UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2020, or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 1-12928
AGREE REALTY CORPORATION
(Exact name of registrant as specified in its charter)
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Maryland |
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38-3148187 |
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State or Other Jurisdiction of Incorporation or |
(I.R.S. Employer Identification No.) |
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Organization |
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70 E. Long Lake Road, Bloomfield Hills, Michigan 48304
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (248) 737-4190
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered |
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Common Stock, $0.0001 par value |
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New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes |
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No |
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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Yes |
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No |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer |
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Accelerated Filer |
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Non-accelerated Filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes |
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No |
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As of April 17, 2020, the Registrant had 49,877,109 shares of common stock issued and outstanding.
AGREE REALTY CORPORATION
Index to Form 10-Q
AGREE REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per-share data)
(Unaudited)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
See accompanying notes to condensed consolidated financial statements.
1
AGREE REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per-share data)
(Unaudited)
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March 31, |
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December 31, |
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2020 |
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2019 |
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LIABILITIES |
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Mortgage Notes Payable, net |
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$ |
33,720 |
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$ |
36,698 |
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Unsecured Term Loans, net |
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237,453 |
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237,403 |
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Senior Unsecured Notes, net |
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509,226 |
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509,198 |
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Unsecured Revolving Credit Facility |
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242,000 |
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89,000 |
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Dividends and Distributions Payable |
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26,859 |
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25,014 |
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Accounts Payable, Accrued Expenses, and Other Liabilities |
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75,334 |
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48,987 |
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Lease intangibles, net of accumulated amortization of |
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$20,319 and $19,307 at March 31, 2020 and December 31, 2019, respectively |
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27,341 |
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26,668 |
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Total Liabilities |
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1,151,933 |
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972,968 |
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EQUITY |
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Common stock, $.0001 par value, 90,000,000 shares |
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authorized, 47,002,109 and 45,573,623 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively |
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5 |
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5 |
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Preferred Stock, $.0001 par value per share, 4,000,000 shares authorized |
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— |
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— |
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Additional paid-in-capital |
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1,856,914 |
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1,752,912 |
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Dividends in excess of net income |
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(62,542) |
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(57,094) |
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Accumulated other comprehensive income (loss) |
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(39,291) |
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(6,492) |
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Total Equity - Agree Realty Corporation |
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1,755,086 |
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1,689,331 |
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Non-controlling interest |
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1,926 |
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2,231 |
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Total Equity |
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1,757,012 |
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1,691,562 |
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Total Liabilities and Equity |
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$ |
2,908,945 |
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$ |
2,664,530 |
See accompanying notes to condensed consolidated financial statements.
2
AGREE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except share and per-share data)
(Unaudited)
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Three Months Ended |
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March 31, 2020 |
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March 31, 2019 |
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Revenues |
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Rental Income |
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$ |
55,783 |
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42,345 |
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Other |
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26 |
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3 |
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Total Revenues |
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55,809 |
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42,348 |
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Operating Expenses |
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Real estate taxes |
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4,702 |
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3,622 |
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Property operating expenses |
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2,335 |
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1,739 |
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Land lease expense |
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328 |
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195 |
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General and administrative |
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4,658 |
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4,035 |
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Depreciation and amortization |
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14,132 |
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9,864 |
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Provision for impairment |
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— |
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416 |
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Total Operating Expenses |
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26,155 |
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19,871 |
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Income from Operations |
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29,654 |
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22,477 |
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Other (Expense) Income |
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Interest expense, net |
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(9,669) |
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(7,558) |
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Gain (loss) on sale of assets, net |
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1,645 |
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3,427 |
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Income tax (expense) benefit |
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(260) |
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170 |
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Net Income |
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21,370 |
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18,516 |
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Less Net Income Attributable to Non-Controlling Interest |
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141 |
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169 |
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Net Income Attributable to Agree Realty Corporation |
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$ |
21,229 |
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$ |
18,347 |
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Net Income Per Share Attributable to Agree Realty Corporation |
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Basic |
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$ |
0.47 |
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$ |
0.49 |
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Diluted |
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$ |
0.46 |
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$ |
0.48 |
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Other Comprehensive Income |
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Net income |
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$ |
21,370 |
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$ |
18,516 |
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Changes in fair value of interest rate swaps |
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(33,025) |
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(3,405) |
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Realized gain (loss) on settlement of interest rate swaps |
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(17) |
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— |
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Total Comprehensive Income (Loss) |
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(11,672) |
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15,111 |
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Less Comprehensive Income (Loss) Attributable to Non-Controlling Interest |
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(109) |
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138 |
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Comprehensive Income (Loss) Attributable to Agree Realty Corporation |
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$ |
(11,563) |
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$ |
14,973 |
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Weighted Average Number of Common Shares Outstanding - Basic |
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45,436,191 |
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37,487,851 |
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Weighted Average Number of Common Shares Outstanding - Diluted |
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45,565,054 |
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38,320,307 |
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See accompanying notes to condensed consolidated financial statements.
3
AGREE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In thousands, except share and per-share data)
(Unaudited)
See accompanying notes to condensed consolidated financial statements.
4
AGREE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In thousands, except share and per-share data)
(Unaudited)
See accompanying notes to condensed consolidated financial statements.
5
AGREE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
See accompanying notes to condensed consolidated financial statements.
6
AGREE REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
Note 1 – Organization
Agree Realty Corporation (the “Company”), a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. The Company was founded in 1971 by its current Executive Chairman, Richard Agree, and its common stock was listed on the New York Stock Exchange (“NYSE”) in 1994.
The Company’s assets are held by, and all of its operations are conducted through, directly or indirectly, Agree Limited Partnership (the “Operating Partnership”), of which Agree Realty Corporation is the sole general partner and in which it held a 99.3% interest as of March 31, 2020. There is a one-for-one relationship between Operating Partnership units (“Operating Partnership Units”) owned by the Company and Company common shares outstanding. Under the partnership agreement of the Operating Partnership, the Company, as the sole general partner, has exclusive responsibility and discretion in the management and control of the Operating Partnership.
The terms “Agree Realty,” the “Company,” “Management,” “we,” “our,” and “us” refer to Agree Realty Corporation and all of its consolidated subsidiaries, including the Operating Partnership.
Note 2 – Summary of Significant Accounting Policies
Basis of Accounting and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. The unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the interim period presented. Operating results for the three months ended March 31, 2020 may not be indicative of the results that may be expected for the year ending December 31, 2020. Amounts as of December 31, 2019 included in the condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. The unaudited condensed consolidated financial statements, included herein, should be read in conjunction with the audited consolidated financial statements and notes thereto, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s Form 10-K for the year ended December 31, 2019.
The unaudited condensed consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries. The Company, as the sole general partner, held 99.3% and 99.2% of the Operating Partnership as of March 31, 2020 and December 31, 2019, respectively. All material intercompany accounts and transactions have been eliminated.
At March 31, 2020 and December 31, 2019, the non-controlling interest in the Operating Partnership consisted of a 0.7% and 0.8% ownership interest in the Operating Partnership held by third parties, respectively. The Operating Partnership Units may, under certain circumstances, be exchanged for shares of common stock. The Company as sole general partner of the Operating Partnership has the option to settle exchanged Operating Partnership Units held by others for cash based on the current trading price of our shares. Assuming the exchange of all non-controlling Operating Partnership Units, there would have been 47,349,728 shares of common stock outstanding at March 31, 2020.
7
Significant Risks and Uncertainties
Currently, one of the most significant risks and uncertainties is the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19. A number of our tenants have announced temporary closures of their stores and requested rent deferral or rent abatement during this pandemic. Many experts predict that the outbreak will trigger, or even has already triggered, a period of global economic slowdown or a global recession.
The COVID-19 pandemic could have material and adverse effects on our financial condition, results of operations and cash flows in the near term due to, but not limited to, the following:
| ● | reduced economic activity severely impacts our tenants' businesses, financial condition and liquidity and may cause tenants to be unable to fully meet their obligations to us or to otherwise seek modifications of such obligations, resulting in increases in uncollectible receivables and reductions in rental income; |
| ● | the negative financial impact of the pandemic could impact our future compliance with financial covenants of our credit facility and other debt agreements; and |
| ● | weaker economic conditions could cause us to recognize impairment in value of our tangible or intangible assets. |
The extent to which the COVID-19 pandemic impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.
Refer to Note 13 – Subsequent Events for additional information.
Real Estate Investments
The Company records the acquisition of real estate at cost, including acquisition and closing costs. For properties developed by the Company, all direct and indirect costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed.
Assets are classified as held for sale based on specific criteria as outlined in ASC 360, Property, Plant & Equipment. Properties classified as “held for sale” are recorded at the lower of their carrying value or their fair value, less anticipated selling costs. Any properties classified as held for sale are not depreciated. Assets are generally classified as held for sale once management has actively engaged in marketing the asset and has received a firm purchase commitment that is expected to close within one year. The Company classified five operating properties as held for sale at March 31, 2020, the assets for which are separately presented in the Condensed Consolidated Balance Sheet.
Real estate held for sale consisted of the following as of March 31, 2020 and December 31, 2019 (in thousands):
8
Acquisitions of Real Estate
The acquisition of property for investment purposes is typically accounted for as an asset acquisition. The Company allocates the purchase price to land, buildings and identified intangible assets and liabilities, based in each case on their relative estimated fair values and without giving rise to goodwill. Intangible assets and liabilities represent the value of in-place leases and above- or below-market leases. In making estimates of fair values, the Company may use a number of sources, including data provided by independent third parties, as well as information obtained by the Company as a result of its due diligence, including expected future cash flows of the property and various characteristics of the markets where the property is located.
In allocating the fair value of the identified intangible assets and liabilities of an acquired property, in-place lease intangibles are valued based on the Company’s estimates of costs related to tenant acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. Above- and below-market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition and the Company’s estimate of current market lease rates for the property. In the case of sale-leaseback transactions, it is typically assumed that the lease is not in-place prior to the close of the transaction.
Depreciation and Amortization
Land, buildings and improvements are recorded and stated at cost. The Company’s properties are depreciated using the straight-line method over the estimated remaining useful life of the assets, which are generally 40 years for buildings and 10 to 20 years for improvements. Properties classified as held for sale and properties under development or redevelopment are not depreciated. Major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.
In-place lease intangible assets and the capitalized above- and below-market lease intangibles are amortized over the non-cancelable term of the lease unless the Company believes it is reasonably certain that the tenant will renew the lease for an option term whereby the Company amortizes the value attributable to the renewal over the renewal period. In-place lease intangible assets are amortized to amortization expense and above- and below-market lease intangibles are amortized as a net reduction of rental income. In the event of early lease termination, the remaining net book value of any above- or below-market lease intangible is recognized as an adjustment of rental income.
The following schedule summarizes the Company’s amortization of lease intangibles for the three months ended March 31, 2020 and 2019 (in thousands):
9
The following schedule represents estimated future amortization of lease intangibles as of March 31, 2020 (in thousands):
Impairments
The Company reviews real estate investments and related lease intangibles, for possible impairment when certain events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable though operations plus estimated disposition proceeds. Events or changes in circumstances that may occur include, but are not limited to, significant changes in real estate market conditions, estimated residual values and an expectation to sell assets before the end of the previously estimated life. Impairments are measured to the extent the current book value exceeds the estimated fair value of the asset less disposition costs for any assets classified as held for sale.
The valuation of impaired assets is determined using valuation techniques including discounted cash flow analysis, analysis of recent comparable sales transactions and purchase offers received from third parties, which are Level 3 inputs. The Company may consider a single valuation technique or multiple valuation techniques, as appropriate, when estimating the fair value of its real estate. Estimating future cash flows is highly subjective and estimates can differ materially from actual results.
Cash and Cash Equivalents and Cash Held in Escrows
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash and money market accounts. Cash held in escrows relates to delayed like-kind exchange transactions pursued under Section 1031 of the Internal Revenue Code. The account balances of cash and cash held in escrow periodically exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance coverage, and as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company had $91.1 million and $40.9 million in cash and cash held in escrow as of March 31, 2020 and December 31, 2019, respectively, in excess of the FDIC insured limit.
Revenue Recognition and Accounts Receivable
The Company leases real estate to its tenants under long-term net leases which we account for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. Rental increases based upon changes in the consumer price indexes, or other variable factors, are recognized only after changes in such factors have occurred and are then applied according to the lease agreements. Certain leases also provide for additional rent based on tenants’ sales volumes. These rents are recognized when determinable after the tenant exceeds a sales breakpoint.
