Agree Realty Corporation 2020 Form 10-K Summary
Business Context and Reporting Period
Agree Realty Corporation is a fully integrated U.S. REIT focused on owning, acquiring, developing and managing retail properties under long-term net leases. This Form 10-K covers the fiscal year ended December 31, 2020, including fourth-quarter developments. The portfolio comprised 1,129 properties in 46 states, approximately 22.7 million square feet, 99.5% leased, with a weighted-average remaining lease term of approximately 9.7 years. Approximately 67.5% of annualized base rent was attributable to investment-grade-rated tenants or their parents.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $248.6 million | $187.5 million | +33% |
| Rental income | $248.3 million | $187.3 million | +33% |
| Income from operations | $125.1 million | $101.1 million | +24% |
| Net income | $92.0 million | $80.8 million | +14% |
| Net income attributable to Agree Realty | $91.4 million | $80.1 million | +14% |
| Diluted EPS | $1.74 | $1.93 | Declined due to substantial share issuance |
| Nareit FFO | $154.4 million | $114.5 million | +35% |
| Core FFO | $170.2 million | $128.0 million | +33% |
| AFFO | $168.8 million | $125.5 million | +34% |
| Diluted AFFO per share | $3.20 | $3.02 | +6% |
| Net cash from operating activities | $143.0 million | $126.7 million | +$16.2 million |
Income from operations represented approximately 50.3% of total revenue, while GAAP net income represented approximately 37.0%. Depreciation and amortization expense was $66.8 million, impairment expense was $4.1 million, interest expense was $40.1 million, and net gains on asset sales were $8.0 million.
Investments, Capitalization and Liquidity
- The Company invested approximately $1.34 billion in 2020, including $1.31 billion for 317 acquisitions and $31.1 million for nine completed developments. The acquisitions had an underwritten weighted-average capitalization rate of approximately 6.4% and an average lease term of approximately 11.3 years.
- The Company sold 17 properties for net proceeds of $47.7 million and recorded an $8.0 million net gain.
- Net real estate investments increased to $3.30 billion from $2.22 billion at December 31, 2019.
- Total gross debt was $1.23 billion at year-end, compared with $876.1 million in 2019. Debt included $33.4 million of mortgage debt, $240.0 million of unsecured term loans, $860.0 million of senior unsecured notes and $92.0 million drawn on the revolving credit facility.
- Total debt was approximately 23.4% of enterprise value and 30.0% of gross assets. The Company reported compliance with all material debt covenants.
- Cash and cash equivalents plus cash held in escrow totaled $8.0 million. The revolving credit facility had $92.0 million outstanding and $407.8 million available, subject to covenant compliance.
- Operating, investing and financing cash flows were $143.0 million, $(1.30) billion and $1.12 billion, respectively. Acquisition spending was primarily funded through equity and debt issuance.
Material Changes Versus the Prior Comparable Period
- Portfolio scale increased from 821 properties and 14.6 million square feet at December 31, 2019 to 1,129 properties and 22.7 million square feet at December 31, 2020.
- Rental income increased 33%, while real estate taxes increased 38%, property operating expenses increased 34%, and depreciation and amortization increased 46%, primarily due to portfolio growth.
- General and administrative expense rose 34% to $20.8 million, driven by higher headcount, new executive employment agreements and professional costs.
- Interest expense increased 21% to $40.1 million because of higher borrowings, partly offset by lower interest rates.
- Net income increased 14%, but diluted EPS declined from $1.93 to $1.74 because diluted weighted-average shares rose from 41.2 million to 52.4 million.
- The Company issued 14.4 million common shares during 2020 and received $896.1 million of net equity proceeds. It also issued $350.0 million of 2.900% senior unsecured notes due 2030.
- Quarterly dividends increased from $0.585 in March 2020 to $0.620 in December 2020, or $2.48 annualized. The Company transitioned to monthly dividends beginning in January 2021.
COVID-19, Outlook, Risks and Unusual Items
COVID-19 was identified as the principal uncertainty affecting tenants, rent collections, property values, financing markets and the broader economy. The Company collected approximately 95%, 98% and 99% of rents originally contracted for the second, third and fourth quarters, respectively. Rent deferral agreements represented 2%, 2% and less than 1% of those quarters' rents, net of repayments. Under the Company's accounting election, deferrals generally affected collection timing rather than recognized rental revenue.
- Management stated that the ultimate impact of COVID-19 on future rental revenue, cash flow and property values could not be determined.
- Key risks include tenant defaults or bankruptcies, single-tenant vacancies, retail-sector disruption and e-commerce competition, geographic and sector concentration, acquisition and development execution, interest-rate and refinancing risk, debt covenants, LIBOR transition, cybersecurity, environmental liabilities and REIT qualification.
- Home improvement, grocery and tire and auto service were the largest tenant sectors at 9.8%, 8.3% and 8.1% of annualized base rent, respectively. No tenant exceeded 10% of annualized base rent.
- Impairment expense increased to $4.1 million from $1.6 million. The filing emphasizes heightened valuation uncertainty because of the pandemic.
- The Company paid $22.7 million to settle interest-rate swaps in 2020; related changes contributed to a $30.0 million other comprehensive loss.
- In January 2021, the Company completed a follow-on offering of 3.45 million shares for approximately $221.4 million of net proceeds.
- The filing reports no material litigation, no unresolved SEC staff comments and no conditions raising substantial doubt about the Company's ability to continue as a going concern.
Important Facts for Investors to Verify
- Whether post-2020 tenant collections, deferrals, bankruptcies and rent concessions remain consistent with the strong fourth-quarter collection rate.
- The effect of continued acquisitions and equity issuance on AFFO per share, leverage and shareholder dilution.
- Debt maturities, refinancing capacity and covenant headroom, particularly the $68.8 million due in 2023 and $193.0 million due in 2024.
- The sustainability of the $2.48 annualized dividend and its coverage by AFFO and operating cash flow.
- Actual property-level exposure to concentrated tenant sectors, states and individual tenants, including single-tenant vacancy risk.
- Assumptions underlying acquisition purchase-price allocations, impairment testing and real estate fair values, which were identified as critical audit matters.
- The financial and operational effects of LIBOR replacement and future interest-rate movements.