Agree Realty Corporation — 2016 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a Maryland REIT focused on owning, acquiring, developing and managing retail properties under net leases. The unaudited report covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. At March 31, 2016, the portfolio comprised 291 properties in 42 states totaling approximately 5.4 million square feet, was approximately 99.5% leased and had a weighted-average remaining lease term of approximately 11.2 years.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $20.2 million | $15.7 million | +28.5% |
| Income from operations | $11.2 million | $9.1 million | +24.1% |
| Operating margin | 55.6% | 57.5% | Down approximately 190 basis points |
| Net income | $7.6 million | $6.5 million | +16.8% |
| Net income attributable to Agree | $7.5 million | $6.4 million | +17.2% |
| Basic/diluted EPS | $0.37/$0.36 | $0.37/$0.37 | Diluted EPS decreased $0.01 |
| Funds from operations | $12.7 million | $10.0 million | +27.1% |
| Diluted FFO per share | $0.61 | $0.56 | +8.9% |
| Adjusted FFO | $12.7 million | $10.1 million | +26.5% |
| Cash flow from operations | $16.5 million | $9.2 million | +80.6% |
Revenue growth was led by a $3.9 million, or 27%, increase in minimum rents, primarily from acquired properties, and higher operating cost reimbursements. Depreciation and amortization increased 43% to $5.1 million, while interest expense increased 48% to $3.6 million, largely because of the $100 million of senior unsecured notes issued in May 2015. No impairment charges or gains or losses on asset sales were recorded in Q1 2016.
At March 31, 2016, total assets were $825.6 million versus $789.9 million at December 31, 2015. Net real estate investments increased to $734.0 million from $699.4 million. Cash and cash equivalents were $3.7 million. Total stockholders’ equity was $450.5 million versus $453.6 million at year-end 2015.
Debt, Liquidity and Capital Allocation
- Total gross indebtedness was $352.3 million, consisting of $92.3 million of mortgage debt, $100.0 million of unsecured term loans, $100.0 million of senior unsecured notes and $60.0 million drawn on the revolving credit facility.
- The $150.0 million revolving credit facility had $90.0 million available at March 31, 2016. The facility matures in July 2018 and has a one-year extension option, subject to conditions.
- Debt represented approximately 30.3% of total market capitalization, which was approximately $1.2 billion.
- The company was in compliance with its debt covenants.
- Scheduled principal payments total $352.3 million, including $22.5 million in 2017, $87.6 million in 2018 and $38.9 million in 2020. Balloon maturities and the 2018 revolving facility maturity create refinancing requirements.
- The company paid a $0.465 per-share quarterly dividend on April 15, 2016.
- Investing cash uses included $33.5 million for property acquisitions and $6.2 million for development and other real estate investments. Financing cash inflows included $42.0 million of revolving credit borrowings, partly offset by $9.3 million of mortgage repayments and $9.6 million of dividends paid.
Material Changes Versus the Prior Comparable Period
- The company acquired 12 retail net lease assets for approximately $33.3 million, located in nine states and leased to 13 tenants. The acquisitions had a weighted-average remaining lease term of approximately 6.9 years and an underwritten weighted-average capitalization rate of approximately 7.9%.
- The portfolio expanded from 278 to 291 properties and from approximately 5.2 million to 5.4 million square feet compared with December 31, 2015.
- The company completed development of a Hobby Lobby property in Springfield, Ohio. The property has a new 15-year lease, with rent commencing in the first quarter; total project cost was approximately $5.0 million.
- Minimum rents increased primarily from acquisitions and development, partly offset by approximately $0.6 million of lost rent from properties sold.
- Interest expense rose due to the May 2015 issuance of the senior unsecured notes, and general and administrative expenses increased 23% due primarily to higher employee and professional costs.
- The company prepaid an $8.6 million mortgage note in March 2016 and issued 53,886 shares under its ATM program for net proceeds of approximately $2.0 million. Approximately $57.9 million remained available under the ATM program.
- The company adopted the new debt issuance cost presentation guidance, reclassifying unamortized debt issuance costs as deductions from debt rather than deferred expenses.
Outlook, Risks, Contingencies and Unusual Items
Management expects short-term liquidity needs to be funded through operating cash flow and the revolving credit facility, with longer-term needs funded through operating cash flow, debt, equity or other financing. The filing provides no specific earnings, acquisition or development guidance.
Key risks include economic and real estate market conditions, tenant credit and bankruptcy risk, lease expirations and re-leasing, acquisition and development performance, availability and cost of financing, interest-rate volatility, capital expenditure requirements and maintaining REIT qualification. A 100-basis-point increase in rates on variable-rate debt would increase annualized interest expense by approximately $0.6 million based on the March 31, 2016 exposure.
The company uses interest-rate swaps to fix rates on portions of its variable-rate debt. The swaps had a combined liability of approximately $6.1 million at March 31, 2016, and changes in fair value contributed to a $2.9 million other comprehensive loss. The company reported no material litigation, no material changes to previously disclosed risk factors, no defaults and no subsequent events requiring recognition or disclosure.
Recent accounting standards concerning share-based compensation, leases and revenue recognition were not yet effective; management was evaluating their impact. The filing states that Q1 results may not be indicative of full-year 2016 results.
Important Facts for Investors to Verify
- Whether acquisition-driven rent growth and the 99.5% leased rate are sustained, including tenant credit quality and lease renewal performance.
- The company’s ability to refinance or repay the $87.6 million of scheduled 2018 principal obligations, including the $60.0 million revolving facility balance.
- Availability and pricing of future debt and equity financing, including the remaining ATM capacity.
- Coverage of the $0.465 quarterly dividend by recurring cash flow, FFO and AFFO after capital requirements.
- Interest-rate exposure, swap valuations and compliance with debt covenants.
- The eventual effects of new lease, revenue recognition and share-based compensation accounting standards.