Agree Realty Corporation — Form 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 under net leases. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, with comparisons to the same periods in 2017.
- Portfolio at June 30, 2018: 481 properties in 44 states, approximately 9.3 million square feet, 99.7% leased and weighted average remaining lease term of approximately 10.2 years.
- The Company owned 98.9% of Agree Limited Partnership and had 31.0 million common shares outstanding as of July 20, 2018.
Financial performance and key metrics
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Total revenue | $35.7 million | $28.1 million | +27% |
| Income from operations | $17.9 million | $14.9 million | +20% |
| Net income | $13.1 million | $15.1 million | -13% |
| Net income attributable to Agree | $12.9 million | $14.9 million | -13% |
| Diluted EPS | $0.41 | $0.56 | Down $0.15 |
| FFO | $22.3 million | $18.0 million | +24% |
| Diluted FFO per share | $0.71 | $0.67 | +6% |
| AFFO | $22.2 million | $17.9 million | +25% |
| Diluted AFFO per share | $0.70 | $0.67 | +4% |
Q2 operating margin was approximately 50.2%, compared with 53.1% in the prior-year quarter. Net margin was approximately 36.6%, compared with 53.7%, reflecting higher interest expense, a $1.2 million impairment charge and lower gains on asset sales.
| Metric | Six months ended June 30, 2018 | Six months ended June 30, 2017 | Change |
|---|---|---|---|
| Total revenue | $70.3 million | $54.6 million | +29% |
| Net income | $29.7 million | $29.8 million | Approximately flat |
| Net income attributable to Agree | $29.4 million | $29.5 million | Approximately flat |
| Diluted EPS | $0.94 | $1.12 | Down $0.18 |
| FFO | $44.4 million | $35.0 million | +27% |
| Diluted FFO per share | $1.41 | $1.32 | +7% |
| AFFO | $44.0 million | $34.9 million | +26% |
| Diluted AFFO per share | $1.40 | $1.31 | +7% |
Balance sheet, cash flow, debt and liquidity
- Total assets were $1.61 billion at June 30, 2018, up from $1.49 billion at December 31, 2017. Net real estate investments were $1.32 billion, versus $1.21 billion.
- Cash and cash equivalents were $9.0 million, compared with $50.8 million at year-end 2017. Cash held in escrows declined to zero from $8.0 million.
- Six-month operating cash flow was $37.0 million, compared with $34.7 million in 2017. Investing cash flow was negative $178.1 million, primarily due to $199.6 million of acquisitions and $8.8 million of development spending, partly offset by $30.4 million of asset-sale proceeds.
- Total gross debt was $647.8 million, consisting of $62.8 million of mortgages, $158.9 million of unsecured term loans, $260.0 million of senior unsecured notes and $166.0 million drawn on the revolving credit facility.
- Debt increased from $522.4 million at December 31, 2017, principally because revolving-facility borrowings increased from $14.0 million to $166.0 million. The Company repaid a $25.0 million mortgage balloon payment during the first quarter.
- At June 30, 2018, $84.0 million remained available under the $250.0 million revolving facility. In July 2018, the Company pursued an accordion increase in commitments to $325.0 million.
- Total debt represented approximately 28.1% of total market capitalization. The Company was in compliance with mortgage and credit-facility covenants.
- The quarterly dividend was $0.540 per share, declared for the quarter ended June 30, 2018 and paid July 13, 2018.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by acquisitions and development. Minimum rents increased 28% in both the quarter and first six months, while operating cost reimbursements increased 21% in Q2 and 35% year to date.
- The Company acquired 23 retail net lease assets for approximately $101.0 million in Q2 and 53 assets for approximately $199.8 million year to date. Q2 acquisitions had a weighted average lease term of approximately 12.4 years and an underwritten weighted average capitalization rate of approximately 7.2%.
- Five properties were sold in Q2 for net proceeds of $10.6 million and a $2.4 million gain. Year-to-date sales totaled 10 properties for $26.7 million of net proceeds and a $6.0 million gain, plus a $3.9 million tenant purchase option transaction producing a $1.0 million gain.
- Interest expense rose 35% in Q2 and 34% year to date because of higher borrowings used to fund acquisitions and development.
- General and administrative expense increased 35% in Q2 due primarily to higher employee headcount and professional costs. G&A was 8.9% of Q2 revenue, compared with 8.4% in the prior-year quarter.
- The Company recognized a $1.2 million impairment charge in Q2 and year to date; no comparable charge was recorded in 2017.
- Per-share GAAP earnings declined partly because the share base increased materially, while FFO and AFFO per share increased.
Guidance, outlook, commentary, risks and unusual items
- No specific earnings or operating guidance is provided in the filing. Management expects short-term liquidity needs to be funded through operating cash flow and revolving-credit borrowings, with longer-term needs supported by debt, equity and other financing.
- The Company entered into a $250.0 million ATM equity program in May 2018; no shares were issued under the program during the quarter, and approximately $250.0 million remained available at June 30, 2018.
- A March 2018 forward equity sale covering 3.45 million shares is required to be settled no later than March 1, 2019. The Company had not yet received the related proceeds as of June 30, 2018; anticipated net proceeds were approximately $162.9 million to $163.1 million, subject to adjustments.
- Development and Partner Capital Solutions projects under construction or completed during the first half had anticipated total costs of approximately $51.6 million. Five projects under construction or commenced in Q2 had anticipated costs of approximately $16.8 million.
- Key risks include tenant credit and bankruptcy risk, re-leasing risk, retail real estate conditions, interest-rate and refinancing risk, availability and cost of capital, covenant compliance, property impairment, and maintaining REIT qualification.
- Interest-rate swaps hedged approximately $158.9 million of variable-rate borrowings and had a net asset fair value of $4.1 million at June 30, 2018. Derivative counterparties could declare a default under specified debt-acceleration circumstances, although the related net liability position was reported as zero.
- Moody’s assigned the Company a Baa2 issuer rating with a stable outlook in May 2018.
- The Company reported no material litigation, no defaults upon senior securities and no material changes to previously disclosed risk factors.
- The Company expects the new lease standard effective January 1, 2019 to require recognition of right-of-use assets and lease liabilities for certain land leases for which it is the lessee, but does not currently anticipate significant changes to lease revenue accounting.
Investor verification priorities
- Verify the settlement timing and proceeds of the $162.9 million to $163.1 million forward equity sale and assess resulting dilution.
- Monitor the $166.0 million revolving-facility balance, the 2019 term-loan and mortgage maturities, and the availability of refinancing or equity capital.
- Reconcile FFO and AFFO to GAAP net income and review the effect of impairment charges, asset-sale gains and non-cash depreciation.
- Evaluate acquisition underwriting, development commitments and the sustainability of portfolio occupancy and tenant credit quality.
- Assess the effect of rising interest rates on the revolving facility and other variable-rate debt despite the Company’s swap portfolio.
- Review the implementation impact of the new lease accounting standard and any subsequent changes to REIT status, covenants or credit ratings.