Agree Realty Corporation — Q1 2022 Form 10-Q Summary
Business context and reporting period
Agree Realty is a fully integrated REIT focused on acquiring, developing, owning and managing retail properties leased primarily under long-term net leases. This unaudited filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
- Portfolio at March 31, 2022: 1,510 properties in 47 states, approximately 31.0 million square feet of gross leasable area, and 99.6% leased.
- Weighted average remaining lease term was approximately 9.1 years; approximately 67.8% of annualized base rent came from investment-grade-rated tenants or their parent entities.
- The Company held a 99.5% common equity interest in Agree Limited Partnership and had 75.2 million common shares outstanding as of May 2, 2022.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $98.3 million | $77.8 million | Up 26% |
| Rental income | $98.3 million | $77.8 million | Up 26% |
| Income from operations | $50.9 million | $42.9 million | Up 19% |
| Net income | $36.3 million | $30.3 million | Up 20% |
| Net income attributable to common stockholders | $34.3 million | $30.1 million | Up 14% |
| Basic and diluted EPS | $0.48 | $0.48 | Flat |
| Net cash provided by operating activities | $61.5 million | $45.8 million | Up $15.7 million |
| FFO per diluted share and unit | $0.86 | $0.77 | Up 12% |
| Core FFO per diluted share and unit | $0.97 | $0.84 | Up 15% |
| AFFO per diluted share and unit | $0.97 | $0.83 | Up 17% |
Derived margins were approximately 51.8% for income from operations, 36.9% for net income and 34.8% for net income attributable to common stockholders, each as a percentage of total revenue. These are calculated from reported figures and are not Company-defined margins.
- Operating expenses increased to $49.7 million from $38.0 million, led by higher depreciation and amortization, real estate taxes and property operating expenses.
- Interest expense increased 20% to $13.9 million, primarily because of higher borrowings used to fund acquisitions and development.
- The Company recorded a $1.0 million impairment provision in Q1 2022 versus none in the prior-year quarter.
- Other comprehensive income included a $20.6 million favorable change in the fair value and settlement of interest rate swaps.
Cash flow, capital allocation and liquidity
- Investing activities used $438.8 million, including $413.1 million for acquisitions and $33.3 million for development and other assets.
- Financing activities provided $357.8 million, including $250.7 million of common-stock proceeds and $160.0 million of net revolving-credit borrowings.
- Cash and cash equivalents plus escrow cash totaled $25.8 million at March 31, 2022, compared with $45.3 million at December 31, 2021.
- The Company declared monthly common dividends of $0.227 per share, or an annualized $2.72 per share, a 9.7% increase from the prior-year annualized dividend. Series A preferred dividends were $0.08854 per depositary share per month.
- At March 31, 2022, $680.0 million remained available under the $1.0 billion revolving credit facility, subject to covenant compliance.
Debt and balance sheet
- Total gross debt was approximately $1.86 billion: $1.51 billion of senior unsecured notes, $320.0 million drawn on the revolving credit facility and $32.4 million of mortgage debt.
- Total debt increased from approximately $1.70 billion at December 31, 2021, primarily due to the $160.0 million increase in revolving-credit borrowings.
- Total assets were $5.64 billion and total equity was $3.68 billion at March 31, 2022.
- Debt represented approximately 26.5% of enterprise value. Management stated that the Company was in compliance with all loan covenants and obligations.
- Nearer-term maturities include approximately $28.3 million of mortgage balloon payments in 2023, $50.0 million of senior notes in 2025 and the $320.0 million revolving facility maturity in January 2026, with extension options to January 2027.
Material changes versus the prior comparable period
- During Q1 2022, the Company acquired 106 retail net-lease assets for approximately $409.8 million, compared with a smaller acquisition program in the prior-year quarter. The acquisitions had an approximately 6.0% underwritten weighted-average capitalization rate and approximately 9.2-year weighted-average lease term.
- The portfolio expanded from approximately 1,213 properties and 24.2 million square feet at March 31, 2021 to 1,510 properties and 31.0 million square feet at March 31, 2022.
- The Company commenced 15 development or Partner Capital Solutions projects and had 17 projects under construction at quarter-end, with anticipated total costs of approximately $50.7 million.
- One property was sold for net proceeds of $7.6 million, generating a $2.3 million gain.
- Common shares outstanding increased materially year over year, contributing to higher total earnings but leaving reported EPS flat at $0.48.
Guidance, outlook, commentary and risks
The filing does not provide explicit quantitative earnings, acquisition or AFFO guidance. Management expects short-term liquidity needs to be funded through operating cash flow and revolving-credit borrowings, with longer-term needs funded through operating cash flow, debt and equity offerings.
- Management reported that substantially all rent payments originally contracted for the quarter were collected.
- COVID-19 remains a significant uncertainty because tenant financial condition, rent collections, asset values, liquidity and covenant compliance could deteriorate if economic conditions worsen.
- Three tenants were being accounted for on a cash basis because collection was no longer considered probable; related adjustments had an immaterial impact on Q1 rental income and net income. The general allowance for operating lease receivables was $0.8 million.
- Interest-rate risk is material because the revolving facility bears variable-rate interest and debt must be refinanced at maturity. The Company had $300.0 million of interest-rate swaps outstanding, valued as a $19.1 million asset at quarter-end.
- Other principal risks include tenant defaults or bankruptcies, retail-sector disruption, acquisition and development execution, access to capital, leverage and debt covenants, cybersecurity, environmental liabilities, lease renewals, dividend capacity and continued qualification as a REIT.
- No material litigation, reportable subsequent events or going-concern uncertainties were identified in the filing.
Important facts for investors to verify
- Whether acquisition volume and portfolio growth can continue without materially increasing leverage or equity dilution.
- The sustainability of the $2.72 annualized common dividend relative to AFFO, debt service and future capital requirements.
- Exposure to the $320.0 million revolving-credit maturity in 2026 and the 2023 mortgage balloon payments.
- Tenant concentration, investment-grade exposure and rent-collection trends, particularly for tenants being accounted for on a cash basis.
- The effect of rising interest rates on the revolving facility, refinancing costs and acquisition capitalization rates.
- Completion costs and expected returns for the 17 development or Partner Capital Solutions projects under construction.
- Comparability of FFO, Core FFO and AFFO with other REITs, because these non-GAAP measures may be calculated differently by peers.