Agree Realty Corporation 10-Q Summary
Business context and reporting period
Agree Realty Corporation is a fully integrated REIT focused on owning, acquiring, developing and managing retail properties leased primarily under net leases. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
- Portfolio: 789 operating properties in 46 states totaling approximately 14.0 million square feet.
- Occupancy: approximately 99.7% leased; weighted average remaining lease term of approximately 10.2 years.
- Tenant credit: approximately 56.9% of annualized base rent was from tenants or parent companies with investment-grade credit ratings.
- The Company adopted ASC 842, Leases, on January 1, 2019. The adoption had no cumulative-effect adjustment, but changed rental-income presentation and resulted in approximately $16.2 million of right-of-use assets and $16.3 million of lease liabilities at September 30, 2019.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenues | $48.1 million | $34.1 million | $135.3 million | $99.5 million |
| Rental income | $48.0 million | $34.0 million | $135.2 million | $99.3 million |
| Income from operations | $26.7 million | $18.5 million | $72.6 million | $52.9 million |
| Net income | $20.8 million | $15.8 million | $58.0 million | $45.5 million |
| Net income attributable to Agree | $20.6 million | $15.6 million | $57.5 million | $45.0 million |
| Diluted earnings per share | $0.48 | $0.48 | $1.41 | $1.42 |
| Net cash from operating activities | Not separately provided | Not separately provided | $88.5 million | $64.3 million |
| FFO | $30.0 million | $20.4 million | $83.1 million | $60.0 million |
| Core FFO | $33.4 million | $23.5 million | $92.9 million | $67.8 million |
| AFFO | $32.7 million | $23.4 million | $91.0 million | $67.4 million |
- Q3 operating margin, calculated as income from operations divided by total revenue, was approximately 55.6%, compared with 54.3% in Q3 2018.
- Q3 net margin was approximately 43.2%, compared with 46.3% in Q3 2018; the decline primarily reflects higher interest expense and a lower gain on asset sales relative to revenue growth.
- Interest expense increased to $8.4 million in Q3 and $23.4 million for the first nine months, primarily because of higher borrowings used to fund acquisitions and development.
- Gain on asset sales was $2.6 million in Q3 and $9.0 million year to date, compared with $3.9 million and $10.9 million, respectively, in the prior-year periods.
Material changes versus the prior comparable period
- Q3 rental income increased 41.0% and nine-month rental income increased 36.0%, mainly due to the substantially larger property portfolio.
- Q3 net income increased 32.0% to $20.8 million; nine-month net income increased 28.0% to $58.0 million.
- FFO increased 46.8% in Q3 and 38.3% for the first nine months. Core FFO increased 42.2% and 37.0%, respectively, while AFFO increased 40.0% and 35.1%.
- Net real estate investments increased to $2.1 billion from $1.7 billion at December 31, 2018. The portfolio grew from 645 properties at December 31, 2018 and approximately 520 properties at September 30, 2018 to 789 properties at September 30, 2019.
- The Company acquired 68 properties for approximately $246.4 million in Q3 and 147 properties for approximately $565.0 million in the first nine months. Year-to-date acquisitions had an underwritten weighted average capitalization rate of approximately 6.9%.
- General and administrative expense increased 30.0% in Q3 and 31.0% year to date, primarily from higher headcount, compensation and professional costs. G&A as a percentage of revenue nevertheless declined to 8.0% in Q3 from 8.7% and to 8.7% year to date from 9.0%.
- Common shares outstanding increased to 42.4 million at September 30, 2019 from 37.5 million at December 31, 2018, reflecting equity issuance used in part to fund growth.
Cash flow, debt and liquidity
- Operating cash flow was $88.5 million for the first nine months, up from $64.3 million.
- Investing cash flow was negative $548.2 million, primarily reflecting $568.5 million of real estate acquisitions and $13.9 million of development expenditures, partly offset by $34.5 million of asset-sale proceeds.
- Financing cash flow was $416.5 million, including $277.0 million of net common-stock offering proceeds, $229.0 million of net revolving-credit borrowings and $66.1 million of dividends paid.
- Cash, cash equivalents and cash held in escrow totaled $10.8 million at September 30, 2019, compared with $54.0 million at December 31, 2018.
- Gross debt was approximately $931.9 million, consisting of $58.9 million of mortgage debt, $240.0 million of unsecured term loans, $385.0 million of senior unsecured notes and $248.0 million drawn on the revolving credit facility.
- The $325.0 million revolving credit facility had $77.0 million available at quarter-end and matured in January 2021, with extension options to January 2022. The Company was in compliance with its debt covenants.
- Total debt to total market capitalization was 23.0% at September 30, 2019. Scheduled debt maturities included $21.5 million in the remainder of 2019, $3.7 million in 2020 and $249.0 million in 2021, including the revolving facility balance.
- The quarterly dividend increased to $0.570 per share, or an annualized $2.28, up 5.6% from the $0.540 per-share quarterly dividend in Q3 2018.
Guidance, outlook, risks and unusual items
- The filing does not provide explicit full-year earnings, FFO or acquisition guidance. Management expects short-term liquidity needs to be met through operating cash flow and revolving-credit borrowings, with longer-term needs funded through operations, debt and equity financing.
- Management states that additional financing may not be available on acceptable terms. The Company expects to use revolving-credit borrowings to fund the October 2019 maturity of a $21.5 million mortgage and the February 2020 maturity of a $2.8 million mortgage.
- In October 2019, after quarter-end, the Operating Partnership issued $125.0 million of 4.47% senior unsecured notes due October 2031. Including terminated interest-rate swaps, the blended all-in rate was approximately 4.42%.
- The Company entered into a $400.0 million ATM equity program in July 2019. It issued 444,228 shares in Q3 for gross proceeds of approximately $33.0 million, with approximately $367.0 million remaining under the program at quarter-end.
- An April 2019 forward equity sale covering 3,162,500 shares remained unsettled at quarter-end and was required to be settled no later than May 1, 2020. Management estimated potential net proceeds of approximately $199.9 million, subject to contractual adjustments.
- Interest-rate swap liabilities totaled $14.0 million at quarter-end, compared with derivative assets of $2.5 million and liabilities of $1.1 million at December 31, 2018. The decline in interest rates produced a $14.6 million year-to-date loss in other comprehensive income.
- Principal risks include economic and real estate market conditions, tenant defaults or bankruptcies, lease rollover and re-leasing risk, interest-rate and refinancing risk, access to capital, REIT qualification, property residual values and the transition away from LIBOR after 2021.
- The Company recorded $1.6 million of impairment expense year to date and no impairment expense in Q3. It reported no material litigation and no going-concern conditions.
Important facts for investors to verify
- Reconcile acquisition growth and financing activity with future same-property and per-share performance, particularly given the increase in common shares outstanding.
- Assess the refinancing plan for the $248.0 million revolving balance maturing in 2021 and other near-term mortgage maturities.
- Review covenant headroom, available revolver capacity and the effect of the post-quarter-end $125.0 million note issuance on leverage and liquidity.
- Evaluate tenant concentration, investment-grade exposure, lease expirations and the collectability of $21.3 million of straight-line rent receivables.
- Consider the effect of interest rates and the LIBOR transition on variable-rate debt, derivatives and future financing costs.
- Distinguish GAAP earnings from FFO, Core FFO and AFFO, and review the Company’s non-GAAP definitions for comparability with other REITs.
- Confirm settlement terms and potential dilution from the April 2019 forward equity sale and the remaining ATM authorization.