Agree Realty Corporation: 2012 Form 10-K Summary
Business context and reporting period
Agree Realty Corporation is a self-administered, self-managed REIT focused on acquiring, developing and managing single-tenant, net-leased retail properties. This filing covers the fiscal year ended December 31, 2012; fourth-quarter 2012 results were included in the annual filing. The Company held a 97.05% interest in Agree Limited Partnership.
At year-end, the portfolio comprised 109 properties in 27 states, totaling approximately 3.26 million square feet and 98.35% leased. The portfolio included 100 freestanding properties and nine community shopping centers, with a weighted average remaining lease term of approximately 12.1 years. National tenants generated 88% of annualized base rent, while Walgreens, Kmart and CVS together generated 44%.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $35.8 million | $31.4 million | 18% |
| Income from continuing operations | $14.9 million | $14.3 million | 4% |
| Net income | $18.6 million | $9.9 million | 88% |
| Net income attributable to Agree Realty | $18.05 million | $9.55 million | 89% |
| Diluted EPS | $1.62 | $0.99 | 64% |
| Funds from operations | $23.4 million | $30.1 million | (22%) |
| Adjusted funds from operations | $23.9 million | $24.8 million | (4%) |
| Cash flow from operations | $21.2 million | $25.5 million | (17%) |
| Cash and cash equivalents | $1.27 million | $2.00 million | (37%) |
| Total assets | $370.1 million | $293.9 million | 26% |
| Total debt, including accrued interest | $161.2 million | $120.0 million | 34% |
Minimum rents increased 18% to $33.5 million, principally from 25 properties acquired in 2012, the full-year effect of 2011 acquisitions and three completed developments. Income from operations under the consolidated income statement was $20.1 million, or approximately 56% of revenue. Net income attributable to the Company was approximately 50% of revenue, although this was materially affected by discontinued-operations gains.
Capital expenditures and acquisitions were significant: cash used in investing activities was $69.3 million, including $84.5 million for real estate acquisitions and development, partly offset by $15.3 million of asset-sale proceeds. The Company paid $1.60 per share in dividends during 2012, equal to reported diluted EPS; 75% of dividends were classified as ordinary income and 25% as return of capital for tax purposes.
Debt, liquidity and capitalization
- Mortgage debt was $117.4 million at year-end, with a weighted average maturity of 5.7 years and a weighted average interest rate of approximately 4.4%.
- The unsecured revolving credit facility had $43.5 million outstanding at 2.39% and $41.5 million of available capacity, subject to customary conditions. The facility matures in October 2015 and can potentially be extended to October 2017.
- Debt represented approximately 33.8% of total market capitalization, compared with 32.4% at December 31, 2011. Management intends to maintain leverage at or below 65%.
- Scheduled mortgage principal repayments totaled $3.5 million in 2013, $12.7 million in 2014, $3.7 million in 2015, $12.5 million in 2016 and $22.5 million in 2017.
- The Company was in compliance with credit facility and mortgage covenants at December 31, 2012. A 100-basis-point increase in variable interest rates was estimated to increase annual interest expense by approximately $430,000.
Material changes versus the prior comparable period
- The Company acquired 25 retail assets for approximately $82.3 million at an 8.6% weighted average capitalization rate, compared with 10 acquisitions totaling approximately $38.8 million in 2011.
- Three developments or redevelopments were completed in 2012, including McDonald’s, Miner’s Super One Foods and Chase Bank projects.
- The Company sold six non-core properties and conveyed four former Borders properties to the lender through a consensual deed-in-lieu-of-foreclosure process, satisfying approximately $9.2 million of debt.
- 2012 included no real estate impairment charges, compared with $13.5 million of impairment charges in 2011, largely related to former Borders properties.
- Revenue growth was offset by higher interest expense, which increased 30% to $5.1 million, and by the absence of $895,000 of development fee income recognized in 2011.
- FFO declined because 2011 included substantial impairment add-backs and other non-recurring adjustments. AFFO was comparatively stable at $23.9 million.
- The Company completed a January/February 2012 equity offering of 1.495 million shares, generating approximately $35.1 million net proceeds, primarily used to reduce credit facility borrowings.
Guidance, outlook, commentary and risks
Management expects to continue growing primarily through development and acquisition of long-term, net-leased retail properties leased to industry-leading tenants. Management stated that operating cash flow and the credit facility were expected to fund operations, dividends and near-term capital needs for at least the following 12 months, but noted that market conditions could limit access to additional financing.
The Company announced a January 2013 offering of 1.725 million shares that generated approximately $44.9 million of net proceeds, used to repay credit facility borrowings and for general corporate purposes. It also declared a quarterly dividend of $0.41 per share for the quarter ending March 31, 2013, compared with $0.40 per share for each 2012 quarter.
- Tenant concentration is material: Walgreens accounted for 30% of annualized base rent, Kmart 7% and CVS 7%.
- Geographic concentration is significant: 47 of 109 properties were located in Michigan.
- Single-tenant properties expose the Company to substantial revenue loss, re-leasing costs and potential impairment if a tenant defaults, closes stores or enters bankruptcy.
- Lease rollover creates risk; 2013 expirations represented 2.7% of annualized base rent, while 2015 expirations represented 6.7%. During 2012, re-leased space carried rent 28.8% below the rent on the leases expiring in 2013.
- Development and acquisitions depend on construction execution, permits, tenant commitments, financing availability and permanent refinancing.
- Mortgage loans may contain cross-default and cross-collateralization provisions, and some debt is recourse or subject to limited guarantees.
- Maintaining REIT qualification requires compliance with complex income, asset and distribution tests. The Company must generally distribute at least 90% of taxable income and may incur taxes through taxable REIT subsidiaries.
- Environmental liabilities, uninsured losses, interest-rate changes, competition, property illiquidity and adverse economic conditions could reduce cash flow and distributions.
The Company reported no material litigation, no unresolved SEC staff comments and effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion.
Most important facts for investors to verify
- Reconcile reported net income, FFO and AFFO, particularly the impact of asset sales, discontinued operations and the absence of 2011 impairment-related adjustments.
- Assess Walgreens, Kmart and CVS tenant credit quality and the effect of their combined 44% annualized-base-rent concentration.
- Review the 2013–2017 debt maturities, refinancing requirements, covenant headroom and available revolver capacity.
- Evaluate whether the $23.9 million of 2012 AFFO adequately covered approximately $18.2 million of common-stock dividends and limited-partner distributions.
- Monitor lease renewals, especially the 2013 expirations and the materially lower rents achieved on 2012 leasing activity.
- Confirm the use of proceeds and balance-sheet impact of the January 2013 equity offering and the subsequent sale of the Ypsilanti property.
- Review the Company’s continued REIT qualification, tax liabilities, environmental exposure and property-level guarantees or cross-collateralization provisions.