Agree Realty Corporation 2018 Form 10-K Summary
Business context and reporting period
Agree Realty Corporation is a fully integrated 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, 2018; fourth-quarter information is presented in the filing’s unaudited quarterly data.
- Portfolio: 645 properties in 46 states totaling approximately 11.2 million square feet.
- Occupancy: approximately 99.8% leased, with a weighted-average remaining lease term of approximately 10.2 years.
- Approximately 51.4% of annualized base rent came from tenants or parent companies with investment-grade credit ratings.
- Largest tenant concentrations were Sherwin-Williams at 6.0% and Walgreens at 5.4% of annualized base rent.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $148.2 million | $116.6 million | +27% |
| Minimum rents | $132.8 million | $105.1 million | +26% |
| Income from operations | $73.0 million | $62.6 million | +17% |
| Net income | $58.8 million | $58.8 million | Flat |
| Net income attributable to Agree | $58.2 million | $58.1 million | Flat |
| Diluted EPS | $1.78 | $2.08 | Down from share issuance and dilution |
| Funds from operations | $93.4 million; $2.85 per diluted share | $76.3 million; $2.72 per diluted share | FFO +22%; per share +5% |
| Adjusted funds from operations | $92.7 million; $2.83 per diluted share | $75.7 million; $2.70 per diluted share | AFFO +22%; per share +5% |
| Net cash from operating activities | $93.2 million | $82.2 million | +13% |
| Net cash used in investing activities | $568.1 million | $319.1 million | Higher investment activity |
| Total assets | $2.03 billion | $1.49 billion | +36% |
| Total debt principal | $724.1 million | $522.4 million | +39% |
Income from operations was approximately 49% of revenue, while net income was approximately 40% of revenue. These margins were affected by substantial depreciation and amortization, a $11.2 million gain on asset sales and a $2.3 million impairment charge.
The Company invested approximately $653.9 million in 2018, including $608.3 million for 225 property acquisitions and $45.6 million for eight completed developments. It sold properties for $65.8 million of net proceeds and recognized an $11.2 million gain.
Liquidity, capital structure and dividends
- Cash and cash equivalents were $54.0 million at year-end.
- The $325.0 million revolving credit facility had $19.0 million outstanding and $306.0 million available, subject to covenant compliance.
- Total debt to market capitalization was 23.0%; total debt to enterprise value was approximately 24.9%, and total debt to gross assets was approximately 31.5%.
- Debt consisted principally of $385.0 million of senior unsecured notes, $258.5 million of unsecured term loans, $61.5 million of mortgage debt and $19.0 million drawn on the revolving facility.
- The Company reported compliance with all debt covenants at December 31, 2018.
- Quarterly dividends increased from $0.520 per share in March 2018 to $0.555 per share in December 2018. The fourth-quarter dividend implied an annualized rate of $2.22 per share.
Material changes versus the prior comparable period
- Property count increased from 436 to 645, and gross leasable area increased from approximately 8.7 million to 11.2 million square feet.
- Revenue growth was driven primarily by 225 acquisitions completed in 2018 and the full-year contribution from 2017 acquisitions, partially offset by properties sold.
- Interest expense increased 37% to $24.9 million because of higher borrowings used to fund portfolio expansion.
- Depreciation and amortization increased 38% to $43.7 million as the property base expanded.
- Net income remained flat despite higher operating income because of increased interest expense, depreciation and amortization, lower gains on asset sales and the 2018 impairment charge.
- Weighted-average diluted shares increased from 27.7 million to 32.4 million, contributing to the decline in diluted GAAP EPS despite higher FFO and AFFO.
- The Company issued $125.0 million of 4.32% senior unsecured notes due 2030 and entered into a $100.0 million term loan due 2026, fixed through interest-rate swaps at an all-in rate of 4.26%.
- Equity financing included $160.2 million of net proceeds from settlement of a March forward offering and $181.2 million of gross proceeds from the ATM program. Approximately $68.8 million remained available under the ATM program at year-end.
Outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or investment guidance. Management expects to fund near-term needs through operating cash flow and the revolving facility and long-term needs through operating cash flow, debt, equity and other capital sources. The Company intends to continue quarterly dividends, but future amounts remain subject to board approval, liquidity, earnings, capital requirements, debt restrictions and REIT distribution requirements.
- A September 2018 forward sale agreement for 3.5 million shares had not been settled at year-end and was required to be settled no later than September 3, 2019; anticipated net proceeds were approximately $190 million, subject to adjustments.
- Debt maturities included approximately $42.8 million in 2019, including a $40.0 million balloon payment, and approximately $20.0 million in 2021, including the revolving facility balance.
- The business is exposed to tenant defaults, bankruptcies, retail-sector disruption and e-commerce competition, particularly because many properties are single-tenant assets.
- Key concentrations include Walgreens, Sherwin-Williams, Michigan, Texas and Florida, although the overall portfolio is geographically diversified.
- Real estate values and liquidity may be affected by interest rates, capital-market access, refinancing conditions, competition, economic conditions, environmental liabilities and natural disasters.
- The Company uses interest-rate swaps to reduce exposure to variable rates. A 100-basis-point increase in variable-rate debt rates would have increased annual interest expense by approximately $0.2 million based on year-end exposures.
- The Company recorded a $2.3 million impairment charge in 2018 and disclosed no material litigation or reportable subsequent events.
- The Company expects adoption of the new lease standard to have limited impact on lessor revenue accounting, while recognizing right-of-use assets and lease liabilities for land leases representing less than 1% of total assets.
Most important facts for investors to verify
- Reconcile the reported 99.8% leased portfolio figure with selected financial data showing 100% leased properties.
- Assess whether FFO and AFFO growth per share continues to offset dilution from equity offerings and the unsettled forward sale.
- Review refinancing plans for the 2019 mortgage and term-loan maturities and the 2021 revolving facility maturity.
- Evaluate tenant credit quality, lease rollover exposure and the effect of e-commerce or tenant bankruptcies on single-tenant properties.
- Verify the ability to fund acquisitions, development spending and dividends while maintaining debt covenants and targeted leverage.
- Review the assumptions supporting property valuations, the $2.3 million impairment and the sustainability of gains from asset sales.
- Confirm future dividend policy and the tax treatment of distributions, including the 2018 return-of-capital component.