Recognizing rent escalations on a straight-line method results in rental revenue in the early years of a lease being higher than actual cash received, creating a straight-line rent receivable asset which is included in the Accounts Receivable - Tenants line item in our Consolidated Balance Sheets. The balance of straight-line rent receivables at March 31, 2020 and December 31, 2019 was $24.3 million and $23.0 million, respectively. To the extent any of the tenants under these leases become unable to pay their contractual cash rents, the Company may be required to write down the straight-line rent receivable from those tenants, which would reduce rental income.
The Company reviews the collectability of charges under its tenant operating leases on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. In the event that collectability with respect to any tenant changes the Company recognizes an adjustment to rental income.
10
The Company’s review of collectability of charges under its operating leases includes any accrued rental revenues related to the straight-line method of reporting rental revenue.
The Company’s leases provide for reimbursement from tenants for common area maintenance (“CAM”), insurance, real estate taxes and other operating expenses. A portion of the Company’s operating cost reimbursements is estimated each period and is recognized as revenue in the period the recoverable costs are incurred and accrued. Receivables from operating cost reimbursements are included in the Accounts Receivable - Tenants line item in the condensed consolidated balance sheets. The balance of unbilled operating cost reimbursement receivable at March 31, 2020 and December 31, 2019 was $2.0 million and $2.6 million, respectively.
The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 842 Leases (“ASC 842”) using the modified retrospective approach as of January 1, 2019 and elected to apply the transition provisions of the standard at the beginning of the period of adoption. The Company adopted the practical expedient in ASC 842 that alleviates the requirement to separately present lease and non-lease rental income. As a result, all income earned pursuant to tenant leases is reflected as one line, “Rental Income,” in the condensed consolidated statement of operations.
Sales Tax
The Company collects various taxes from tenants and remits these amounts, on a net basis, to the applicable taxing authorities.
Earnings per Share
Earnings per common share has been computed pursuant to the guidance in the FASB ASC Topic 260, “Earnings Per Share.” The guidance requires the classification of the Company’s unvested restricted stock, which contain rights to receive non forfeitable dividends, as participating securities requiring the two-class method of computing net income per common share. In accordance with the two-class method, earnings per share has been computed by dividing the net income less net income attributable to unvested restricted shares by the weighted average number of common shares outstanding less unvested restricted shares. Diluted earnings per share is computed by dividing net income by the weighted average common shares and potentially dilutive common shares outstanding in accordance with the treasury stock method.
The following is a reconciliation of the numerator and denominator for the basic net earnings per common share and diluted net earnings per common share computation for each of the periods presented: (in thousands, except for share data)
11
For the three months ended March 31, 2020, 57,163 shares of common stock included in the 2019 ATM Forward Offerings, 29,418 shares of common stock included in the 2020 ATM Forward Offerings, and 4,719 shares of restricted common stock granted in 2020 were anti-dilutive and were not included in the computation of diluted earnings per share.
Forward Equity Sales
The Company occasionally sells shares of common stock through forward sale agreements to enable the Company to set the price of such shares upon pricing the offering (subject to certain adjustments) while delaying the issuance of such shares and the receipt of the net proceeds by the Company.
To account for the forward sale agreements, the Company considers the accounting guidance governing financial instruments and derivatives. To date, we have concluded that our forward sale agreements are not liabilities as they do not embody obligations to repurchase our shares nor do they embody obligations to issue a variable number of shares for which the monetary value are predominantly fixed, varying with something other than the fair value of the shares, or varying inversely in relation to our shares. We then evaluate whether the agreements meet the derivatives and hedging guidance scope exception to be accounted for as equity instruments. We have concluded that the agreements are classifiable as equity contracts based on the following assessments: (i) none of the agreements’ exercise contingencies are based on observable markets or indices besides those related to the market for our own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to our own stock.
The Company also considers the potential dilution resulting from the forward sale agreements on the earnings per share calculations. The Company uses the treasury stock method to determine the dilution resulting from the forward sale agreements during the period of time prior to settlement.
Income Taxes
The Company made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) and related regulations. The Company generally will not be subject to federal income taxes on amounts distributed to stockholders, providing it distributes 100% of its REIT taxable income and meets certain other requirements for qualifying as a REIT. For the periods ending March 31, 2020 and December 31, 2019, the Company believes it has qualified as a REIT. Notwithstanding its qualification for taxation as a REIT, the Company is subject to certain state taxes on its income and real estate.
Earnings and profits that determine the taxability of distributions to shareholders differ from net income reported for financial reporting purposes due to differences in the estimated useful lives and methods used to compute depreciation and the carrying value (basis) of the investments in properties for tax purposes, among other things.
The Company and its taxable REIT subsidiaries (“TRS”) have made a timely TRS election pursuant to the provisions of the REIT Modernization Act. A TRS is able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within its TRS entity are subject to federal and state income taxes. All provisions for federal income taxes in the accompanying condensed consolidated financial statements are attributable to the Company’s TRS.
We regularly analyze our various federal and state filing positions and only recognize the income tax effect in our financial statements when certain criteria regarding uncertain income tax positions have been met. We believe that our income tax positions would more likely than not be sustained upon examination by all relevant taxing authorities. Therefore, no provisions for uncertain income tax positions have been recorded in our financial statements.
Fair Values of Financial Instruments
The Company’s estimates of fair value of financial and non-financial assets and liabilities are based on the framework established in the fair value accounting guidance. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. The
12
guidance describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels:
Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities.
Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques.
Management’s Responsibility to Evaluate Our Ability to Continue as a Going Concern
When preparing financial statements for each annual and interim reporting period, management has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. In making its evaluation, the Company considers, but is not limited to, any risks and/or uncertainties to its results of operations, contractual obligations in the form of near-term debt maturities, dividend requirements, or other factors impacting the Company’s liquidity and capital resources. No conditions or events that raised substantial doubt about the ability to continue as a going concern within one year were identified as of the issuance date of the financial statements contained in this Quarterly Report on Form 10-Q.
Segment Reporting
The Company is primarily in the business of acquiring, developing and managing retail real estate which is considered to be one reportable segment. The Company has no other reportable segments.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of (1) assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and (2) revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848).” ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In August 2018, the FASB issued ASU No. ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). These amendments modify the disclosure requirements in Topic 820 on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty. The Company adopted ASU 2018-13 on January 1, 2020. However, as the Company did not
13
have any Level 3 fair value measurements and/or other circumstances addressed in ASU 2018-13, adoption did not have a material effect on the Company’s financial statements or disclosures.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes how entities measure credit losses for most financial assets. This guidance requires an entity to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses”, which clarified that receivables arising from operating leases are within the scope of the leasing standard (Topic 842), not Topic 326. The Company adopted this new standard on January 1, 2020. In the event any of the Company’s leases ever were to be classified as sales-type or direct finance leases, it would become subject to the provisions of ASU 2016-13. However, the Company does not currently have any such leases, nor does it have a significant number of other financial instruments subject to the new standard. Therefore, adoption of ASU 2016-13 has not had, and is not currently expected to have, a material effect on the Company’s financial statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases” (“ASU 2016-02”). The new standard creates ASC 842 and supersedes FASB ASC 840, Leases, which the Company adopted on January 1, 2019 along with related interpretations. The adoption of the new Leases standard ASU 2016-02 generally had, and will have, the following impacts on the Company:
|
• |
Topic 842 requires a lessee to recognize right of use assets and lease obligation liabilities that arise from leases (operating and finance). On January 1, 2019, the Company recognized $7.5 million of right of use assets and lease liabilities, within Other Assets and Accounts Payable, Accrued Expenses, and Other Liabilities on the Condensed Consolidated Balance Sheet. The Company was not required to reassess the classification of existing land leases and therefore these leases continue to be accounted for as operating leases. In the event the Company modifies existing land leases or enters into new land leases after adoption of the new standard, such leases may be classified as finance leases. Business activity occurring subsequent to January 1, 2019, including the Company entering into additional operating leases as lessee, has increased the balances of the right to use assets and lease liabilities to $15.9 million and $16.1 million as of March 31, 2020. |
|
• |
Topic 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. Based on its election of practical expedients, the Company’s existing retail leases, where it is the lessor, continue to be accounted for as operating leases under the new standard. However, Topic 842 changed certain requirements regarding the classification of leases that could result in the Company recognizing certain long-term leases entered into or modified after January 1, 2019 as sales-type leases, as opposed to operating leases. |
|
• |
The Company elected an optional transition method that allows entities to initially apply Topic 842 at the adoption date (January 1, 2019) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. However, the Company ultimately did not have any cumulative-effect adjustment as of the adoption date. |
|
• |
The Company elected a practical expedient which allows lessors to not separate non-lease components from the lease component when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease component is classified as an operating lease. As a result, the Company now presents all rentals and reimbursements from tenants as a single line item Rental Income within the Condensed Consolidated Statement of Income and Comprehensive Income. |
|
• |
Under Topic 842, beginning on January 1, 2019, changes in the probability of collecting tenant rental income results in direct adjustments of rental income and tenant receivables. The Company no longer recognizes any separate specific bad debt provision or allowance for doubtful accounts. |
14
Note 3 – Leases
Tenant Leases
The Company is primarily focused on the ownership, acquisition, development and management of retail properties leased to industry leading tenants. As of March 31, 2020, the Company’s portfolio was approximately 99.3% leased and had a weighted average remaining lease term (excluding extension options) of approximately 9.8 years. A significant majority of its properties are leased to national tenants and approximately 59.6% of its annualized base rent was derived from tenants, or parent entities thereof, with an investment grade credit rating from S&P Global Ratings, Moody’s Investors Service, Fitch Ratings or the National Association of Insurance Commissioners.
Substantially all of the Company’s tenants are subject to net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and actual property operating expenses incurred, including property taxes, insurance and maintenance. In addition, the Company’s tenants are typically subject to future rent increases based on fixed amounts or increases in the consumer price index and certain leases provide for additional rent calculated as a percentage of the tenants’ gross sales above a specified level. Certain of the Company’s properties are subject to leases under which it retains responsibility for specific costs and expenses of the property.
The Company’s leases typically provide the tenant one or more multi-year renewal options to extend their leases, subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term.
The Company attempts to maximize the amount it expects to derive from the underlying real estate property following the end of the lease, to the extent it is not extended. The Company maintains a proactive leasing program that, combined with the quality and locations of its properties, has made its properties attractive to tenants. The Company intends to continue to hold its properties for long-term investment and, accordingly, place a strong emphasis on the quality of construction and an on-going program of regular and preventative maintenance. However, the residual value of a real estate property is still subject to various market-specific, asset-specific, and tenant-specific risks and characteristics. As the classification of a lease is dependent on the fair value of its cash flows at lease commencement, the residual value of a property represents a significant assumption in its accounting for tenant leases.
The Company has elected the practical expedient in ASC Topic 842 on not separating non-lease components from associated lease components. The lease and non-lease components combined as a result of this election largely include tenant rentals and maintenance charges, respectively. The Company applies the accounting requirements of ASC Topic 842 to the combined component.
The following table includes information regarding the Company’s operating leases for which it is the lessor, for the three months ended March 31, 2020 and March 31, 2019. (presented in thousands)
Deferred Revenue
As of March 31, 2020, and December 31, 2019, there was $2.1 million and $4.1 million, respectively, in deferred revenues resulting from rents paid in advance.
15
Land Lease Obligations
The Company is the lessee under land lease agreements for certain of its properties, all of which qualified as operating leases as of March 31, 2020. The Company’s land leases are net lease agreements and do not include variable lease payments. These leases typically provide multi-year renewal options to extend their term as lessee at the Company’s option. Option periods are included in the calculation of the lease obligation liability only when options are reasonably certain to be exercised. Land lease expense was $0.3 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively.
In calculating its lease obligations under the ground leases, the Company uses discount rates estimated to be equal to what it would have to pay to borrow on a collateralized basis over a similar term, for an amount equal to the lease payments, in a similar economic environment.
