Agree Realty Corporation: Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
Agree Realty Corporation is a fully integrated REIT focused on acquiring, developing, owning and managing retail properties under net leases. The filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. At quarter-end, the portfolio included 463 properties in 43 states, approximately 8.9 million square feet of gross leasable area, 99.7% occupancy and a weighted average remaining lease term of approximately 10.3 years.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $34.6 million | $26.6 million | +30% |
| Operating income | $17.6 million | $14.3 million | +24% |
| Net income | $16.6 million | $14.8 million | +13% |
| Net income attributable to Agree | $16.5 million | $14.6 million | +13% |
| Diluted EPS | $0.53 | $0.56 | Down $0.03 |
| Funds from operations | $22.0 million; $0.71 per diluted share | $17.0 million; $0.65 per diluted share | +29%; +9% |
| Adjusted FFO | $21.8 million; $0.70 per diluted share | $17.1 million; $0.65 per diluted share | +28%; +8% |
| Net cash from operating activities | $17.8 million | $15.6 million | +14% |
Minimum rents increased 28% to $30.7 million, primarily from portfolio growth and development activity. Operating cost reimbursements increased 52% to $3.6 million. Operating income represented approximately 51.1% of revenue, compared with approximately 53.8% in the prior-year quarter; net income attributable to Agree represented approximately 47.6% of revenue, compared with approximately 54.9%.
Interest expense increased 32% to $5.5 million, and depreciation and amortization increased 42% to $10.0 million, mainly because of additional properties and higher borrowings. The quarter included a $4.6 million net gain on asset sales.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets were $1.53 billion at March 31, 2018, including $1.27 billion of net real estate investments.
- Cash and cash equivalents were $2.2 million, while cash and restricted deposits totaled $11.1 million at quarter-end.
- Total debt principal was $558.6 million, compared with $522.4 million at December 31, 2017. Debt consisted of $63.5 million of mortgage debt, $159.1 million of unsecured term loans, $260.0 million of senior unsecured notes and $76.0 million drawn on the revolving credit facility.
- The revolving facility had $174.0 million of remaining availability and matures in January 2021, with extension options. The company was in compliance with debt covenants.
- Cash flow used in investing was $84.2 million, including $99.4 million for acquisitions and development, partially offset by $20.0 million of asset-sale proceeds.
- Cash flow from financing was $18.7 million, including $62.0 million of net revolving-facility borrowings, offset by $25.6 million of mortgage repayments and $16.1 million of dividends.
- Total debt represented approximately 27.0% of total market capitalization as reported by management.
Material Changes Versus the Prior Comparable Period
- The company acquired 30 retail net-lease assets for approximately $98.8 million, versus substantially lower acquisition spending in Q1 2017. The properties were 100% leased to 21 tenants, with a weighted average lease term of approximately 13.6 years and an underwritten capitalization rate of approximately 7.2%.
- The property count increased from 436 at December 31, 2017 to 463 at March 31, 2018, and net real estate investments increased from $1.21 billion to $1.27 billion.
- The company sold five properties for $16.1 million of net proceeds and completed a tenant store purchase for $3.9 million of proceeds; total net gains on sales were $4.6 million.
- Revolving credit borrowings increased from $14.0 million to $76.0 million, while mortgage principal declined by $25.6 million following repayment of a $25.0 million balloon obligation.
- Weighted average diluted shares increased materially year over year, from 26.0 million to 30.9 million, reflecting equity issuance and portfolio growth. This contributed to diluted EPS declining despite higher net income.
- The company entered into a forward sale agreement for approximately 3.5 million shares at a public offering price of $48.00 per share. The expected net proceeds were approximately $162.9 million to $163.1 million, but the company had not received proceeds by quarter-end. The agreement expires March 1, 2019.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide explicit full-year earnings or operating guidance. Management expects short-term liquidity needs to be met through operating cash flow and revolving-credit borrowings, and long-term capital needs through operating cash flow, debt and equity financing. Nine development or Partner Capital Solutions projects were completed or under construction, with anticipated total costs of approximately $50.8 million.
- Key risks include interest-rate volatility, refinancing and rollover risk, access to capital, tenant bankruptcies or defaults, re-leasing risk, property-market conditions and the ability to maintain REIT qualification.
- Approximately $42.8 million of debt was scheduled to mature in 2019, including $39.8 million of balloon payments; the revolving facility balance of $76.0 million was scheduled to mature in 2021, subject to extension options.
- Interest-rate swaps hedged approximately $184.1 million of variable-rate debt and had a net asset value of $3.3 million at quarter-end. A derivative default could have required settlement of approximately $1.0 million.
- The company adopted the new real-estate-sale revenue guidance effective January 1, 2018 and reported no material cumulative or ongoing impact. It also adopted restricted-cash cash-flow presentation guidance.
- The company expects the forthcoming leases standard to require recognition of right-of-use assets and lease liabilities for land leases where it is the lessee; the ultimate impact was still being evaluated.
- There was no material litigation, no material change to previously disclosed risk factors, and no subsequent event requiring recognition or disclosure.
Important Facts for Investors to Verify
- Reconcile FFO and AFFO to GAAP net income and review the company-specific non-GAAP adjustments before comparing with other REITs.
- Assess the funding plan for acquisitions and development, including settlement timing and proceeds of the forward equity sale.
- Review 2019 and 2021 debt maturities, revolving-credit availability, covenant headroom and refinancing assumptions.
- Evaluate tenant concentration, lease rollover, occupancy and the credit quality of the retail tenant base.
- Monitor the effect of higher interest expense and interest-rate changes despite the company’s swap portfolio.
- Consider the effect of increased share count on per-share earnings and per-share cash-flow growth.