Business Context and Reporting Period
Agree Realty Corporation is a fully integrated Maryland REIT focused on owning, acquiring, developing and managing retail properties under predominantly net lease arrangements. This Form 10-K covers the fiscal year ended December 31, 2019; the filing is an annual report rather than a quarterly filing. The company operated through Agree Limited Partnership and owned a 99.2% interest in it at year-end.
- Portfolio: 821 properties in 46 states, approximately 14.6 million square feet and 99.6% leased.
- Weighted average remaining lease term: approximately 10.0 years.
- Approximately 58.2% of annualized base rent came from investment-grade tenants or their parent companies.
- No tenant represented more than 5.0% of annualized base rent; total annualized base rent was $204.1 million.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $187.5 million | $137.1 million | +37% |
| Rental income | $187.3 million | $136.9 million | +37% |
| Income from operations | $101.1 million | $73.0 million | +38% |
| Net income | $80.8 million | $58.8 million | +37% |
| Net income attributable to Agree Realty | $80.1 million | $58.2 million | +38% |
| Diluted EPS | $1.93 | $1.78 | +8% |
| Net cash provided by operating activities | $126.7 million | $93.2 million | +$33.5 million |
| FFO | $114.5 million | $82.8 million | +38% |
| Core FFO | $128.0 million | $93.4 million | +37% |
| AFFO | $125.5 million | $92.7 million | +35% |
| AFFO per diluted share | $3.02 | $2.83 | +7% |
Calculated margins were approximately 53.9% for income from operations and 43.1% for net income in 2019, compared with approximately 53.2% and 42.9%, respectively, in 2018. Interest expense increased to $33.1 million from $24.9 million, primarily because of higher borrowings used to fund portfolio growth. The company recorded a $13.3 million gain on asset sales and $1.6 million of impairment charges.
- Real estate investments before accumulated depreciation increased to $2.35 billion from $1.76 billion.
- Total assets increased to $2.66 billion from $2.03 billion.
- Total debt before deferred financing costs was $876.1 million, versus $724.1 million at December 31, 2018.
- Debt to enterprise value was approximately 21.6%; debt to gross assets was approximately 29.9%.
- Cash and cash equivalents were $15.6 million; cash and cash held in escrow totaled approximately $42.2 million.
- The revolving credit facility had $89.0 million outstanding and $411.0 million available, subject to covenants.
Material Changes Versus the Prior Comparable Period
- The company invested approximately $724.7 million in net leased retail real estate, including 186 acquisitions totaling approximately $702.9 million and eight completed developments totaling approximately $21.8 million.
- Sixteen properties were sold for net proceeds of $65.5 million, compared with 21 properties sold for $65.8 million in 2018.
- The portfolio expanded from 645 to 821 properties and from approximately 11.2 million to 14.6 million square feet.
- Common equity issuance generated $472.7 million of net proceeds. The company also entered into forward equity sales for 2,003,118 shares that had not been settled at year-end and were required to be settled by dates in December 2020.
- The company issued $125.0 million of 4.47% senior unsecured notes due October 2031, with a blended all-in rate of approximately 4.42% after hedging effects.
- In December 2019, the company entered into a new $600.0 million unsecured credit arrangement, comprising a $500.0 million revolving facility and $100.0 million of term loans, generally maturing in January 2024.
- The quarterly dividend increased from $0.555 per share in March 2019 to $0.585 in December 2019. The fourth-quarter annualized dividend was $2.34 per share.
- ASC 842 lease accounting was adopted in 2019. The adoption resulted in recognition of operating lease right-of-use assets and liabilities but no cumulative-effect adjustment to opening equity.
Outlook, Risks, Contingencies and Unusual Items
Management expects short-term liquidity needs to be funded through operating cash flow and the revolving facility, with longer-term needs funded through operating cash flow, debt, equity and other capital sources. The filing does not provide quantitative earnings or acquisition guidance. Management states that additional financing is expected to be available on reasonable terms, but cautions that financing may not be available or acceptable when needed.
- Two development or Partner Capital Solutions projects were under construction at year-end, with anticipated total project costs of approximately $10.6 million. Rent for the ALDI and Harbor Freight Tools spaces in Frankfort, Kentucky was expected to commence fully in the first quarter of 2020.
- Principal risks include tenant defaults or bankruptcies, single-tenant property vacancies, e-commerce disruption, retail-sector concentration, geographic concentration, acquisition and development execution, refinancing and interest-rate risk, covenant compliance, environmental liabilities, cybersecurity incidents and maintaining REIT qualification.
- Debt maturities include approximately $3.7 million in 2020, $68.7 million in 2023, $190.0 million in 2024 and $611.7 million thereafter, including scheduled and balloon payments.
- The company was in compliance with all debt covenants at December 31, 2019. Its debt agreements include leverage, secured leverage, interest coverage and unencumbered asset pool requirements.
- Interest-rate swaps had gross fair value assets of $0.6 million and liabilities of $7.9 million at year-end. The company identified LIBOR transition as a future risk because certain debt and hedging contracts were LIBOR-indexed.
- Real estate impairment charges were $1.6 million in 2019. The filing notes that events in 2020 suggested potential impairment at one property, although year-end undiscounted cash-flow estimates indicated recoverability.
- Routine litigation was not expected to have a material adverse effect. The company reported no unresolved SEC staff comments, no material subsequent events through issuance of the financial statements and effective internal controls.
Investor Verification Priorities
- Verify the sustainability of AFFO of $3.02 per diluted share against the $2.34 annualized dividend and the effect of continued equity issuance.
- Assess whether the 2019 acquisition volume and 6.9% underwritten acquisition capitalization rate translate into expected 2020 cash-flow growth.
- Review tenant credit quality, lease rollover exposure and sector concentrations, particularly home improvement, tire and auto service, grocery, pharmacy and off-price retail.
- Evaluate refinancing requirements for 2023–2024 maturities and available capacity under the revolving credit facility.
- Monitor settlement of the 2,003,118 ATM forward shares and any resulting dilution or capital deployment.
- Review impairment assumptions, including capitalization rates, holding periods, tenant performance and residual values.
- Confirm the impact of ASC 842, straight-line rent receivables of $23.0 million and collectability assumptions on reported rental income.