The following tables include information on the Company’s land leases for which it is the lessee, for the three months ended March 31, 2020 and March 31, 2019. (presented in thousands)
Maturity Analysis of Lease Liabilities (presented in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31, |
|
(remaining) |
|
|
2021 |
|
2022 |
|
2023 |
|
2024 |
|
Thereafter |
|
Total |
|||||||
|
Lease Payments |
|
$ |
802 |
|
|
$ |
1,015 |
|
$ |
789 |
|
$ |
789 |
|
$ |
789 |
|
$ |
30,583 |
|
$ |
34,767 |
|
Imputed Interest |
|
|
(495) |
|
|
|
(645) |
|
|
(634) |
|
|
(628) |
|
|
(621) |
|
|
(15,634) |
|
|
(18,657) |
|
Total Lease Liabilities |
|
$ |
307 |
|
|
$ |
370 |
|
$ |
155 |
|
$ |
161 |
|
$ |
168 |
|
$ |
14,949 |
|
$ |
16,110 |
Note 4 – Real Estate Investments
Real Estate Portfolio
As of March 31, 2020, the Company owned 868 operating properties located in 46 states, with a total gross leasable area (“GLA”) of approximately 16.3 million square feet. Net Real Estate Investments totaled $2.4 billion as of March 31, 2020. As of December 31, 2019, the Company owned 821 operating properties located in 46 states, with a total GLA of approximately 14.6 million square feet. Net Real Estate Investments totaled $2.2 billion as of December 31, 2019.
16
Acquisitions
During the three months ended March 31, 2020, the Company purchased 51 retail net lease assets for approximately $227.0 million, which includes acquisition and closing costs. These properties are located in 24 states and are leased for a weighted average lease term of approximately 11.0 years.
The aggregate acquisitions for the three months ended March 31, 2020 were allocated $63.0 million to land, $144.7 million to buildings and improvements, and $19.3 million to lease intangibles. The acquisitions were all cash purchases and there was no material contingent consideration associated with these acquisitions. None of the Company’s acquisitions during the first three months of 2020 caused any new or existing tenant to comprise 10% or more of its total assets or generate 10% or more of its total annualized contractual base rent at March 31, 2020.
Developments
During the three months ended March 31, 2020, the Company completed three developments or Partner Capital Solutions projects. At March 31, 2020 the Company had one such project under construction.
Dispositions
During the three months ended March 31, 2020, the Company sold six properties for net proceeds of $24.4 million and the Company recorded a net gain of $1.6 million.
Provision for Impairment
As a result of our review of Real Estate Investments, the Company recognized no provisions for impairment for the three months ended March 31, 2020 and $0.4 million for the three months ended March 31, 2019, respectively. The estimated fair value of the impaired real estate assets at their time of impairment during the three months ended March 31, 2019 was $0.6 million.
Note 5 – Debt
As of March 31, 2020, the Company had total gross indebtedness of $1.0 billion, including (i) $34.1 million of mortgage notes payable; (ii) $240.0 million of unsecured term loans; (iii) $510.0 million of senior unsecured notes; and (iv) $242.0 million of borrowings under the Company’s Credit Facility.
Mortgage Notes Payable
As of March 31, 2020, the Company had total gross mortgage indebtedness of $34.1 million which was collateralized by related real estate and tenants’ leases with an aggregate net book value of $44.6 million. Including mortgages that have been swapped to a fixed interest rate, the weighted average interest rate on the Company’s mortgage notes payable was 4.24% as of March 31, 2020 and 4.40% as of December 31, 2019.
17
The mortgage loans encumbering the Company’s properties are generally non-recourse, subject to certain exceptions for which it would be liable for any resulting losses incurred by the lender. These exceptions vary from loan to loan, but generally include fraud or material misrepresentations, misstatements or omissions by the borrower, intentional or grossly negligent conduct by the borrower that harms the property or results in a loss to the lender, filing of a bankruptcy petition by the borrower, either directly or indirectly, and certain environmental liabilities. At March 31, 2020, there were no mortgage loans with partial recourse to us.
The Company had entered into mortgage loans which are secured by multiple properties and contain cross-default and cross-collateralization provisions. Cross-collateralization provisions allow a lender to foreclose on multiple properties in the event that the Company defaults under the loan. Cross-default provisions allow a lender to foreclose on the related property in the event a default is declared under another loan.
Unsecured Term Loan Facilities
The following table presents the unsecured term loans balance net of unamortized debt issuance costs as of March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|
December 31, 2019 |
||
|
2023 Term Loan |
|
$ |
40,000 |
|
$ |
40,000 |
|
2024 Term Loan Facilities |
|
|
100,000 |
|
|
100,000 |
|
2026 Term Loan |
|
|
100,000 |
|
|
100,000 |
|
Total Principal |
|
|
240,000 |
|
|
240,000 |
|
Unamortized debt issuance costs |
|
|
(2,547) |
|
|
(2,597) |
|
Total |
|
$ |
237,453 |
|
$ |
237,403 |
In August 2016, the Company entered into a $20.3 million unsecured amortizing term loan that matured May 2019 (the “2019 Term Loan”). Borrowings under the 2019 Term Loan were priced at LIBOR plus 170 basis points. In order to fix LIBOR on the 2019 Term Loan at 1.92% until maturity, the Company had an interest rate swap agreement in place, which was assigned by the lender under the Mortgage Note to the 2019 Term Loan lender. Including the swap, the 2019 Term Loan bore an all-in interest rate of 3.62%. The 2019 Term Loan was repaid upon maturity in May 2019.
In July 2016, the Company completed a $40.0 million unsecured term loan facility that matures July 2023 (the “2023 Term Loan”). Borrowings under the 2023 Term Loan are priced at LIBOR plus 85 to 165 basis points, depending on the Company’s credit rating. The Company entered into an interest rate swap agreement to fix LIBOR at 140 basis points until maturity. As of March 31, 2020, $40.0 million was outstanding under the 2023 Term Loan, which was subject to an all-in interest rate of 2.40%, including the swap.
18
The Credit Agreement, described below, extended the maturity dates of the $65.0 million unsecured term loan facility (the “$65 Million Term Loan”) and $35.0 million unsecured term loan facility (the “$35 Million Term Loan,” and together with the $65 Million Term Loan, the “2024 Term Loan Facilities”) to January 2024. In connection with entering into the Credit Agreement, the prior notes evidencing the existing $65 Million Term Loan and $35 Million Term Loan were canceled and new notes evidencing the 2024 Term Loan Facilities were executed. Borrowings under the unsecured 2024 Term Loan Facilities bear interest at a variable LIBOR plus 85 to 165 basis points, depending on the Company’s credit rating. The Company utilized existing interest rate swap agreements to effectively fix LIBOR at 213 basis points until September 2020 for the $35 Million Term Loan and July 2021 for the $65 Million Term Loan (refer to Note 9 – Derivative Instruments and Hedging Activity). As of March 31, 2020, $100.0 million was outstanding under the 2024 Term Loan Facilities, bearing an all-in interest rate of 3.13%, including the swaps.
In December 2018, the Company entered into a $100.0 million unsecured term loan facility that matures January 2026 (the “2026 Term Loan”). Borrowings under the 2026 Term Loan are priced at LIBOR plus 145 to 240 basis points, depending on the Company’s credit rating. The Company entered into interest rate swap agreements to fix LIBOR at 266 basis points until maturity. As of March 31, 2020, $100.0 million was outstanding under the 2026 Term Loan, which was subject to an all-in interest rate of 4.26%, including the swap.
Senior Unsecured Notes
The following table presents the senior unsecured notes balance net of unamortized debt issuance costs as of March 31, 2020, and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|
December 31, 2019 |
||
|
2025 Senior Unsecured Notes |
|
$ |
50,000 |
|
$ |
50,000 |
|
2027 Senior Unsecured Notes |
|
|
50,000 |
|
|
50,000 |
|
2028 Senior Unsecured Notes |
|
|
60,000 |
|
|
60,000 |
|
2029 Senior Unsecured Notes |
|
|
100,000 |
|
|
100,000 |
|
2030 Senior Unsecured Notes |
|
|
125,000 |
|
|
125,000 |
|
2031 Senior Unsecured Notes |
|
|
125,000 |
|
|
125,000 |
|
Total Principal |
|
|
510,000 |
|
|
510,000 |
|
Unamortized debt issuance costs |
|
|
(774) |
|
|
(802) |
|
Total |
|
$ |
509,226 |
|
$ |
509,198 |
All of the Senior Unsecured Notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act.
In May 2015, the Company and the Operating Partnership completed a private placement of $100.0 million principal amount of senior unsecured notes. The senior unsecured notes were sold in two series; $50.0 million of 4.16% notes due May 2025 (the “2025 Senior Unsecured Notes”) and $50.0 million of 4.26% notes due May 2027 (the “2027 Senior Unsecured Notes”).
In July 2016, the Company and the Operating Partnership entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $60.0 million aggregate principal amount of 4.42% senior unsecured notes due July 2028 (the “2028 Senior Unsecured Notes”).
In September 2017, the Company and the Operating Partnership completed a private placement of $100.0 million aggregate principal amount of 4.19% senior unsecured notes due September 2029 (the “2029 Senior Unsecured Notes”).
In September 2018, the Company and the Operating Partnership entered into two supplements to uncommitted master note facilities with institutional purchasers. Pursuant to the supplements, the Operating Partnership completed a private placement of $125.0 million aggregate principal amount of 4.32% senior unsecured notes due September 2030 (the “2030 Senior Unsecured Notes”).
19
In October 2019, the Company and the Operating Partnership closed on a private placement of $125.0 million of 4.47% senior unsecured notes due October 2031 (the “2031 Senior Unsecured Notes”). In March 2019, the Company entered into forward-starting interest rate swap agreements to fix the interest for $100.0 million of long-term debt until maturity. The Company terminated the swap agreements at the time of pricing the 2031 Senior Unsecured Notes, which resulted in an effective annual fixed rate of 4.41% for $100.0 million aggregate principal amount of the 2031 Senior Unsecured Notes. Considering the effect of the terminated swap agreements, the blended all-in rate to the Company for the $125.0 million aggregate principal amount of 2031 Senior Unsecured Notes is 4.42%.
Senior Unsecured Revolving Credit Facility
In December 2019, the Company entered into a Second Amended and Restated Revolving Credit and Term Loan Agreement (the “Credit Agreement”). The Credit Agreement provides for a $500.0 million unsecured revolving credit facility (the “Revolving Credit Facility”), a $65 Million Term Loan and a $35 Million Term Loan. The Credit Agreement amended and restated in its entirety the Company’s previous amended and restated credit agreement dated December 15, 2016.
The Credit Agreement provides $600.0 million unsecured borrowing capacity, composed of the Revolving Credit Facility, which matures on January 15, 2024, as well as the 2024 Term Loan Facilities, which mature on January 15, 2024. Subject to certain terms and conditions set forth in the Credit Agreement, the Company (i) may request additional lender commitments under any or all facilities of up to an additional aggregate of $500.0 million and (ii) may elect, for an additional fee, to extend the maturity date of the Revolving Credit Facility by six months up to two times, for a maximum maturity date of January 15, 2025. No amortization payments are required under the Credit Agreement, and interest is payable in arrears no less frequently than quarterly.
All borrowings under the Revolving Credit Facility (except for swing line loans) bear interest at a rate per annum equal to, at the option of the Company, (i) LIBOR plus a margin that is based upon the Company’s credit rating, or (ii) the Base Rate (which is defined as the greater of the rate of interest as publicly announced from time to time by PNC Bank, National Association, as its prime rate, the Federal Funds Open Rate plus 0.50%, or the Daily Eurodollar Rate plus 1.0%) plus a margin that is based upon the Company’s credit rating. The margins for the Revolving Credit Facility range in amount from 0.775% to 1.450% for LIBOR-based loans and 0.00% to 0.45% for Base Rate loans, depending on the Company’s credit rating. The margins for the Revolving Credit Facility are subject to improvement based on the Company’s leverage ratio, provided its credit rating meets a certain threshold.
Concurrent with entering into the Credit Agreement, certain conforming changes, including customary financial covenants, were made to the 2023 Term Loan and 2026 Term Loan.
The Company and Richard Agree, the Executive Chairman of the Company, are parties to a Reimbursement Agreement dated November 18, 2014. Pursuant to the Reimbursement Agreement, Mr. Agree has agreed to reimburse the Company for any loss incurred under the Revolving Credit Facility in an amount not to exceed $14.0 million to the extent that the value of the Operating Partnership’s assets available to satisfy the Operating Partnership’s obligations under the revolving credit facility is less than $14.0 million.
