expects short-term liquidity needs to be funded through cash, operating cash flow and the revolving credit facility, and expects long-term capital needs to be funded through these sources plus debt and equity offerings.
- Management reported that substantially all rent payments originally contracted for the quarter were collected.
- COVID-19, inflation, higher interest rates, capital-market volatility, tenant defaults or bankruptcies, retail-sector disruption, leasing risk, financing availability, covenant restrictions, cybersecurity, environmental liabilities and REIT qualification remain material risks.
- Four tenants were placed on a cash-basis accounting method because collection was no longer considered probable. Related adjustments reduced rental income and net income by approximately $0.4 million in both Q3 and the first nine months.
- The Company recognized a $1.0 million impairment provision year to date; no impairment was recorded in Q3.
- Interest-rate swaps produced a $28.4 million settlement gain in 2022 that was recorded through accumulated other comprehensive income and will be amortized against interest expense. No derivatives were outstanding at quarter-end.
- Twenty development or Partner Capital Solutions projects were under construction at September 30, 2022, with estimated remaining total costs of approximately $64.2 million.
- In October 2022, after quarter-end, the Company completed a 5.75 million-share follow-on offering tied to forward sale agreements, expected to generate approximately $381.7 million of net proceeds upon settlement by September 2023.
Most important facts for investors to verify
- Whether acquisition-driven rent growth and 99.7% occupancy remain sustainable as interest rates, inflation and retail conditions evolve.
- The effect of common equity issuance and forward sales on per-share FFO, AFFO, EPS and dividend coverage.
- Liquidity and refinancing plans for the January and September 2023 mortgage maturities and longer-term senior-note maturities.
- Tenant credit quality, rent collections and any further cash-basis accounting or receivable write-offs.
- Actual costs, completion timing and expected returns for the 20 development and Partner Capital Solutions projects.
- The filing does not provide a clear formal full-year earnings or FFO guidance range; investors should verify subsequent guidance separately.