Business Context and Reporting Period
Agree Realty Corporation filed its Form 10-K for the fiscal year ended December 31, 2022. The company is a fully integrated REIT focused on owning, acquiring, developing and managing retail properties under predominantly net lease agreements. Its assets and operations are conducted through Agree Limited Partnership, in which the company held a 99.6% common interest at year-end.
At December 31, 2022, the portfolio comprised 1,839 properties in 48 states, approximately 38.1 million square feet of gross leasable area, 99.7% occupancy and an approximately 8.8-year weighted-average remaining lease term. Approximately 67.8% of annualized base rent was generated by tenants or parent companies with investment-grade credit ratings.
Financial and Operating Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $429.8 million | $339.3 million | 27% |
| Rental income | $429.6 million | $339.1 million | 27% |
| Operating income | $218.1 million | $190.3 million | 15% |
| Net income | $153.0 million | $122.9 million | 25% |
| Net income attributable to common stockholders | $145.0 million | $120.1 million | 21% |
| Diluted earnings per share | $1.83 | $1.78 | 3% |
| Nareit FFO | $274.1 million | $202.6 million | 35% |
| Core FFO | $307.7 million | $241.5 million | 27% |
| AFFO | $304.9 million | $237.0 million | 29% |
| AFFO per diluted share and partnership unit | $3.83 | $3.51 | 9% |
| Net cash from operating activities | $362.1 million | $246.3 million | 47% |
| Net cash used in investing activities | $(1.616) billion | $(1.387) billion | Higher use of cash |
| Net cash provided by financing activities | $1.238 billion | $1.178 billion | 5% |
Derived margins were approximately 50.7% for operating income and 35.6% for net income in 2022, compared with approximately 56.1% and 36.2%, respectively, in 2021. The filing does not present these margins as reported metrics.
- Real estate investments, net, increased to $5.74 billion from $4.37 billion.
- Total assets increased to $6.71 billion from $5.23 billion.
- Total debt outstanding before deferred financing costs and discounts was $1.96 billion, including $1.81 billion of senior unsecured notes, $50.4 million of mortgage debt and $100.0 million drawn on the revolving credit facility.
- Total debt represented approximately 23.0% of enterprise value and 27.9% of gross assets.
- Cash, cash equivalents and cash held in escrow totaled $28.9 million at year-end; $900.0 million remained available under the $1.0 billion revolving credit facility, subject to covenants.
- The company declared common dividends of $2.805 per share for 2022, compared with $2.604 in 2021. The monthly common dividend increased to $0.240 per share in October 2022, equivalent to an annualized rate of $2.88.
Material Changes Versus the Prior Comparable Period
- The company acquired 434 retail net lease assets for approximately $1.6 billion, compared with 290 assets acquired for approximately $1.39 billion in 2021. The acquisitions had a 6.2% weighted-average capitalization rate and approximately 10.2 years of weighted-average lease term.
- Seven development or Partner Capital Solutions projects were completed, and 24 such projects remained under construction at year-end. Total anticipated costs for 31 completed or under-construction projects were approximately $118.5 million.
- Seven properties were sold for net proceeds of $44.9 million, compared with $56.0 million in 2021. The related gain on sale declined to $5.3 million from $14.9 million.
- Rental income increased primarily because of portfolio expansion. Depreciation and amortization increased 40% to $133.6 million, and interest expense increased 26% to $63.4 million because of higher borrowings and higher revolving-facility rates.
- General and administrative expense increased 18% to $30.1 million, while G&A as a percentage of revenue declined to 7.0% from 7.5%.
- The company issued or settled substantial common equity during the year. Net proceeds from common stock offerings were $1.258 billion, and common shares outstanding increased to 90.2 million from 71.3 million.
- In August 2022, the company issued $300 million of 4.80% senior unsecured notes due 2032. Considering terminated interest-rate swaps, the blended all-in rate was 3.96%.
- The revolving credit facility was amended to replace LIBOR with SOFR plus a 10-basis-point adjustment. Its balance declined from $160.0 million to $100.0 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative earnings or acquisition guidance. Management states that it expects to fund short-term liquidity needs through operating cash flow and revolving-facility borrowings, and longer-term needs through operating cash flow, debt issuance, common or preferred equity and other capital sources. Management also states that it intends to continue regular dividends, but does not guarantee the amount or continued increases.
- Management identifies economic conditions, capital-market access, elevated interest rates, tenant defaults or bankruptcies, retail-sector disruption, lease expirations, and property valuation declines as key risks.
- The portfolio is concentrated in single-tenant properties, making a tenant failure or vacancy potentially significant to property cash flow and value.
- Sector exposure includes home improvement, grocery, tire and auto service, dollar stores, convenience stores and general merchandise. No tenant represented more than 10% of annualized base rent.
- Forward sale agreements covered approximately 4.35 million common shares with anticipated net proceeds of $300.9 million. Remaining settlements were required by dates between November and December 2023. These agreements, together with equity issuance capacity, may dilute existing shareholders.
- Debt maturities include $5.5 million of mortgage debt in 2023, $51.0 million in 2025, $100.6 million in 2026 and $50.0 million in 2027, with $1.75 billion due thereafter. Estimated future interest payments on outstanding debt totaled $492.5 million.
- Interest-rate exposure increased through the $100.0 million floating-rate revolving balance. The company had no derivative instruments outstanding at December 31, 2022.
- Real estate impairment charges were $1.0 million in 2022, down from $1.9 million in 2021. The company recorded a $0.4 million reduction to rental income and net income for tenant-specific collectability issues.
- The company reported no material litigation, no reportable subsequent events, compliance with material debt covenants, and no conditions raising substantial doubt about its ability to continue as a going concern.
- Management and Grant Thornton LLP concluded that internal control over financial reporting was effective as of December 31, 2022, and the financial statement audit opinion was unqualified.
Important Facts for Investors to Verify
- Reconcile AFFO growth and dividend coverage with the significant increase in common shares outstanding.
- Review the timing and settlement terms of outstanding forward equity sales and their potential dilution.
- Assess tenant credit quality, sector concentration and lease expirations, particularly the 11.1% of annualized base rent scheduled to expire in 2030.
- Evaluate exposure to SOFR and refinancing requirements for the revolving facility and debt maturities through 2027.
- Review acquisition underwriting assumptions, including the 6.2% acquisition capitalization rate and fair-value allocations identified by the auditor as a critical audit matter.
- Confirm the sustainability of the $2.88 annualized common dividend against AFFO, operating cash flow, capital requirements and debt service.