20
Debt Maturities
The following table presents scheduled principal payments related to the Company’s debt as of March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled |
|
Balloon |
|
|
|
||
|
|
Principal |
|
Payment |
|
Total |
|||
|
Remainder of 2020 |
$ |
711 |
|
$ |
— |
|
$ |
711 |
|
2021 |
|
998 |
|
|
— |
|
|
998 |
|
2022 |
|
1,060 |
|
|
— |
|
|
1,060 |
|
2023 |
|
1,069 |
|
|
67,656 |
|
|
68,725 |
|
2024 (1) |
|
963 |
|
|
342,000 |
|
|
342,963 |
|
Thereafter |
|
1,654 |
|
|
610,000 |
|
|
611,654 |
|
Total |
$ |
6,455 |
|
$ |
1,019,656 |
|
$ |
1,026,111 |
|
(1) |
The balloon payment balance includes the balance outstanding under the Revolving Credit Facility as of March 31, 2020. The Credit Facility matures in January 2024, with options to extend the maturity as described under Senior Unsecured Revolving Credit Facility above. |
Loan Covenants
Certain loan agreements contain various restrictive covenants, including the following financial covenants: maximum total leverage ratio, maximum secured leverage ratios, consolidated net worth requirements, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, a minimum unsecured interest expense ratio, a minimum interest coverage ratio, a minimum unsecured debt yield and a minimum unencumbered interest expense ratio. As of March 31, 2020, the most restrictive covenant was the minimum unencumbered interest expense ratio. The Company was in compliance with all of its loan covenants and obligations as of March 31, 2020.
Note 6 – Common Stock
Follow-on Public Offerings
In September 2018, the Company entered into a follow-on public offering of 3,500,000 shares of common stock in connection with a forward sale agreement (the “September 2018 Forward”). The September 2018 Forward was settled in its entirety in April 2019. Upon settlement we issued 3,500,000 shares of common stock and received net proceeds of $186.0 million, after deducting fees and expenses.
In April 2019, the Company entered into a follow-on public offering (the “April 2019 Forward”) to sell an aggregate of 3,162,500 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 412,500 shares of common stock. The April 2019 Forward was settled in its entirety in December 2019. Upon settlement, the Company issued 3,162,500 shares of common stock and received net proceeds of approximately $195.8 million, after deducting fees and expenses.
Refer to Note 13 – Subsequent Events regarding the Company’s April 2020 common stock issuance.
ATM Programs
2019 ATM Program
In July 2019, the Company entered into a $400.0 million at-the-market equity (“ATM”) program (the “2019 ATM Program”) through which the Company, from time to time, sold shares of common stock. In addition to selling shares of common stock, the Company entered into forward sale agreements through the 2019 ATM Program. During the third quarter of 2019, the Company issued 444,228 shares under the 2019 ATM Program, at an average price of $74.30, realizing gross proceeds of $33.0 million.
21
During the fourth quarter of 2019, the Company entered into forward sale agreements in connection with the 2019 ATM Program to sell an aggregate of 2,003,118 shares of common stock (the “2019 ATM Forward Offerings”). During the three months ended March 31, 2020, the Company settled 1,245,118 shares from the 2019 ATM Forward Offerings. The Company is required to settle the remaining 758,000 shares under the 2019 ATM Forward Offerings by December 2020.
During the first quarter of 2020, the Company entered into forward sale agreements in connection with the 2019 ATM Program to sell an aggregate of 3,169,754 shares of common stock (the “2020 ATM Forward Offerings”). During the three months ended March 31, 2020 the Company settled 155,133 shares from the 2020 ATM Forward Offerings. The Company is required to settle the remaining 3,014,621 shares under the 2020 ATM Forward Offerings by certain dates between January 2021 and March 2021.
The 2019 ATM Program was terminated simultaneously with the establishment of the 2020 ATM Program, which is discussed below. As a result, no future issuances will occur under the 2019 ATM Program.
2020 ATM Program
In March 2020, the Company entered into a new $400.0 million ATM program (the “2020 ATM Program”) through which the Company, from time to time, may sell shares of common stock. In addition to selling shares of common stock, the Company may enter into forward sale agreements through the 2020 ATM Program.
During the first quarter of 2020, the Company entered into a forward sale agreement in connection with the 2020 ATM Program to sell an aggregate of 204,074 shares of common stock. As of March 31, 2020, no shares have been settled under the 2020 ATM Program. The Company is required to settle the 204,074 outstanding shares under the 2020 ATM Program by April 2021.
After considering the 204,074 shares of common stock subject to the forward sale agreement, the Company had approximately $387.3 million of availability remaining under the 2020 ATM Program as of March 31, 2020.
2018 ATM Program
In May 2018, the Company entered into a $250.0 million at-the-market equity program (“2018 ATM Program”) through which the Company, from time to time, sold shares of common stock. In addition to selling shares of common stock, the Company entered into forward sale agreements through the 2018 ATM Program. During the three months ended March 31, 2019, the Company did not issue shares of common stock under the 2018 ATM Program. The 2018 ATM Program was terminated, and no future issuances will occur under the 2018 ATM Program.
Note 7 – Dividends and Distribution Payable
On February 25, 2020, the Company declared a dividend of $0.585 per share (and distributions per Operating Partnership Unit) for the quarter ended March 31, 2020. The holders of the Operating Partnership Units were entitled to an equal distribution per Operating Partnership Unit held as of March 27, 2020. The dividends and distributions payable were recorded as liabilities on the Company’s condensed consolidated balance sheet at March 31, 2020. The dividend has been reflected as a reduction of stockholders’ equity and the distribution has been reflected as a reduction of the limited partners’ non-controlling interest. These amounts were paid on April 9, 2020.
Note 8 – Income Taxes (not presented in thousands)
Uncertain Tax Positions
The Company is subject to the provisions of Financial Accounting Standards Board Accounting Standard Codification 740-10 (“FASB ASC 740-10”) and has analyzed its various federal and state filing positions. The Company believes that its income tax filing positions and deductions are documented and supported. Additionally, the Company believes that its accruals for tax liabilities are adequate. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FASB ASC 740-10. The Company’s federal income tax returns are open for examination by taxing authorities
22
for all tax years after December 31, 2015. The Company has elected to record related interest and penalties, if any, as income tax expense on the Consolidated Statements of Operations and Comprehensive Income. We have no material interest or penalties relating to income taxes recognized for the three months ended March 31, 2020 and 2019.
Deferred Taxes
As of December 31, 2018, the Company had accrued a deferred income tax liability in the amount of $475,000. This deferred income tax balance represented the federal and state tax effect of deferring income tax in 2007 on the sale of an asset under section 1031 of the Code. This transaction was accrued within the Company’s TRS entities. During the three months ended March 31, 2019, the Company restructured its ownership of the TRS to which the deferred tax liability was related, resulting in a reversal of the previously accrued amount.
Income Tax Expense
The Company recognized total federal and state tax benefit (expense) of approximately ($260,000) and $170,000 for the three months ended March 31, 2020 and 2019, respectively.
Note 9 – Derivative Instruments and Hedging Activity
Background
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risk, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and, to a limited extent, the use of derivative instruments. For additional information regarding the leveling of the Company’s derivatives (refer to Note 10 – Fair Value Measurements).
The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements and add stability to interest expense. To accomplish this objective, the Company uses interest rate swap agreements as part of its interest rate risk management strategy. Interest rate swap agreements designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreement without exchange of the underlying notional amount.
Recent Activity
In March 2019, the Company entered into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $100.0 million of long-term debt. The Company hedged its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period of one year. In May, the Company terminated the swap agreements at the time of pricing the future debt issuance, receiving $0.8 million upon termination. See discussion of the 2031 Senior Unsecured Notes in Note 5 – Debt above.
In June 2019, the Company entered into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $100.0 million of long-term debt. The Company is hedging its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending March 2021. As of March 31, 2020, these interest rate swaps were valued as a liability of $15.4 million.
In October 2019, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.4275%. This swap effectively converts $65.0 million of variable-rate
23
borrowings to fixed-rate borrowings from July 12, 2021 to January 12, 2024. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $1.7 million.
Also in October 2019, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.4265%. This swap effectively converts $35.0 million of variable-rate borrowings to fixed-rate borrowings from September 29, 2020 to January 12, 2024. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $1.2 million.
In February 2020, the Company entered into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $100.0 million of long-term debt. The Company is hedging its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending March 2021. As of March 31, 2020, these interest rate swaps were valued as a liability of $6.5 million.
Prior Derivative Transactions
In September 2013, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on one month LIBOR and pays to the counterparty a fixed rate of 2.20%. This swap effectively converted $35.0 million of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $0.3 million.
In July 2014, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company receives from the counterparty interest on the notional amount based on one month LIBOR and pays to the counterparty a fixed rate of 2.09%. These swaps effectively converted $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of March 31, 2020, these interest rate swaps were valued as a liability of approximately $1.5 million.
In September 2017, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $40.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on one month LIBOR and pays to the counterparty a fixed rate of 1.40%. This swap effectively converted $40.0 million of variable-rate borrowings to fixed-rate borrowings from August 1, 2016 to July 1, 2023. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $1.4 million.
In December 2018, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $100.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company receives from the counterparty interest on the notional amount based on one month LIBOR and pays to the counterparty a fixed rate of 2.66%. These swaps effectively converts $100.0 million of variable-rate borrowings to fixed-rate borrowings from December 27, 2018 to January 15, 2026. As of March 31, 2020, these interest rate swaps were valued as a liability of approximately $12.4 million.
24
Recognition
On January 1, 2019, the Company adopted ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” which provided changes in hedge accounting recognition and presentation requirements. The Company now recognizes all changes in fair value for hedging instruments designated and qualifying for cash flow hedge accounting treatment as a component of Other Comprehensive Income (OCI), as opposed to previously recognizing the ineffective portion, if any, directly in earnings. Upon adoption, there were no adjustments to recognize relating to previously recorded derivatives transactions or amounts. Net realized gains or losses resulting from derivatives that were settled in conjunction with planned fixed rate financings or refinancings continue to be included in accumulated OCI during the term of the hedged debt transaction.
Amounts reported in accumulated OCI related to currently outstanding interest rate derivatives are recognized as an adjustment to income as interest payments are made on the Company’s variable-rate debt. Realized gains or losses on settled derivative instruments included in accumulated OCI are recognized as an adjustment over the term of the hedged debt transaction. During the next twelve months, the Company estimates that an additional $5.8 million will be reclassified as an increase to interest expense.
The Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands, except number of instruments):
The table below presents the estimated fair value of the Company’s derivative financial instruments, as well as their classification in the condensed consolidated balance sheets (in thousands).
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Asset Derivatives |
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March 31, 2020 |
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December 31, 2019 |
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Fair Value |
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Fair Value |
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Derivatives designated as cash flow hedges: |
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Interest Rate Swaps |
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$ |
— |
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$ |
572 |
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Liability Derivatives |
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March 31, 2020 |
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December 31, 2019 |
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Fair Value |
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Fair Value |
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Derivatives designated as cash flow hedges: |
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Interest Rate Swaps |
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$ |
40,396 |
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$ |
7,943 |
The table below displays the effect of the Company’s derivative financial instruments in the condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2020 and 2019 (in thousands).
The Company does not use derivative instruments for trading or other speculative purposes and did not have any other derivative instruments or hedging activities as of March 31, 2020.
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Credit-risk-related Contingent Features
The Company has agreements with its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to default on the indebtedness.
As of March 31, 2020, the fair value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $41.5 million.
Although the derivative contracts are subject to master netting arrangements, which serve as credit mitigants to both the Company and its counterparties under certain situations, the Company does not net its derivative fair values or any existing rights or obligations to cash collateral on the condensed consolidated balance sheets.
