Agree Realty Corporation: FY2014 Form 10-K Summary
Business Context and Reporting Period
Agree Realty Corporation is a fully integrated REIT focused on acquiring, developing, owning and managing retail properties primarily leased on a net-lease basis. This Form 10-K covers the fiscal year ended December 31, 2014, with quarterly data provided for the fourth quarter.
- Portfolio: 209 properties in 37 states totaling approximately 4.3 million square feet.
- Occupancy: approximately 98.6% leased; weighted average remaining lease term of approximately 11.9 years.
- Annualized base rent: $56.5 million, including 91.6% from 203 net-lease properties and 8.4% from six community shopping centers.
- Investment-grade tenants or parent companies generated approximately 55.8% of annualized base rent.
- Walgreens represented approximately 21.9% of annualized base rent, creating a significant tenant concentration.
Financial Performance and Key Metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenue | $53.6 million | $43.5 million | Up 23% |
| Minimum rental income | $49.4 million | $40.9 million | Up 21% |
| Income from operations | $27.9 million | $25.4 million | Up 10% |
| Net income | $18.9 million | $20.2 million | Down 6% |
| Net income attributable to Agree Realty | $18.5 million | $19.7 million | Down 6% |
| Diluted EPS | $1.24 | $1.50 | Down 17% |
| Funds from operations | $33.3 million | $28.4 million | Up 17% |
| FFO per diluted share | $2.18 | $2.10 | Up 4% |
| Adjusted FFO | $33.9 million | $29.0 million | Up 17% |
| Net cash from operating activities | $35.1 million | $29.6 million | Up 19% |
Based on consolidated revenue of $53.6 million, income from operations was approximately 52.1% of revenue and net income was approximately 35.3% of revenue. These margins are affected by depreciation, amortization, impairment charges and other REIT-specific items.
- Interest expense increased 33% to $8.6 million, primarily because of additional borrowing used to fund acquisitions and development.
- Depreciation and amortization increased 31% to $11.1 million.
- The company recorded $3.0 million of impairment charges, including $2.8 million for Chippewa Commons and $0.2 million for Petoskey Town Center.
- Cash and cash equivalents declined to $5.4 million from $14.5 million at year-end 2013, reflecting substantial investment activity.
- 2014 dividends totaled $1.74 per share, compared with $1.64 per share in 2013. Approximately 80.35% of 2014 dividends was classified as ordinary income and 19.65% as return of capital for tax purposes.
Fourth-Quarter Results
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Revenue | $14.3 million | $11.7 million |
| Net income | $5.7 million | $5.6 million |
| Diluted EPS | $0.36 | $0.40 |
Debt, Liquidity and Capital Resources
- Total debt was approximately $221.8 million at December 31, 2014, consisting of $106.8 million of mortgage debt, $100.0 million of unsecured term loans and $15.0 million drawn on the revolving facility.
- Total debt was approximately 28.5% of total market capitalization and approximately 34.1% of total gross assets before accumulated depreciation.
- The new $150.0 million revolving credit facility matures in July 2018, with a potential one-year extension. $135.0 million was available at year-end.
- The $65.0 million 2021 Term Loan matures in July 2021 and was effectively fixed at an all-in rate of approximately 3.74% through interest-rate swaps. The $35.0 million 2020 Term Loan was effectively fixed at approximately 3.85%.
- Mortgage debt had a weighted average interest rate of approximately 4.27% and a weighted average maturity of 5.1 years.
- Scheduled principal repayments were $3.8 million in 2015, $12.7 million in 2016, $22.7 million in 2017 and $42.6 million in 2018, including the revolving facility balance.
- The company was in compliance with its debt covenants at December 31, 2014. A 100-basis-point increase in variable interest rates was estimated to increase annual interest expense by approximately $150,000.
Material Changes Versus the Prior Comparable Period
- Agree Realty acquired 77 properties for approximately $147.5 million and completed five developments costing approximately $17.7 million during 2014. The properties were 100% leased with a weighted average lease term of approximately 14.1 years and an underwritten capitalization rate of approximately 8.2%.
- The property portfolio expanded from 130 to 209 properties, gross leasable area increased from approximately 3.7 million to 4.3 million square feet, and gross real estate investments increased from $471.4 million to $589.1 million.
- The company issued 2,587,500 common shares in December 2014 and received approximately $73.3 million of net proceeds, primarily used to repay revolving credit borrowings.
- Four properties were sold for gross proceeds of approximately $12.9 million, producing a loss of approximately $405,000 before related presentation items.
- Revenue growth was driven primarily by acquisitions and development, but higher interest expense, depreciation and impairment charges caused GAAP net income and diluted EPS to decline.
- The company early adopted ASU 2014-08, generally limiting discontinued-operations treatment to disposals representing a strategic shift. This changed the presentation of certain prior-period results.
Outlook, Management Commentary, Risks and Unusual Items
Management expects to fund short-term liquidity needs through operating cash flow and the revolving credit facility and expects to use operating cash flow, debt and equity offerings for long-term capital needs. The filing does not provide specific earnings, acquisition or dividend guidance beyond the expectation of continuing quarterly dividends.
- The board increased the quarterly dividend twice during 2014, ending the year at $0.45 per share, or $1.80 annualized.
- Management intends to continue its acquisition, development and net-lease investment strategy while maintaining a capital structure primarily consisting of common equity and prudent debt.
- Key operating risks include Walgreens concentration, pharmacy-sector exposure, geographic concentration in Michigan, tenant defaults or bankruptcies, lease rollover, re-leasing costs, retail-sector disruption and competition for properties and financing.
- Development and acquisition risks include construction delays, cost overruns, permitting issues, uncertain permanent financing and underperformance of acquired assets.
- Debt risks include refinancing and interest-rate risk, covenant restrictions, cross-default and cross-collateralization provisions, and potential foreclosure of secured properties.
- Environmental and ADA liabilities may arise even where the company has not identified current noncompliance. The company states it carries no insurance for the described environmental risks.
- The company depends on maintaining REIT qualification and meeting complex income, asset and distribution tests. Failure to qualify could result in significant corporate taxation and reduced distributions.
- No material litigation was reported, and management stated that routine litigation is not expected to materially affect liquidity, results or financial condition.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded that internal controls were effective.
Most Important Facts for Investors to Verify
- Whether the 98.6% leased rate, long weighted average lease term and contracted minimum rents continue to support stable cash flow.
- The financial health and lease concentration of Walgreens, which accounts for approximately 21.9% of annualized base rent and approximately 25.4% of future minimum rents.
- The company’s ability to refinance or repay scheduled 2017 and 2018 maturities while continuing acquisitions and dividend payments.
- Whether FFO and AFFO growth adequately covers the $1.74 per-share 2014 dividend and the $1.80 annualized dividend rate exiting 2014.
- The causes and potential recurrence of impairment charges, particularly at community shopping centers and properties with anchor-tenant exposure.
- The effect of continued equity issuance on per-share results, ownership dilution and dividend coverage.
- Exposure to Michigan, pharmacy and retail-sector concentration, tenant bankruptcies, lease expirations and re-leasing costs.
- The effect of early adoption of discontinued-operations accounting on comparisons with prior periods and future property-sale reporting.