Agree Realty Corporation — Q1 2017 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 under predominantly net leases. The unaudited quarter ended March 31, 2017 is compared with the quarter ended March 31, 2016; balance sheet amounts are compared with December 31, 2016.
- Portfolio: 377 properties in 43 states, approximately 7.3 million square feet, 99.6% leased, with a weighted average remaining lease term of approximately 10.6 years.
- Agree Realty owned 98.7% of the Operating Partnership at March 31, 2017.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $26.6 million | $20.2 million | Up 31% |
| Minimum rents | $24.0 million | $18.5 million | Up 30% |
| Operating expenses | $12.4 million | $9.0 million | Up 38% |
| Income from operations | $14.2 million | $11.2 million | Up 26% |
| Operating margin | 53.3% | 55.6% | Down approximately 230 bps |
| Net income | $14.8 million | $7.6 million | Up 95% |
| Net income attributable to Agree | $14.6 million | $7.5 million | Up 95% |
| Diluted EPS | $0.56 | $0.36 | Up 56% |
| Funds from operations | $17.0 million | $12.7 million | Up 35% |
| Adjusted FFO | $17.1 million | $12.7 million | Up 34% |
| Diluted AFFO per share | $0.65 | $0.61 | Up 7% |
| Net cash provided by operating activities | $15.6 million | $16.5 million | Down 6% |
Net income benefited from a $4.7 million gain on the sale of a Walgreens property. Interest expense increased 13% to $4.1 million, primarily because of additional debt issued since March 31, 2016. No impairment charges were recorded in either comparable quarter.
At March 31, 2017, net real estate investments were $992.3 million and total assets were $1.16 billion. Cash and cash equivalents declined to $2.3 million from $33.4 million at year-end 2016.
Material changes versus the prior comparable period
- The Company acquired 11 retail net-lease assets for approximately $53.2 million, with a weighted average lease term of approximately 10.6 years and an underwritten weighted average capitalization rate of approximately 7.6%.
- Net real estate investments increased by $42.0 million from year-end 2016, while the property count increased from 366 to 377.
- A Walgreens property in Ann Arbor, Michigan was sold for $10.2 million of net proceeds, generating a $4.7 million gain.
- Development and Partner Capital Solutions projects had approximately $21.5 million of anticipated total project costs; two projects were under construction at quarter-end.
- Cash used in investing activities was $46.8 million, including $53.7 million for acquisitions and other assets.
- Weighted average basic shares increased to 26.0 million from 20.4 million, reflecting substantial equity issuance in the prior-period comparison.
Debt, liquidity and capital resources
- Gross indebtedness was $418.3 million, consisting of $69.4 million of mortgage debt, $159.9 million of unsecured term loans, $160.0 million of senior unsecured notes and $29.0 million drawn on the revolving credit facility.
- Total debt represented 24.7% of total market capitalization. Fixed-rate debt, including variable-rate debt hedged with swaps, had a carrying value of $386.3 million and an estimated fair value of $400.3 million.
- The revolving facility had $221.0 million available under a $250.0 million commitment. The Company was in compliance with its debt covenants.
- Scheduled debt principal payments totaled $19.3 million, while balloon payments totaled $399.0 million. Significant maturities include $28.3 million in 2018, $21.3 million in 2019, $38.9 million in 2020 and $95.0 million in 2021.
- Management expects short-term liquidity needs to be funded by operating cash flow and revolver borrowings, and longer-term needs through operating cash flow, debt and equity financing.
- The Company declared a quarterly dividend of $0.495 per share, paid April 14, 2017.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or same-store operating guidance. Management expects continued acquisition and development activity and believes financing can be obtained on reasonable terms, but cautions that financing may not be available or may not be available on acceptable terms.
- Primary risks include economic and real estate market conditions, tenant defaults or bankruptcies, lease expirations and re-leasing risk, acquisition and development execution, rising interest rates, refinancing risk, and the ability to maintain REIT qualification.
- A 100-basis-point increase in interest rates on variable-rate debt would increase annual interest expense by approximately $0.3 million, based on exposures at March 31, 2017.
- Interest rate swaps had $1.6 million of asset fair value and $1.4 million of liability fair value. A net derivative liability of approximately $1.2 million could have required settlement if specified default provisions had been triggered.
- Straight-line rent receivables were $10.3 million and could require write-downs if tenants cannot pay contractual rents.
- The portfolio recovery rate for operating cost reimbursements declined to 90% from 94% in the comparable quarter.
- The Company is evaluating the potential effects of new accounting standards for business combinations, leases and revenue recognition; it anticipated an immaterial impact from the leases standard but had not finalized its assessment.
- No material changes were reported to the risk factors in the latest Form 10-K, and no material litigation was disclosed.
Important facts for investors to verify
- Determine whether growth in rents, FFO and AFFO is sustainable after excluding the $4.7 million property-sale gain and considering acquisition financing costs.
- Review the concentration, credit quality and lease rollover schedule of the 377-property portfolio, including the 99.6% reported leased rate.
- Assess the ability to refinance or repay the substantial balloon maturities, particularly the 2018-2021 obligations, while maintaining dividend payments and acquisition activity.
- Reconcile operating cash flow of $15.6 million with the $13.1 million of declared dividends and the $46.8 million of investing cash outflows.
- Monitor available revolver capacity, leverage and compliance with financial covenants as debt-funded acquisitions continue.
- Evaluate the effect of tenant reimbursement trends, straight-line rent receivables and potential tenant credit deterioration on recurring cash earnings.