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The table below presents a gross presentation of the effects of offsetting and a net presentation of the Company’s derivatives as of March 31, 2020 and December 31, 2019. The gross amounts of derivative assets or liabilities can be reconciled to the Tabular Disclosure of Fair Values of Derivative Instruments above, which also provides the location that derivative assets and liabilities are presented on the condensed consolidated balance sheets (in thousands):
Offsetting of Derivative Assets as of March 31, 2020
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Net Amounts of |
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Offset in the |
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Assets presented |
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Gross Amounts |
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Statement of |
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in the Statement |
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of Recognized |
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of Financial |
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Financial |
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Cash Collateral |
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Position |
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Instruments |
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Received |
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Net Amount |
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Derivatives |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
Offsetting of Derivative Liabilities as of March 31, 2020
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Net Amounts of |
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Liabilities |
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Offset in the |
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presented in the |
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Gross Amounts |
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Statement of |
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Statement of |
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Statement of Financial Position |
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of Recognized |
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Financial |
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Financial |
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Financial |
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Cash Collateral |
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Liabilities |
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Position |
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Instruments |
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Posted |
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Net Amount |
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Derivatives |
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$ |
40,396 |
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$ |
— |
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$ |
40,396 |
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$ |
— |
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$ |
— |
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$ |
40,396 |
Offsetting of Derivative Assets as of December 31, 2019
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Net Amounts of |
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Offset in the |
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Gross Amounts Not Offset in the |
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Gross Amounts |
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Statement of |
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in the Statement |
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Statement of Financial Position |
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of Recognized |
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Financial |
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of Financial |
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Financial |
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Cash Collateral |
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Assets |
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Position |
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Position |
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Instruments |
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Received |
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Net Amount |
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Derivatives |
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$ |
572 |
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$ |
— |
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$ |
572 |
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$ |
(572) |
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$ |
— |
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$ |
— |
Offsetting of Derivative Liabilities as of December 31, 2019
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Net Amounts of |
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Gross Amounts |
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Liabilities |
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Offset in the |
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presented in the |
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Gross Amounts Not Offset in the |
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Gross Amounts |
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Statement of |
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Statement of |
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Statement of Financial Position |
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of Recognized |
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Financial |
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Financial |
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Financial |
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Cash Collateral |
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Liabilities |
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Position |
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Position |
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Instruments |
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Posted |
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Net Amount |
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Derivatives |
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$ |
7,943 |
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$ |
— |
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$ |
7,943 |
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$ |
(572) |
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$ |
— |
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$ |
7,372 |
Note 10 – Fair Value Measurements
Assets and Liabilities Measured at Fair Value
The Company accounts for fair values in accordance with FASB Accounting Standards Codification Topic 820 Fair Value Measurements and Disclosure (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.
ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources
27
independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls, is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Derivative Financial Instruments
Currently, the Company uses interest rate swap agreements to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves.
To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2020, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 (in thousands):
28
Other Financial Instruments
The carrying values of cash and cash equivalents, receivables and accounts payable and accrued liabilities are reasonable estimates of their fair values because of the short maturity of these financial instruments.
The Company estimated the fair value of its debt based on its incremental borrowing rates for similar types of borrowing arrangements with the same remaining maturity and on the discounted estimated future cash payments to be made for other debt. The discount rate used to calculate the fair value of debt approximates current lending rates for loans and assumes the debt is outstanding through maturity. Since such amounts are estimates that are based on limited available market information for similar transactions, which is a Level 2 non-recurring measurement, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument.
Fixed rate debt (including variable rate debt swapped to fixed, excluding the value of the derivatives) with carrying values of $780.4 million and $783.3 million as of March 31, 2020 and December 31, 2019, respectively, had fair values of $880.3 million and $817.7 million, respectively. Variable rate debt’s fair value is estimated to be equal to the carrying values of $242.0 million and $89.0 million, as of March 31, 2020 and December 31, 2019, respectively.
Note 11 – Equity Incentive Plan
In 2014, the Company’s stockholders approved the 2014 Omnibus Incentive Plan (the “2014 Plan”), which replaced the 2005 Equity Incentive Plan. The 2014 Plan authorizes the issuance of a maximum of 700,000 shares of common stock.
Restricted Stock
Restricted common stock has been granted to certain employees and directors under the 2014 Plan.
The holder of a restricted share award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The restricted shares vest over a five-year period based on continued service to the Company.
The Company estimates the fair value of restricted stock grants at the date of grant and amortizes those amounts into expense on a straight line basis or amount vested, if greater, over the appropriate vesting period. During the three months ended March 31, 2020 and 2019, the Company recognized $0.7 million and $0.7 million, respectively, of expense relating to restricted stock grants.
As of March 31, 2020, there was $10.3 million of total unrecognized compensation costs related to the outstanding restricted stock, which is expected to be recognized over a weighted average period of 3.7 years. The Company used 0% for the forfeiture rate for determining the fair value of restricted stock. The intrinsic value of restricted shares redeemed was $1.6 million and $1.4 million for the three months ended March 31, 2020 and 2019, respectively.
Restricted stock activity is summarized as follows:
29
Performance Units
On February 23, 2020 certain executive officers received performance units. Performance units are subject to a three-year performance period, at the conclusion of which, shares awarded are to be determined by the Company’s total shareholder return compared to the constituents of the MSCI US REIT Index and a defined peer group. 50% of the award is based upon the total shareholder return percentile rank versus the MSCI US REIT index for the three-year performance period; and 50% of the award is based upon TSR percentile rank versus a specified net lease peer group for the three-year performance period. Vesting of the performance units following their issuance will occur ratably over a three-year period, with the initial vesting occurring immediately following the conclusion of the performance period such that all shares vest within five years of the original award date of February 23, 2020.
The grant date fair value of these awards is determined using a Monte Carlo simulation pricing model and compensation expense is amortized on an attribution method over a five-year period. The Monte Carlo simulation pricing model for the 2020 grants utilized the following assumptions: (i) expected term of 2.9 years (equal to the remaining performance measurement period at the grant date), (ii) volatility of 18.4% (based on historical volatility), (iii) dividend yield of 2.9% (based on the most recently paid dividend at grant date), (iv) risk-free rate of 1.3% (interpolated based on 2- and 3-year rates). Compensation expense related to performance units is determined at the grant date and is not adjusted throughout the measurement or vesting periods.
During the three months ended March 31, 2020 and 2019, the Company recognized $0.3 million and $0.2 million, respectively, of expense related to performance units. As of March 31, 2020, there was $4.5 million of total unrecognized compensation costs related to the outstanding performance units, which is expected to be recognized over a weighted average period of 4.0 years. The Company used 0% for the forfeiture rate for determining the fair value of performance units.
Prior to 2019, the Company’s equity incentive plan utilized performance shares instead of units. These performance shares had substantially identical terms to the performance units described above.
Performance share and unit activity is summarized as follows:
Note 12 – Commitments and Contingencies
In the ordinary course of business, we are party to various legal actions which we believe are routine in nature and incidental to the operation of our business. We believe that the outcome of the proceedings will not have a material adverse effect upon our consolidated financial position or results of operations.
Note 13 – Subsequent Events
In connection with the preparation of its financial statements, the Company has evaluated events that occurred subsequent to March 31, 2020 through the date on which these financial statements were issued to determine whether any of these events required disclosure in the financial statements.
30
COVID-19
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and geographies, including how it will impact its tenants and business partners. While the Company did not incur significant disruptions during the three months ended March 31, 2020 from the COVID-19 pandemic, it is unable to predict the impact that the COVID-19 pandemic will have on its financial condition, results of operations and cash flows due to numerous uncertainties.
In April, the Company received certain rent relief requests, most often in the form of rent deferral requests, as a result of COVID-19. The Company is evaluating each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modification agreements, nor is the Company forgoing its contractual rights under its lease agreements.
Recent Equity Issuances
In April 2020, the Company completed a follow-on public offering of 2,875,000 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 375,000 shares of common stock. Upon closing the Company issued 2,875,000 shares of common stock and received net proceeds of $170.4 million after deducting the underwriting discount and estimated fees and expenses.
There were no other reportable subsequent events or transactions.
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with the Interim Condensed Consolidated Financial Statements of Agree Realty Corporation (the “Company”), including the respective notes thereto, which are included in this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “will,” “seek,” “could,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and which could materially affect the Company’s results of operations, financial condition, cash flows, performance or future achievements or events. Currently, one of the most significant factors, however, is the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets. The extent to which COVID-19 impacts the Company and its tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, you should interpret many of the risks identified in this report, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Additional factors which may cause actual results to differ materially from current expectations include, but are not limited to: the factors included in our Annual Report on Form 10-K for the year ended December 31, 2019, including those set forth under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; global and national economic conditions and changes in general economic, financial and real estate market conditions; the financial failure of, or other default in payment by, tenants under their leases and the potential resulting vacancies; our concentration with certain tenants and in certain markets, which may make us more susceptible to adverse events; changes in our business strategy; risks that our acquisition and development projects will fail to perform as expected; adverse changes and disruption in the retail sector and the financing stability of our tenants, which could impact our tenants’ ability to pay rent and expense reimbursement; our ability to pay dividends; risks relating to information technology and cybersecurity attacks, loss of confidential information and other related business disruptions; loss of key management personnel; the potential need to fund improvements or other capital expenditures out of operating cash flow; financing risks, such as the inability to obtain debt or equity financing on favorable terms or at all; the level and volatility of interest rates; our ability to renew or re-lease space as leases expire; limitations in our tenants’ leases on real estate tax, insurance and operating cost reimbursement obligations; loss or bankruptcy of one or more of our major tenants, and bankruptcy laws that may limit our remedies if a tenant becomes bankrupt and rejects its leases; potential liability for environmental contamination, which could result in substantial costs; our level of indebtedness, which could reduce funds available for other business purposes and reduce our operational flexibility; covenants in our credit agreements, which could limit our flexibility and adversely affect our financial condition; credit market developments that may reduce availability under our revolving credit facility; an increase in market interest rates which could raise our interest costs on existing and future debt; a decrease in interest rates, which may lead to additional competition for the acquisition of real estate or adversely affect our results of operations; our hedging strategies, which may not be successful in mitigating our risks associated with interest rates; legislative or regulatory changes, including changes to laws governing REITs; our ability to maintain our qualification as a REIT for federal income tax purposes and the limitations imposed on our business by our status as a REIT; and our failure to qualify as a REIT for federal income tax purposes, which could adversely affect our operations and ability to make distributions.
32
Overview
The Company is a fully integrated REIT primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. The Company was founded in 1971 by its current Executive Chairman, Richard Agree, and its common stock was listed on the New York Stock Exchange (“NYSE”) in 1994. The Company’s assets are held by, and all of its operations are conducted through, directly or indirectly, Agree Limited Partnership (the “Operating Partnership”), of which the Company is the sole general partner and in which the Company held a 99.3% interest as of March 31, 2020. Under the partnership agreement of the Operating Partnership, we, as the sole general partner, have exclusive responsibility and discretion in the management and control of the Operating Partnership. As of March 31, 2020, the Company’s portfolio consisted of 868 properties located in 46 states and totaling approximately 16.3 million square feet of gross leasable area (“GLA”).
As of March 31, 2020, the Company’s portfolio was approximately 99.3% leased and had a weighted average remaining lease term of approximately 9.8 years. A significant majority of our properties are leased to national tenants and approximately 59.6% of our annualized base rent was derived from tenants, or parent entities thereof, with an investment grade credit rating from S&P Global Ratings, Moody’s Investors Service, Fitch Ratings or the National Association of Insurance Commissioners. Substantially all of our tenants are subject to net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance.
We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 1994. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes and we intend to continue operating in such a manner.
COVID-19
We are closely monitoring the impact of the novel coronavirus (“COVID-19”) pandemic on all aspects of our business and geographies, including how it will impact our tenants and business partners. While we did not incur significant disruptions during the three months ended March 31, 2020 from the COVID-19 pandemic, we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and, as cases of COVID-19 have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. Certain states and cities, including where we own properties, have development sites and where our principal place of business is located, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue. The Company cannot predict if additional states and cities will implement similar restrictions or when restrictions currently in place will expire. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which the Company and our tenants operate. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown.
In addition, we cannot predict the impact that COVID-19 will have on our tenants and other business partners; however, any material effect on these parties could adversely impact us. As of April 17, 2020, the Company received April rent payments from approximately 87% of its portfolio. In addition, as is believed to be the case with all retail landlords, the Company received a myriad of short-term rent relief requests, most often in the form of rent deferral requests, or requests for further discussion from tenants, from approximately 33% of its portfolio, as measured by annualized base rent. The Company believes many of these requests are opportunistic in nature and are coming from tenants that have the ability to pay rent. Not all tenant requests will ultimately result in modification agreements, nor is the Company forgoing its
33
contractual rights under its lease agreements. April collections and rent relief requests to-date may not be indicative of collections or requests in any future period.
The impact of the COVID-19 pandemic on our rental revenue for the second quarter of 2020 and thereafter cannot, however, be determined at present. The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with tenants, government officials and business partners and assessing potential impacts to our financial position and operating results, as well as potential adverse developments in our business. For further information regarding the impact of COVID-19 on the Company, see Part II, Item 1A titled “Risk Factors.”
