Agree Realty Corporation: 2017 Second-Quarter 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 and six months ended June 30, 2017. At quarter-end, the Company owned 413 properties in 43 states totaling approximately 7.9 million square feet, was approximately 99.6% leased, and had a weighted average remaining lease term of approximately 10.6 years.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Total revenue | $28.1 million | $21.8 million | $54.6 million | $42.1 million |
| Income from operations | $14.7 million | $11.6 million | $28.9 million | $22.8 million |
| Net income | $15.1 million | $10.8 million | $29.8 million | $18.4 million |
| Net income attributable to Agree | $14.9 million | $10.7 million | $29.5 million | $18.1 million |
| Diluted EPS | $0.56 | $0.48 | $1.12 | $0.85 |
| FFO | $18.0 million | $13.8 million | $35.0 million | $26.4 million |
| Diluted FFO per share | $0.67 | $0.61 | $1.32 | $1.22 |
| AFFO | $17.9 million | $13.7 million | $34.9 million | $26.5 million |
| Diluted AFFO per share | $0.67 | $0.61 | $1.31 | $1.22 |
Second-quarter operating margin was approximately 52.3%, compared with 53.1% in the prior-year quarter. Net income margin was approximately 53.7%, compared with 49.6%, although results included a $4.8 million gain on asset sales. For the six-month period, operating margin was approximately 52.8% versus 54.3%, and net income margin was approximately 54.6% versus 43.8%.
- Minimum rents increased 26% year over year in the second quarter to $25.2 million and 28% in the first six months to $49.2 million.
- Operating cost reimbursements increased 49% in the second quarter to $2.9 million and 48% year to date to $5.2 million.
- Net cash provided by operating activities was $34.7 million for the first six months, compared with $26.7 million in 2016.
- Investing cash flow was a use of $177.0 million, including $185.6 million for acquisitions and $12.8 million for development, partly offset by $21.9 million of asset-sale proceeds.
- Financing cash flow provided $113.1 million, including $108.0 million of net common-stock offering proceeds and net revolving-credit borrowings of $34.0 million.
- Cash and cash equivalents declined to $4.2 million at June 30, 2017 from $33.4 million at December 31, 2016.
Balance Sheet, Debt and Liquidity
- Total assets were $1.287 billion, including $1.081 billion of net real estate investments, compared with $1.142 billion and $950.3 million, respectively, at December 31, 2016.
- Total gross indebtedness was $436.5 million: $68.8 million of mortgages, $159.7 million of unsecured term loans, $160.0 million of senior unsecured notes and $48.0 million drawn on the revolving credit facility.
- The revolving facility had $202.0 million available under a $250.0 million capacity. The Company was in compliance with its debt covenants.
- Total debt represented 24.7% of total market capitalization as of June 30, 2017.
- Scheduled debt maturities include $28.3 million in 2018, $21.3 million in 2019, $3.9 million in 2020 and $49.0 million in 2021, including the revolving facility balance.
- A 100-basis-point increase in variable interest rates would increase annual interest expense by approximately $0.5 million. Interest-rate swaps had aggregate notional principal of approximately $184.7 million.
Material Changes Versus the Prior Comparable Period
- The Company acquired 36 retail net-lease assets for approximately $131.2 million during the second quarter and 47 assets for approximately $184.4 million during the first six months. The second-quarter acquisitions had a weighted average capitalization rate of approximately 7.7% and a weighted average lease term of approximately 12.7 years.
- Real estate sales generated $11.7 million of net proceeds and a $4.8 million gain in the second quarter; year-to-date sales generated $21.9 million of proceeds and a $9.5 million gain, compared with $2.7 million of gains in the prior-year period.
- General and administrative expense increased 26% in the second quarter and 27% year to date, primarily due to increased employee count, professional costs and timing of expenses.
- Interest expense increased 26% in the second quarter and 20% year to date due primarily to additional debt issued since June 30, 2016.
- Shares outstanding increased materially following a June follow-on offering of 2.415 million shares, which generated approximately $108.2 million of net proceeds. A $200 million ATM program had approximately $199.9 million remaining at quarter-end.
- The quarterly dividend was $0.505 per share, payable July 14, 2017.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide specific full-year earnings or FFO guidance in the filing. Management expects short-term liquidity needs to be met through operating cash flow and the revolving facility, and expects long-term capital needs to be funded through operating cash flow, debt issuance, equity issuance and other financing sources.
- Seven development or Partner Capital Solutions projects were completed or under construction during the first six months, with anticipated total costs of approximately $45.9 million. The projects generally have long-term build-to-suit leases.
- Management stated that it believes additional financing can be obtained on reasonable terms, but cautioned that financing may not be available or may not be available on acceptable terms.
- Principal risks include economic and real estate market conditions, acquisition and development execution, tenant bankruptcies or defaults, re-leasing risk, interest-rate volatility, refinancing risk, operating-cost increases and maintaining REIT qualification.
- Leases generally provide for tenant reimbursement of property expenses and include fixed or inflation-linked rent increases, but rent growth may not keep pace with inflation.
- Straight-line rent receivables were $11.2 million at June 30, 2017; deterioration in tenant credit quality could require write-downs and reduce operating income.
- The Company expects the new lease standard to require recognition of right-of-use assets and liabilities for land leases where it is the lessee, while it does not currently anticipate significant changes to lease revenue accounting.
- After quarter-end, the Chief Financial Officer resigned effective on or around August 4, 2017, and Kenneth R. Howe was appointed interim CFO.
- The filing reports no material changes to previously disclosed risk factors and no material litigation beyond routine matters expected to be covered by insurance.
Important Facts for Investors to Verify
- Verify the sustainability of FFO and AFFO growth excluding the $9.5 million year-to-date gain on asset sales.
- Assess acquisition yields, tenant concentration, lease expirations and the credit quality of the expanded 413-property portfolio.
- Review liquidity relative to the $28.3 million of 2018 maturities, $21.3 million of 2019 maturities and the $48.0 million revolving balance maturing in 2021.
- Monitor leverage, covenant compliance, refinancing terms and exposure to higher LIBOR rates.
- Evaluate whether the $0.505 quarterly dividend is adequately supported by recurring AFFO after debt service and capital requirements.
- Follow the CFO transition, development commitments and the implementation effects of new lease and revenue accounting standards.