Agree Realty Corporation: FY2016 Form 10-K Summary
Business context and reporting period
Agree Realty Corporation is a fully integrated Maryland REIT focused on owning, acquiring, developing and managing retail properties under long-term net leases. This filing covers the fiscal year ended December 31, 2016, with comparative results for 2015 and 2014.
- Portfolio: 366 properties in 43 states, approximately 7.0 million square feet, and approximately 99.6% leased.
- Lease profile: weighted average remaining lease term of approximately 10.6 years; 98.1% of annualized base rent came from 363 net-lease properties.
- Tenant concentration: Walgreens represented approximately 11.6% of annualized base rent; no other tenant exceeded 5.0%.
- Approximately 45.6% of annualized base rent was attributable to tenants or parent companies with investment-grade credit ratings.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenues | $91.5 million | $70.0 million | +30.8% |
| Minimum rental income | $84.0 million | $64.3 million | +31% |
| Income from operations | $51.5 million | $40.1 million | +28.4% |
| Net income | $45.8 million | $39.8 million | +15.2% |
| Net income attributable to Agree Realty | $45.1 million | $39.0 million | +15.6% |
| Diluted EPS | $1.97 | $2.16 | Down due primarily to share issuance |
| FFO | $59.2 million | $44.1 million | +34.3% |
| FFO per diluted share | $2.54 | $2.39 | +6.3% |
| AFFO | $58.4 million | $43.9 million | +33.1% |
| AFFO per diluted share | $2.51 | $2.38 | +5.5% |
| Net cash provided by operating activities | $61.7 million | $44.7 million | +38.2% |
| Cash and cash equivalents | $33.4 million | $2.7 million | Increased $30.7 million |
Based on reported income from operations and total revenues, the operating margin was approximately 56.3% in 2016 versus 57.3% in 2015. Net margin was approximately 50.0% versus 56.8%, reflecting higher interest expense, depreciation and amortization, and a lower gain on asset sales. The filing does not present a separate company-defined EBITDA margin.
- Operating expenses were $40.0 million, including $23.4 million of depreciation and amortization, $8.0 million of general and administrative expense and $8.6 million of property costs.
- Interest expense increased to $15.3 million from $12.3 million.
- The Company reported a $10.0 million gain on property sales, compared with a $12.1 million gain in 2015.
- No impairment charges were recorded in 2016 or 2015; 2014 included $3.0 million of impairment charges.
- 2016 dividends totaled $1.92 per share, compared with $1.845 in 2015. The quarterly dividend increased from $0.465 in March 2016 to $0.495 in December 2016.
Balance sheet, debt and liquidity
- Total assets were $1.112 billion, including $950.3 million of net real estate investments, compared with $789.9 million and $699.4 million, respectively, at December 31, 2015.
- Total debt before deferred financing costs was approximately $404.0 million, versus approximately $321 million at year-end 2015.
- Debt consisted of $70.0 million of mortgage debt, $160.0 million of unsecured term loans, $160.0 million of senior unsecured notes and $14.0 million outstanding under the revolving credit facility.
- Total debt to total market capitalization was approximately 24.9%; total debt to gross assets was approximately 34.2%.
- The revolving credit facility had $236.0 million available at year-end, subject to covenant compliance. Total amended credit capacity was $350.0 million, with potential expansion to $500.0 million subject to lender approval.
- The Company reported compliance with applicable debt covenants. Interest-rate swaps substantially fixed portions of variable-rate debt; a 100-basis-point increase in variable-rate debt rates was estimated to increase annual interest expense by approximately $0.1 million.
- Contractual obligations totaled $524.4 million, including debt principal, land lease obligations and estimated interest payments. Major maturities include $79.0 million of balloon payments in 2021 and $160.0 million of senior unsecured notes thereafter.
Material changes versus the prior comparable period
- The Company invested approximately $311.9 million in 2016, including 82 acquisitions totaling approximately $295.6 million and ten completed developments totaling approximately $16.3 million. The investments were 100% leased, with an approximately 7.9% weighted average capitalization rate.
- Real estate investments expanded materially, with gross real estate increasing from approximately $755.8 million to $1.020 billion and the portfolio increasing from 278 to 366 properties.
- Common equity offerings generated approximately $228.0 million of net proceeds, including May and October follow-on offerings and ATM sales. These offerings increased the diluted share base substantially, contributing to lower diluted GAAP EPS despite higher FFO per share.
- The Company issued $60.0 million of 4.42% senior unsecured notes due 2028 and entered into new unsecured term loan arrangements totaling approximately $60.3 million of proceeds.
- Mortgage debt declined by approximately $31.6 million as the Company repaid an $8.6 million mortgage and a $20.3 million secured term loan, replacing the latter with unsecured financing.
- The Company sold four Walgreens properties for gross proceeds of $29.7 million and recognized a $10.0 million gain, compared with eight property sales and a $12.1 million gain in 2015.
Fourth-quarter results and outlook
- Fourth-quarter 2016 revenue was $25.3 million, compared with $19.2 million in the fourth quarter of 2015.
- Fourth-quarter net income was $12.9 million, compared with $7.9 million in the prior-year quarter; diluted EPS was $0.50 versus $0.41.
- At year-end, four development and Partner Capital Solutions projects were under construction with anticipated total costs of approximately $21.7 million. The filing identifies additional projects expected to commence rent in 2017.
- Management expects to fund short-term needs through operating cash flow and the revolving facility, and longer-term needs through operating cash flow, debt issuance, equity issuance and other capital sources. No specific 2017 earnings or investment guidance is provided in the filing.
- Management stated that it believes financing can be obtained on reasonable terms, but cautioned that future financing may be unavailable or available only on unfavorable terms.
Risks, contingencies and unusual items
- Dependence on rental income creates exposure to tenant defaults, bankruptcies, store closures, lease non-renewals and difficulty re-leasing specialized single-tenant properties.
- Walgreens concentration, geographic exposure to Michigan, retail-sector disruption from e-commerce and tenant credit deterioration could materially affect cash flow.
- Acquisition and development activity carries construction, permitting, cost-overrun, financing and execution risks.
- Debt creates refinancing, interest-rate, covenant, cross-default, cross-collateralization and foreclosure risks. The Company also remains exposed to lender and derivative-counterparty performance.
- Environmental contamination, uninsured losses, ground-lease obligations and ADA compliance could require material expenditures.
- The Company intends to maintain REIT qualification, but failure to satisfy REIT income, asset or distribution requirements could result in increased taxes and reduced distributions.
- Routine legal proceedings were not expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the sustainability of FFO and AFFO growth after adjusting for acquisitions, equity issuance, straight-line rent and gains on property sales.
- Monitor Walgreens’ 11.6% annualized base-rent concentration and the credit quality of major tenants.
- Review the timing and refinancing plan for 2018-2021 maturities, including the $79.0 million of 2021 balloon payments and the revolving facility balance.
- Assess whether the approximately 99.6% leased rate and 10.6-year weighted average lease term remain stable as leases expire.
- Evaluate development and acquisition yields, integration performance and capital requirements for projects under construction.
- Reconcile the filing’s selected financial data presentation with the consolidated statements, particularly the differing “income from operations” figures.
- Verify future dividend coverage using operating cash flow and AFFO rather than GAAP earnings alone; the Company does not guarantee continued dividend increases.