Results of Operations
Overall
The Company’s real estate investment portfolio grew from approximately $1.8 billion in gross investment amount representing 694 properties with 11.9 million square feet of GLA as of March 31, 2019 to approximately $2.4 billion in gross investment amount representing 868 properties with 16.3 million square feet of GLA at March 31, 2020. The Company’s real estate investments were made throughout and between the periods presented and were not all outstanding for the entire period; accordingly, a portion of the increase in rental income between periods is related to recognizing revenue in 2020 on acquisitions that were made during 2019. Similarly, the full rental income impact of acquisitions made during first quarter 2020 will not be seen until the remainder of 2020.
Acquisitions
During the three months ended March 31, 2020, the Company acquired 51 retail net lease assets for approximately $227.0 million, which includes acquisition and closing costs. These properties are located in 24 states and are leased to 17 different tenants operating in 13 diverse retail sectors for a weighted average lease term of approximately 11.0 years. The underwritten weighted-average capitalization rate on the Company’s first quarter 2019 acquisitions was approximately 6.4%.1
Dispositions
During the three months ended March 31, 2020, the Company sold six properties for net proceeds of $24.4 million and recorded a net gain of $1.6 million.
Development and Partner Capital Solutions
During the three months ended March 31, 2020, the Company completed three developments or Partner Capital Solutions projects. At March 31, 2020 the Company had one such project under construction.
Comparison of Three Months Ended March 31, 2020 to Three Months Ended March 31, 2019
1 When used within this discussion, “weighted-average capitalization rate” for acquisitions and dispositions is defined by the Company as the sum of contractual fixed annual rents computed on a straight-line basis over the primary lease terms and anticipated annual net tenant recoveries, divided by the purchase and sales prices.
34
The variances in rental income, real estate tax expense, property operating expense, land lease expense and depreciation and amortization expense shown above were due to the acquisitions and ownership of additional properties during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, as further described under Results of Operations - Overall above.
General and administrative expenses increased $0.7 million, or 15%, to $4.7 million for the three months ended March 31, 2020, compared to $4.0 million for the three months ended March 31, 2019. The increase was primarily the result of increased employee headcount and increased compensation costs. General and administrative expenses as a percentage of total revenue decreased to 8.3% in the first quarter of 2020 from 9.5% in the first quarter of 2019.
No provision for impairment for the three months ended March 31, 2020 was recorded, and $0.4 million was recorded for the three months ended March 31, 2019. Provisions for impairment reflect the amount by which current book value exceeds estimated fair value and are not necessarily comparable period-to-period.
Interest expense increased $2.1 million, or 28%, to $9.7 million for the three months ended March 31, 2020, compared to $7.6 million for the three months ended March 31, 2019. The increase in interest expense was primarily a result of higher levels of borrowings in the first quarter of 2020 in comparison to the first quarter of 2019. Borrowings increased in order to finance the acquisition and development of additional properties. Acquisition and development activity increased in the first quarter of 2020 compared to the prior period.
Gain on sale of assets decreased $1.8 million, or 52%, to $1.6 million for the three months ended March 31, 2020, compared to $3.4 million for the three months ended March 31, 2019. Gains on sales of assets are dependent on levels of disposition activity and the assets’ bases relative to their sales prices. As a result, such gains are not necessarily comparable period-to-period.
Income tax expense increased to $0.3 million for the three months ended March 31, 2020 compared to negative $0.2 million for the three months ended March 31, 2019. An increase in income tax expense due to the acquisition and the ownership of additional properties during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was offset by a one-time credit of $0.5 million during the three months ended March 31, 2019 to reflect a reduction in the Company’s deferred tax liability of one of its taxable REIT subsidiaries.
Net income increased $2.9 million, or 15%, to $21.4 million for the three months ended March 31, 2020, compared to $18.5 million for the three months ended March 31, 2019. The change was the result of the items discussed above.
Liquidity and Capital Resources
The Company’s principal demands for funds include payment of operating expenses, payment of principal and interest on its outstanding indebtedness, dividends and distributions to our stockholders and holders of the operating partnership units of the Operating Partnership (the “Operating Partnership Units”), and future property acquisitions and development.
The Company expects to meet its short-term liquidity requirements through cash provided from operations and borrowings under its revolving credit facility. As of March 31, 2020, available cash and cash equivalents was $92.1 million. As of March 31, 2020, the Company had $242.0 million outstanding on its revolving credit facility and $258.0 million was available for future borrowings, subject to its compliance with covenants. The Company anticipates funding its long-term capital needs through cash provided from operations, borrowings under its revolving credit facility, the issuance of debt and common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity.
The Company continually evaluates alternative financing, and believes that the Company can obtain financing on reasonable terms. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to us. Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted, could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled “Risk Factors” and in the other reports the Company has filed with the SEC. As of April 17, 2020, the Company received April rent payments from approximately 87% of its portfolio. In addition, as is
35
believed to be the case with all retail landlords, the Company received a myriad of short-term rent relief requests, most often in the form of rent deferral requests, or requests for further discussions from tenants, from approximately 33% of its portfolio, as measured by annualized base rent. The Company believes many of these requests are opportunistic in nature and are coming from tenants that have the ability to pay rent. Not all tenant requests will ultimately result in modification agreements, nor is the Company forgoing its contractual rights under its lease agreements. April collections and rent relief requests to-date may not be indicative of collections or requests in any future period.
The impact of the COVID-19 pandemic on our rental revenue and, as a result, cash from operations, for the second quarter of 2020 and thereafter cannot, however, be determined at present.
Capitalization
As of March 31, 2020, the Company’s total market capitalization was approximately $3.9 billion. Total market capitalization consisted of $2.9 billion of common equity (based on the March 31, 2020 closing price on the NYSE of $61.90 per common share and assuming the conversion of Operating Partnership Units and $934.0 Million of total debt, including (i) $242.0 million of borrowings under its revolving credit facility; (ii) $240.0 million of unsecured term loans; (iii) $510.0 million of senior unsecured notes; (iv) $34.1 million of mortgage notes payable, less (v) cash, cash equivalents and cash held in escrow of $92.1 million. The Company’s ratio of total debt to total market capitalization was 26.5% at March 31, 2020.
At March 31, 2020, the non-controlling interest in the Operating Partnership represented ownership of 0.7% of the Operating Partnership. The Operating Partnership Units may, under certain circumstances, be exchanged for shares of common stock on a one-for-one basis. The Company, as sole general partner of the Operating Partnership, has the option to settle exchanged Operating Partnership Units held by others for cash based on the current trading price of its shares. Assuming the exchange of all Operating Partnership Units, there would have been 47,349,728 shares of common stock outstanding at March 31, 2020.
Equity
Follow-on Public Offerings
In September 2018, the Company entered into a follow-on public offering of 3,500,000 shares of common stock in connection with a forward sale agreement (the “September 2018 Forward”). The September 2018 Forward was settled in its entirety in April 2019. Upon settlement we issued 3,500,000 shares of common stock and received net proceeds of $186.0 million, after deducting fees and expenses.
In April 2019, the Company entered into a follow-on public offering (the “April 2019 Forward) to sell an aggregate of 3,162,500 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 412,500 shares of common stock. The April 2019 Forward was settled in its entirety in December 2019. Upon settlement, the Company issued 3,162,500 shares of common stock and received net proceeds of approximately $195.8 million, after deducting fees and expenses.
In April 2020, the Company completed a follow-on public offering of 2,875,000 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 375,000 shares of common stock. Upon closing the Company issued 2,875,000 shares and received net proceeds of $170.4 million after deducting the underwriting discount and estimated fees and expenses.
2019 ATM Program
In July 2019, the Company entered into a $400.0 million at-the-market equity (“ATM”) program (the “2019 ATM Program”) through which the Company, from time to time, sold shares of common stock. In addition to selling shares of common stock, the Company entered into forward sale agreements through the 2019 ATM Program. During the third quarter of 2019, the Company issued 444,228 shares under the 2019 ATM Program, at an average price of $74.30, realizing gross proceeds of $33.0 million.
36
During the fourth quarter of 2019, the Company entered into forward sale agreements in connection with the 2019 ATM Program to sell an aggregate of 2,003,118 shares of common stock (the “2019 ATM Forward Offerings”). During the three months ended March 31, 2020, the Company settled 1,245,118 shares from the 2019 ATM Forward Offerings. The Company is required to settle the remaining 758,000 shares under the 2019 ATM Forward Offerings by December 2020.
During the first quarter of 2020, the Company entered into forward sale agreements in connection with the 2019 ATM Program to sell an aggregate of 3,169,754 shares of common stock (the “2020 ATM Forward Offerings”). During the three months ended March 31, 2020 the Company settled 155,133 shares from the 2020 ATM Forward Offerings. The Company is required to settle the remaining 3,014,621 shares under the 2020 ATM Forward Offerings by certain dates between January 2021 and March 2021.
The 2019 ATM Program was terminated simultaneously with the establishment of the 2020 ATM Program, which is discussed below. As a result, no future issuances will occur under the 2019 ATM Program.
2020 ATM Program
In March 2020, the Company entered into a new $400.0 million ATM program (the “2020 ATM Program”) through which the Company, from time to time, may sell shares of common stock. In addition to selling shares of common stock, the Company may enter into forward sale agreements through the 2020 ATM Program.
During the first quarter of 2020, the Company entered into a forward sale agreement in connection with the 2020 ATM Program to sell an aggregate of 204,074 shares of common stock. As of March 31, 2020, no shares have been settled under the 2020 ATM Program. The Company is required to settle the 204,074 outstanding shares under the 2020 ATM Program by April 2021.
After considering the 204,074 shares of common stock subject to the forward sale agreement, the Company had approximately $387.3 million of availability remaining under the 2020 ATM Program as of March 31, 2020.
2018 ATM Program
In May 2018, the Company entered into a $250.0 million at-the-market equity program (“2018 ATM Program”) through which the Company, from time to time, sold shares of common stock. In addition to selling shares of common stock, the Company entered into forward sale agreements through the 2018 ATM Program. During the three months ended March 31, 2019, the Company did not issue shares of common stock under the 2018 ATM Program. The 2018 ATM Program was terminated, and no future issuances will occur under the 2018 ATM Program.
37
Debt
The below table summarizes the Company’s outstanding debt as of March 31, 2020 and December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
Principal Amount Outstanding |
||||
|
Senior Unsecured Revolving Credit Facility |
|
Rate |
|
|
Maturity |
|
March 31, 2020 |
|
December 31, 2019 |
||
|
Credit Facility (1) |
|
1.81 |
% |
|
January 2024 |
|
$ |
242,000 |
|
$ |
89,000 |
|
Total Credit Facility |
|
|
|
|
|
|
$ |
242,000 |
|
$ |
89,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Term Loans (2) |
|
|
|
|
|
|
|
|
|
|
|
|
2023 Term Loan |
|
2.40 |
% |
|
July 2023 |
|
|
40,000 |
|
|
40,000 |
|
2024 Term Loan Facility |
|
3.09 |
% |
|
January 2024 |
|
|
65,000 |
|
|
65,000 |
|
2024 Term Loan Facility |
|
3.20 |
% |
|
January 2024 |
|
|
35,000 |
|
|
35,000 |
|
2026 Term Loan |
|
4.26 |
% |
|
January 2026 |
|
|
100,000 |
|
|
100,000 |
|
Total Unsecured Term Loans |
|
|
|
|
|
|
$ |
240,000 |
|
$ |
240,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Unsecured Notes (2) |
|
|
|
|
|
|
|
|
|
|
|
|
2025 Senior Unsecured Notes |
|
4.16 |
% |
|
May 2025 |
|
$ |
50,000 |
|
$ |
50,000 |
|
2027 Senior Unsecured Notes |
|
4.26 |
% |
|
May 2027 |
|
|
50,000 |
|
|
50,000 |
|
2028 Senior Unsecured Notes |
|
4.42 |
% |
|
July 2028 |
|
|
60,000 |
|
|
60,000 |
|
2029 Senior Unsecured Notes |
|
4.19 |
% |
|
September 2029 |
|
|
100,000 |
|
|
100,000 |
|
2030 Senior Unsecured Notes |
|
4.32 |
% |
|
September 2030 |
|
|
125,000 |
|
|
125,000 |
|
2031 Senior Unsecured Notes |
|
4.42 |
% |
|
October 2031 |
|
|
125,000 |
|
|
125,000 |
|
Total Senior Unsecured Notes |
|
|
|
|
|
|
$ |
510,000 |
|
$ |
510,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Notes Payable (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Single Asset Mortgage Loan |
|
6.24 |
% |
|
February 2020 |
|
|
— |
|
|
2,775 |
|
CMBS Portfolio Loan |
|
3.60 |
% |
|
January 2023 |
|
|
23,640 |
|
|
23,640 |
|
Single Asset Mortgage Loan |
|
5.01 |
% |
|
September 2023 |
|
|
4,733 |
|
|
4,779 |
|
Portfolio Credit Tenant Lease |
|
6.27 |
% |
|
July 2026 |
|
|
5,738 |
|
|
5,921 |
|
Total Mortgage Notes Payable |
|
|
|
|
|
|
$ |
34,111 |
|
$ |
37,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Principal Amount Outstanding |
|
|
|
|
|
|
$ |
1,026,111 |
|
$ |
876,115 |
| (1) | The annual interest rate of the Credit Facility assumes one-month LIBOR as of March 31, 2020 of 0.98%. |
| (2) | Interest rate includes the effects of variable interest rates that have been swapped to fixed interest rates. |
Senior Unsecured Revolving Credit Facility
In December 2019, the Company entered into a Second Amended and Restated Revolving Credit and Term Loan Agreement (the “Credit Agreement”). The Credit Agreement provides for a $500.0 million unsecured revolving credit facility (the “Revolving Credit Facility”), a $65.0 million unsecured term loan facility (the $65 Million Term Loan”) and a $35.0 million unsecured term loan facility (the “$35 Million Term Loan,” and together with the $65 Million Term Loan, the “2024 Term Loan Facilities”). The Credit Agreement amended and restated in its entirety the Company’s previous credit agreement dated December 15, 2016.
