Agree Realty Corporation: FY 2023 Form 10-K Summary
Business context and reporting period
Agree Realty Corporation is a fully integrated U.S. REIT focused on acquiring, developing, owning and managing retail properties under predominantly net leases. The filing covers the fiscal year ended December 31, 2023; it is an annual report rather than a quarterly filing.
- Portfolio: 2,135 properties in 49 states, approximately 44.2 million square feet, 99.8% leased and weighted-average remaining lease term of 8.4 years.
- Approximately 69.1% of annualized base rent was from tenants or parent companies with investment-grade credit ratings.
- Annualized contractual base rent was $556.4 million. No tenant represented more than 10% of annualized base rent.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenues | $537.5 million | $429.8 million | 25% |
| Rental income | $537.4 million | $429.6 million | 25% |
| Income from operations | $254.4 million | $218.1 million | 17% |
| Net income | $170.5 million | $153.0 million | 11% |
| Net income attributable to common stockholders | $162.5 million | $145.0 million | 12% |
| Diluted EPS | $1.70 | $1.83 | Down $0.13 |
| Nareit FFO | $343.0 million | $274.1 million | 25% |
| Core FFO | $376.5 million | $307.7 million | 22% |
| AFFO | $378.7 million | $304.9 million | 24% |
| Diluted AFFO per share and OP unit | $3.95 | $3.83 | 3% |
| Net cash provided by operating activities | $391.6 million | $362.1 million | 8% |
Income from operations represented approximately 47.3% of total revenue, while net income represented approximately 31.7% of total revenue. Interest expense increased to $81.1 million from $63.4 million, primarily because of higher borrowings and higher revolving-credit-facility rates.
- Net real estate investments increased to $6.74 billion from $5.74 billion.
- The Company acquired 282 properties for approximately $1.20 billion at an underwritten weighted-average capitalization rate of 6.9% and completed 21 development or Developer Funding Platform projects costing approximately $86.2 million.
- Net cash used in investing activities was $1.275 billion, including $1.206 billion for acquisitions and $82.4 million for development.
- Net cash provided by financing activities was $869.0 million, including $689.9 million of common-stock offering proceeds and $350.0 million of term-loan proceeds.
- Cash, cash equivalents and cash held in escrow totaled $14.5 million at year-end, compared with $28.9 million at December 31, 2022.
Debt, liquidity and dividends
- Total gross debt was $2.43 billion at December 31, 2023, compared with $1.96 billion at year-end 2022.
- Total debt was approximately 27.2% of enterprise value and 29.6% of total gross assets.
- Debt consisted of $1.81 billion of senior unsecured notes, $350.0 million of unsecured term debt, $227.0 million drawn on the revolving credit facility and $44.9 million of mortgage debt.
- The revolving credit facility had $773.0 million of availability, subject to covenant compliance, and matures in January 2026 with extension options to January 2027.
- The $350.0 million 2029 Unsecured Term Loan matures in January 2029. Interest-rate swaps convert the related SOFR exposure to a weighted-average fixed rate of 3.57% through January 2029.
- Management stated that the Company was in compliance with all material debt covenants at December 31, 2023 and identified no conditions raising substantial doubt about going-concern status.
- The monthly common dividend increased to $0.247 per share in October 2023, or $2.964 annualized at December 2023. The 2023 declared common dividend totaled $2.919 per share.
- Series A preferred dividends remained $1.0625 per depositary share annually, with a 4.25% dividend rate.
Material changes versus the prior comparable period
- Portfolio size increased from 1,839 to 2,135 properties and from 38.1 million to 44.2 million square feet; net real estate investments increased 17%.
- 2023 acquisitions declined to 282 properties and approximately $1.20 billion from 434 properties and approximately $1.60 billion in 2022, reflecting a lower investment pace amid higher interest rates and tighter financing conditions.
- Interest expense rose 28%, while general and administrative expense increased 15% to $34.8 million. G&A as a percentage of revenue improved to 6.5% from 7.0%.
- Provision for impairment increased to $7.2 million from $1.0 million.
- Common shares outstanding increased to 100.5 million from 90.2 million, primarily reflecting equity issuance and forward-sale settlements. The increase in share count contributed to diluted EPS declining despite higher net income.
- Operating cash flow increased 8%, while total dividends and distributions paid increased to $286.1 million from $228.7 million.
- The Company sold six assets for net proceeds of $13.8 million, compared with seven assets and $44.9 million of proceeds in 2022.
Outlook, commentary, risks and unusual items
Management intends to continue growing through acquisitions, development and the Developer Funding Platform while maintaining a conservative capital structure and a growing dividend. The filing does not provide quantitative 2024 earnings or acquisition guidance.
- Management expects short-term liquidity needs to be funded through cash, operating cash flow and revolver borrowings, with longer-term needs funded through operating cash flow, debt and common or preferred equity offerings.
- Management cautions that high inflation and elevated interest rates have increased acquisition costs, reduced financing availability and required higher investment yields.
- Key risks include tenant defaults or bankruptcies, single-tenant property vacancies, retail-sector weakness, e-commerce, lease rollover, geographic and sector concentration, interest-rate and refinancing risk, debt covenants, capital-market access, cybersecurity, environmental liability, insurance availability and continued REIT qualification.
- Approximately 12.3% of annualized base rent was concentrated in grocery, home-improvement and tire-and-auto-service sectors; Texas, Florida, Illinois, North Carolina and Ohio were the largest state exposures by rent.
- The Company recognized a $2.7 million impairment on a former corporate office building held for sale. The building was sold for $3.7 million to an entity controlled by an independent director; the transaction was approved by the Audit Committee and closed on January 16, 2024.
- Three leases across three tenants were accounted for on a cash basis because collectability was not considered probable. The filing reports no general allowance for operating lease receivables at year-end.
- Cybersecurity risks had not materially affected the Company through the filing date. The Company reported effective disclosure controls and internal control over financial reporting, with an unqualified audit opinion.
Important facts for investors to verify
- Whether tenant credit quality, rent collections and occupancy remain consistent with the 99.8% leased rate and 69.1% investment-grade rent exposure.
- The refinancing plan for the $227.0 million revolver maturity in 2026 and the $50.0 million senior notes maturity in 2025.
- Whether interest rates, acquisition capitalization rates and financing spreads permit continued external growth at acceptable returns.
- The sustainability of the common dividend relative to AFFO, debt service, capital expenditures and required REIT distributions.
- The effect of continued equity issuance and remaining forward-sale settlements on per-share metrics and shareholder dilution.
- Potential impairment, vacancy or re-leasing exposure for single-tenant properties and properties in concentrated retail sectors or states.
- The assumptions supporting real-estate purchase-price allocations, impairment valuations and straight-line rent receivables.