The Credit Agreement provides $600.0 million unsecured borrowing capacity, composed of the Revolving Credit Facility, which matures on January 15, 2024, as well as the 2024 Term Loan Facilities, which mature on January 15, 2024. Subject to certain terms and conditions set forth in the Credit Agreement, the Company (i) may request additional lender commitments under any or all facilities of up to an additional aggregate of $500.0 million and (ii) may elect, for an additional fee, to extend the maturity date of the Revolving Credit Facility by six months up to two times, for a maximum
38
maturity date of January 15, 2025. No amortization payments are required under the Credit Agreement, and interest is payable in arrears no less frequently than quarterly.
All borrowings under the Revolving Credit Facility (except swing line loans) bear interest at a rate per annum equal to, at the option of the Company, (i) LIBOR plus a margin that is based upon the Company’s credit rating, or (ii) the Base Rate (which is defined as the greater of the rate of interest as publicly announced from time to time by PNC Bank, National Association, as its prime rate, the Federal Funds Open Rate plus 0.50%, or the Daily Eurodollar Rate plus 1.0%) plus a margin that is based upon the Company’s credit rating. The margins for the Revolving Credit Facility range in amount from 0.775% to 1.450% for LIBOR-based loans and 0.00% to 0.45% for Base Rate loans, depending on the Company’s credit rating. The margins for the Revolving Credit Facility are subject to improvement based on the Company’s leverage ratio, provided its credit rating meets a certain threshold.
Concurrent with entering into the Credit Agreement, certain conforming changes, including customary financial covenants, were made to the 2023 Term Loan and 2026 Term Loan.
The Company and Richard Agree, the Executive Chairman of the Company, are parties to a Reimbursement Agreement dated November 18, 2014. Pursuant to the Reimbursement Agreement, Mr. Agree has agreed to reimburse the Company for any loss incurred under the Revolving Credit Facility in an amount not to exceed $14.0 million to the extent that the value of the Operating Partnership’s assets available to satisfy the Operating Partnership’s obligations under the revolving credit facility is less than $14.0 million.
Unsecured Term Loan Facilities
In August 2016, the Company entered into a $20.3 million unsecured amortizing term loan that matured May 2019 (the “2019 Term Loan”). Borrowings under the 2019 Term Loan were priced at LIBOR plus 170 basis points. In order to fix LIBOR on the 2019 Term Loan at 1.92% until maturity, the Company had an interest rate swap agreement in place, which was assigned by the lender under the Mortgage Note to the 2019 Term Loan lender. Including the swap, the 2019 Term Loan bore an all-in interest rate of 3.62%. The 2019 Term Loan was repaid upon maturity in May 2019.
In July 2016, the Company completed a $40.0 million unsecured term loan facility that matures July 2023 (the “2023 Term Loan”). Borrowings under the 2023 Term Loan are priced at LIBOR plus 85 to 165 basis points, depending on the Company’s credit rating. The Company entered into an interest rate swap agreement to fix LIBOR at 140 basis points until maturity. As of March 31, 2020, $40.0 million was outstanding under the 2023 Term Loan, which was subject to an all-in interest rate of 2.40%, including the swap.
The Agreement, described below, extended the maturity dates of the $65 Million Term Loan and the $35 Million Term Loan to January 2024. In connection with entering into the Credit Agreement, the prior notes evidencing the existing $65 Million Term Loan and $35 Million Term Loan were canceled and new notes evidencing the 2024 Term Loan Facilities were executed. Borrowings under the unsecured 2024 Term Loan Facilities bear interest at a variable LIBOR plus 85 to 165 basis points, depending on the Company’s credit rating. The Company utilized existing interest rate swap agreements to effectively fix the LIBOR at 213 basis points until September 2020 for the $35 Million Term Loan and July 2021 for the $65 Million Term Loan (refer to Note 9 – Derivative Instruments and Hedging Activity). As of March 31, 2020, $100.0 million was outstanding under the 2024 Term Loan Facilities, bearing an all-in interest rate of 3.13%, including the swaps.
In December 2018, the Company entered into a $100.0 million unsecured term loan facility that matures January 2026 (the “2026 Term Loan”). Borrowings under the 2026 Term Loan are priced at LIBOR plus 145 to 240 basis points, depending on the Company’s credit rating. The Company entered into interest rate swap agreements to fix LIBOR at 266 basis points until maturity. As of March 31, 2020, $100.0 million was outstanding under the 2026 Term Loan, which was subject to an all-in interest rate of 4.26%, including the swap.
Senior Unsecured Notes
In May 2015, the Company and Operating Partnership completed a private placement of $100.0 million principal amount of senior unsecured notes. The senior unsecured notes were sold in two series; $50.0 million of 4.16% notes due May 2025
39
(the “2025 Senior Unsecured Notes”) and $50.0 million of 4.26% notes due May 2027 (the “2027 Senior Unsecured Notes”).
In July 2016, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $60.0 million aggregate principal amount of its 4.42% senior unsecured notes due July 2028 (the “2028 Senior Unsecured Notes”).
In September 2017, the Company and the Operating Partnership completed a private placement of $100.0 million aggregate principal amount of 4.19% senior unsecured notes due September 2029 (the “2029 Senior Unsecured Notes”).
In September 2018, the Company and the Operating Partnership entered into two supplements to uncommitted master note facilities previously entered into with institutional purchasers. Pursuant to the supplements, the Operating Partnership completed a private placement of $125.0 million aggregate principal amount of its 4.32% senior unsecured notes due September 2030 (the “2030 Senior Unsecured Notes”).
In October 2019, the Company and the Operating Partnership closed on a private placement of $125.0 million of 4.47% senior unsecured notes due October 2031. In March 2019, the Company entered into forward-starting interest rate swap agreements to fix the interest for $100.0 million of long-term debt until maturity. The Company terminated the swap agreements at the time of pricing the 2031 Senior Unsecured Notes, which resulted in an effective annual fixed rate of 4.41% for $100.0 million aggregate principal amount of the 2031 Senior Unsecured Notes. Considering the effect of the terminated swap agreements, the blended all-in rate to the Company for the $125.0 million aggregate principal amount of 2031 Senior Unsecured Notes is 4.42%.
Mortgage Notes Payable
As of March 31, 2020, the Company had total gross mortgage indebtedness of $34.1 million which was collateralized by related real estate and tenants’ leases with an aggregate net book value of $44.6 million. Including mortgages that have been swapped to a fixed interest rate, the weighted average interest rate on the Company’s mortgage notes payable was 4.40% as of March 31, 2020 and 4.24% as of December 31, 2019.
The Company has entered into mortgage loans which are secured by multiple properties and contain cross-default and cross-collateralization provisions. Cross-collateralization provisions allow a lender to foreclose on multiple properties in the event that the Company defaults under the loan. Cross-default provisions allow a lender to foreclose on the related property in the event a default is declared under another loan.
Loan Covenants
Certain loan agreements contain various restrictive covenants, including the following financial covenants: maximum leverage ratio, maximum secured leverage ratios, consolidated net worth requirements, a minimum fixed charge coverage ratio, a maximum unencumbered leverage ratio, a minimum unsecured interest expense ratio, a minimum interest coverage ratio, a minimum unsecured debt yield and a minimum unencumbered interest expense ratio. As of March 31, 2020, the most restrictive covenant was the minimum unencumbered interest expense ratio. The Company was in compliance with all of its loan covenants and obligations as of March 31, 2020.
Cash Flows
Operating - Substantially all of the Company’s cash from operations is generated by rental income from its investment portfolio. Net cash provided by operating activities for the three months ended March 31, 2020 increased by $5.2 million over the same period in 2019, primarily due to the increase in the size of the Company’s real estate investment portfolio as a result of operations.
Investing - Net cash used in investing activities was $68.0 million higher during the three months ended March 31, 2020, compared to the same period in 2019. Acquisitions of properties during the first three months of 2020 were $87.3 million higher than the same period in 2019, due to overall increases in the level of acquisition activity. Development costs during
40
the three months ended March 31, 2020 were $4.9 million lower than the same period in 2019, due to the timing of costs incurred related to the Company’s development activity. Proceeds from asset sales decreased by $14.5 million during the three months ended March 31, 2020 compared to the same period in 2019. Proceeds from asset sales are dependent on levels of disposition activity and the specific assets sold. Proceeds from sales are not necessarily comparable period-to-period.
Financing - Net cash provided by financing activities was $141.4 million higher during the three months ended March 31, 2020, compared to the same period in 2019. Net proceeds from the issuance of common stock and borrowings increased by $46.8 million during the three months ended March 31, 2020 compared to the same period in 2019, primarily to fund the increased level of acquisitions occurring in 2020. In addition, borrowings on the revolving credit facility increased by $101.0 million during the three months ended March 31, 2020 compared to the same period in 2019, to fund increased acquisition investment activity. The Company increased its total dividends and distributions paid to its stockholders and non-controlling owners by $4.0 million during the first three months of 2020 compared to the same period in 2019. The Company increased its quarterly dividend in the first quarter of 2020 to an annualized $2.34 per common share, a 5.4% increase over the annualized $2.22 per common share declared in the first quarter of 2019.
Contractual Obligations
The following table summarizes the Company’s contractual obligations as of March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2021 |
|
2022 |
|
2023 |
|
2024 |
|
Thereafter |
|
Total |
|
|||||||
|
Mortgage Notes Payable |
|
$ |
709 |
|
$ |
998 |
|
$ |
1,060 |
|
$ |
28,726 |
|
$ |
963 |
|
$ |
1,655 |
|
$ |
34,111 |
|
|
Revolving Credit Facility |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
242,000 |
|
|
— |
|
|
242,000 |
|
|
Unsecured Term Loans |
|
|
— |
|
|
— |
|
|
— |
|
|
40,000 |
|
|
100,000 |
|
|
100,000 |
|
|
240,000 |
|
|
Senior Unsecured Notes |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
510,000 |
|
|
510,000 |
|
|
Land Lease Obligations |
|
|
802 |
|
|
1,015 |
|
|
789 |
|
|
789 |
|
|
789 |
|
|
30,583 |
|
|
34,767 |
|
|
Estimated Interest Payments on Outstanding Debt (1) |
|
|
28,239 |
|
|
37,596 |
|
|
37,534 |
|
|
36,148 |
|
|
32,250 |
|
|
132,878 |
|
|
304,645 |
|
|
Total |
|
$ |
29,750 |
|
$ |
39,609 |
|
$ |
39,383 |
|
$ |
105,663 |
|
$ |
376,002 |
|
$ |
775,116 |
|
$ |
1,365,523 |
|
| (1) | Includes estimated interest payments based on (i) the stated rates for mortgage notes payable, including the effect of interest rate swap agreements; (ii) the stated rates for unsecured term loans, including the effect of interest rate swap agreements and assuming the interest rate in effect for the most recent quarter remains in effect through the respective maturity dates; and (iii) the stated rates for senior unsecured notes. |
Dividends
During the quarter ended March 31, 2020, the Company declared a quarterly dividend of $0.585 per share. The cash dividend was paid on April 9, 2020 to holders of record on March 27, 2020.
Recent Accounting Pronouncements
Refer to Note 2 – Summary of Significant Accounting Policies
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires the Company’s management to use judgment in the application of accounting policies, including making estimates and assumptions. Management bases estimates on the best information available at the time, its experience, and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. If management’s judgment
41
or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting principles would have been applied, resulting in a different presentation of the interim condensed consolidated financial statements. From time to time, the Company may re-evaluate its estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of the Company’s critical accounting policies is included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The Company has not made any material changes to these policies during the periods covered by this quarterly report.
Non-GAAP Financial Measures
Funds from Operations (“FFO or “Nareit FFO”)
FFO is defined by the National Association of Real Estate Investment Trusts, Inc. (“Nareit”) to mean net income computed in accordance with GAAP, excluding gains (or losses) from sales of real estate assets and/or changes in control, plus real estate related depreciation and amortization and any impairment charges on depreciable real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations.
FFO should not be considered an alternative to net income as the primary indicator of the Company’s operating performance, or as an alternative to cash flow as a measure of liquidity. Further, while the Company adheres to the Nareit definition of FFO, its presentation of FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that all REITs may not use the same definition.
Core Funds from Operations (“Core FFO”)
The Company defines Core FFO as Nareit FFO with the addback of noncash amortization of above- and below- market lease intangibles. Under Nareit’s definition of FFO, lease intangibles created upon acquisition of a net lease must be amortized over the remaining term of the lease. The Company believes that by recognizing amortization charges for above- and below-market lease intangibles, the utility of FFO as a financial performance measure can be diminished. Management believes that its measure of Core FFO facilitates useful comparison of performance to its peers who predominantly transact in sale-leaseback transactions and are thereby not required by GAAP to allocate purchase price to lease intangibles. Unlike many of its peers, the Company has acquired the substantial majority of its net leased properties through acquisitions of properties from third parties or in connection with the acquisitions of ground leases from third parties.
Core FFO should not be considered an alternative to net income as the primary indicator of the Company’s operating performance, or as an alternative to cash flow as a measure of liquidity. Further, the Company’s presentation of Core FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that all REITs may not use the same definition.
Adjusted Funds from Operations (“AFFO”)
AFFO is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. AFFO further adjusts FFO and Core FFO for certain non-cash and/or infrequently recurring items that reduce or increase net income computed in accordance with GAAP. Management considers AFFO a useful supplemental measure of the Company’s performance, however, AFFO should not be considered an alternative to net income as an indication of its performance, or to cash flow as a measure of liquidity or ability to make distributions. The Company’s computation of AFFO may differ from the methodology for calculating AFFO used by other equity REITs, and therefore may not be comparable to such other REITs.
42
Reconciliations
The following table provides a reconciliation from net income to FFO, Core FFO and AFFO for the three months ended March 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
March 31, 2020 |
|
March 31, 2019 |
|
||
|
Reconciliation from Net Income to Funds from Operations |
|
|
|
|
|
|
|
Net income |
$ |
21,370 |
|
$ |
18,516 |
|
|
Depreciation of rental real estate assets |
|
10,402 |
|
|
7,643 |
|
|
Amortization of lease intangibles - in-place leases and leasing costs |
|
3,621 |
|
|
2,157 |
|
|
Provision for impairment |
|
— |
|
|
416 |
|
|
(Gain) loss on sale of assets |
|
(1,645) |
|
|
(3,427) |
|
|
Funds from Operations |
$ |
33,748 |
|
$ |
25,305 |
|
|
|
|
|
|
|
|
|
|
Amortization of above (below) market lease intangibles, net |
|
3,809 |
|
|
3,276 |
|
|
Core Funds from Operations |
$ |
37,557 |
|
$ |
28,581 |
|
|
|
|
|
|
|
|
|
|
Straight-line accrued rent |
|
(1,637) |
|
|
(1,498) |
|
|
Deferred tax expense (benefit) |
|
— |
|
|
(475) |
|
|
Stock based compensation expense |
|
1,014 |
|
|
913 |
|
|
Amortization of financing costs |
|
168 |
|
|
156 |
|
|
Non-real estate depreciation |
|
109 |
|
|
64 |
|
|
Adjusted Funds from Operations |
$ |
37,211 |
|
$ |
27,741 |
|
|
|
|
|
|
|
|
|
|
Funds from Operations Per Share - Diluted |
$ |
0.74 |
|
$ |
0.65 |
|
|
Core Funds from Operations Per Share - Diluted |
$ |
0.82 |
|
$ |
0.74 |
|
|
Adjusted Funds from Operations Per Share - Diluted |
$ |
0.81 |
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares and Operating Partnership Units outstanding |
|
|
|
|
|
|
|
Basic |
|
45,783,810 |
|
|
37,835,470 |
|
|
Diluted |
|
45,912,672 |
|
|
38,667,926 |
|
|
|
|
|
|
|
|
|
|
Additional supplemental disclosure |
|
|
|
|
|
|
|
Scheduled principal repayments |
$ |
230 |
|
$ |
863 |
|
|
Capitalized interest |
$ |
25 |
|
$ |
90 |
|
|
Capitalized building improvements |
$ |
915 |
|
$ |
34 |
|
ITEM 3.Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to interest rate risk primarily through borrowing activities. There is inherent roll-over risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company’s future financing requirements.
The Company’s interest rate risk is monitored using a variety of techniques. The table below presents the principal payments and the weighted average interest rates on outstanding debt, by year of expected maturity, to evaluate the
43
expected cash flows and sensitivity to interest rate changes. Average interest rates shown reflect the impact of the swap agreements described later in this section.
($ in thousands)
| (1) | The balloon payment balance includes the balance outstanding under the Revolving Credit Facility as of March 31, 2020. The Revolving Credit Facility matures in January 2024, with options to extend the maturity date by six months up to two times, for a maximum maturity of January 2025. |
The fair value is estimated to be $35.9 million, $252.7 million and $591.7 million for mortgage notes payable, unsecured term loans and senior unsecured notes, respectively, as of March 31, 2020.
The table above incorporates those exposures that exist as of March 31, 2020; it does not consider those exposures or positions which could arise after that date. As a result, the Company’s ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period and interest rates.
The Company seeks to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs by closely monitoring its variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous. From time to time, the Company may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements are intended to lessen the impact of rising interest rates, they also expose us to the risks that the other parties to the agreements will not perform. The Company could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow hedges under GAAP guidance.
In September 2013, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.20%. This swap effectively converted $35.0 million of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $0.3 million.
In July 2014, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.09%. These swaps effectively converted $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of March 31, 2020, these interest rate swaps were valued as a liability of approximately $1.5 million.
In September 2017, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $40.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month
44
LIBOR and pays to the counterparty a fixed rate of 1.40%. This swap effectively converted $40.0 million of variable-rate borrowings to fixed-rate borrowings from August 1, 2016 to July 1, 2023. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $1.4 million.
In December 2018, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $100.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.66%. These swaps effectively converts $100.0 million of variable-rate borrowings to fixed-rate borrowings from December 27, 2018 to January 15, 2026. As of March 31, 2020, these interest rate swaps were valued as a liability of approximately $12.4 million.
In June 2019, the Company entered into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $100 million of long-term debt. The Company is hedging its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending March 2021. As of March 31, 2020, these interest rate swaps were valued as a liability of approximately $15.4 million.
In October 2019, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.4275%. This swap effectively converts $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 12, 2021 to January 12, 2024. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $1.7 million.
Also in October 2019, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.4265%. This swap effectively converts $35.0 million of variable-rate borrowings to fixed-rate borrowings from September 29, 2020 to January 12, 2024. As of March 31, 2020, this interest rate swap was valued as a liability of approximately $1.3 million.
In February 2020, the Company entered into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $100.0 million of long-term debt. The Company is hedging its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending March 2021. As of March 31, 2020, these interest rate swaps were valued as a liability of $6.5 million.
The Company does not use derivative instruments for trading or other speculative purposes and the Company did not have any other derivative instruments or hedging activities as of March 31, 2020.
Refer to the section “Risks Related to Our Debt Financings” under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 for discussion of the future transition from LIBOR and the possible impact it may have on the Company’s debt, swap agreements, and interest payments.
45
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
At the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that its disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
46
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not presently involved in any material litigation nor, to its knowledge, is any other material litigation threatened against us, except for routine litigation arising in the ordinary course of business which is expected to be covered by its liability insurance.
ITEM 1A. Risk Factors
For a discussion of our potential risks and uncertainties, see the information below and under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
The current pandemic of the novel coronavirus, or COVID-19, and the future outbreak of other highly infectious or contagious diseases, could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.
Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.
The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and, as cases of COVID-19 have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel.
Certain states and cities, including where we own properties, have development sites and where our principal place of business is located, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue. The Company cannot predict if additional states and cities will implement similar restrictions or when restrictions currently in place will expire. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including industries in which the Company and our tenants operate. A number of our tenants have announced temporary closures of their stores and requested rent deferral or rent abatement during this pandemic. In addition, in response to an executive order issued by the Governor of Michigan, the majority of our employees based at our headquarters are currently working remotely. The effects of the executive order, including an extended period of remote work arrangements, could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business. The COVID-19 pandemic, or a future pandemic, could also have material and adverse effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors:
| ● | a complete or partial closure of, or other operational issues at, one or more of our properties resulting from government or tenant action; |
| ● | the reduced economic activity severely impacts our tenants' businesses, financial condition and liquidity and may cause one or more of our tenants to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations; |
| ● | the reduced economic activity could result in a prolonged recession, which could negatively impact consumer discretionary spending; |
47
| ● | difficulty accessing debt and equity capital on attractive terms, or at all, impacts to our credit ratings, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis and our tenants' ability to fund their business operations and meet their obligations to us; |
| ● | the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of our credit facility and other debt agreements and result in a default and potentially an acceleration of indebtedness, which non-compliance could negatively impact our ability to make additional borrowings under our revolving credit facility and pay dividends; |
| ● | any impairment in value of our tangible or intangible assets which could be recorded as a result of a weaker economic conditions; |
| ● | a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow our portfolio of properties; |
| ● | a deterioration in our or our tenants' ability to operate in affected areas or delays in the supply of products or services to us or our tenants from vendors that are needed for our or our tenants' efficient operations could adversely affect our operations and those of our tenants; and |
| ● | the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption. |
The extent to which the COVID-19 pandemic impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Additional closures by our tenants of their stores and early terminations by our tenants of their leases could reduce our cash flows, which could impact our ability to continue paying dividends to our stockholders at expected levels or at all.
The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows and performance. Moreover, many risk factors set forth in the 2019 Annual Report should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
Not applicable.
48
ITEM 6. EXHIBITS
|
|
|
|
|
|
|
3.1 |
|
|
|
|
|
*31.1 |
|
|
|
|
|
*31.2 |
|
|
|
|
|
*32.1 |
|
|
|
|
|
*32.2 |
|
|
|
|
|
*101 |
The following materials from Agree Realty Corporation’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020 formatted in Inline iXBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statement of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these consolidated financial statements. |
|
|
|
|
*104 |
Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Agree Realty Corporation |
|
|
|
|
|
/s/ JOEL N. AGREE |
|
|
Joel N. Agree |
|
|
President and Chief Executive Officer |
|
|
|
|
|
/s/ CLAYTON R. THELEN |
|
|
Clayton R. Thelen |
|
|
Chief Financial Officer and Secretary |
|
|
(Principal Financial Officer) |
|
|
|
|
|
Date: April 20, 2020 |
|
50
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joel N. Agree, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ending March 31, 2020 of Agree Realty Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
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Date: April 20, 2020 |
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/s/ Joel N. Agree |
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Name: |
Joel N. Agree |
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Title: |
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Clayton Thelen, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ending March 31, 2020 of Agree Realty Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
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Date: April 20, 2020 |
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/s/ Clayton Thelen |
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Name: |
Clayton Thelen |
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Title: |
Chief Financial Officer and Secretary |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Based on a review of the Quarterly Report on Form 10-Q for the period ending March 31, 2020 of Agree Realty Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joel N. Agree, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report, containing the financial statements, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Joel N. Agree |
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Joel N. Agree |
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President and Chief Executive Officer |
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April 20, 2020 |
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Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Based on a review of the Quarterly Report on Form 10-Q for the period ending March 31, 2020 of Agree Realty Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Clayton Thelen, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report, containing the financial statements, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Clayton Thelen |
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Clayton Thelen |
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Chief Financial Officer and Secretary |
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April 20, 2020 |
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