UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2022, or
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period fromto
Commission File Number 001-12928
AGREE REALTY CORPORATION
(Exact name of registrant as specified in its charter)
Maryland |
| 38-3148187 |
State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) | |
organization |
| |
70 E. Long Lake Road, Bloomfield Hills, Michigan |
| 48304 |
(Address of principal executive offices) | (Zip Code) | |
(248) 737-4190
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, $0.0001 par value | ADC | New York Stock Exchange |
Depositary Shares, each representing one-thousandth of a share of 4.25% Series A Cumulative Redeemable Preferred Stock, $0.0001 par value | ADCPrA | 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.
Yes | ☒ | No | ◻ |
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).
Yes | ☒ | No | ◻ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
Large Accelerated Filer | ☒ | Accelerated Filer | ◻ | Non-accelerated Filer | ◻ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
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).
Yes | ☐ | No | ☒ |
As of May 2, 2022, the Registrant had 75,174,452 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)
March 31, | December 31, | |||||
2022 | 2021 | |||||
LIABILITIES |
| |||||
Mortgage Notes Payable, net | $ | 32,249 | $ | 32,429 | ||
| ||||||
Senior Unsecured Notes, net | 1,495,650 |
| 1,495,200 | |||
| ||||||
Unsecured Revolving Credit Facility | 320,000 |
| 160,000 | |||
| ||||||
Dividends and Distributions Payable | 17,763 |
| 16,881 | |||
Accounts Payable, Accrued Expenses, and Other Liabilities | 63,476 |
| 70,005 | |||
| ||||||
Lease Intangibles, net of accumulated amortization of | ||||||
$31,184 and $29,726 at March 31, 2022 and December 31, 2021, respectively | 33,711 |
| 33,075 | |||
| ||||||
Total Liabilities | 1,962,849 |
| 1,807,590 | |||
| ||||||
EQUITY |
| |||||
Preferred stock, $.0001 par value per share, 4,000,000 shares authorized, 7,000 shares Series A outstanding, at stated liquidation value of $25,000 per share, at March 31, 2022 and December 31, 2021 | 175,000 |
| 175,000 | |||
Common stock, $.0001 par value, 180,000,000 shares authorized, 75,174,580 and 71,285,311 shares and at March 31, 2022 and December 31, 2021, respectively | 8 | 7 | ||||
Additional paid-in-capital | 3,646,770 |
| 3,395,549 | |||
Dividends in excess of net income | (162,765) |
| (147,366) | |||
Accumulated other comprehensive income (loss) | 15,060 |
| (5,503) | |||
| ||||||
Total Equity - Agree Realty Corporation | 3,674,073 |
| 3,417,687 | |||
Non-controlling interest | 1,668 |
| 1,629 | |||
Total Equity | 3,675,741 |
| 3,419,316 | |||
| ||||||
Total Liabilities and Equity | $ | 5,638,590 | $ | 5,226,906 | ||
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)
Three Months Ended | |||||||
|
| March 31, 2022 |
| March 31, 2021 | |||
Revenues |
|
|
|
| |||
Rental income | $ | 98,312 | $ | 77,760 | |||
Other |
| 30 |
| 69 | |||
Total Revenues |
| 98,342 |
| 77,829 | |||
|
|
|
| ||||
Operating Expenses |
|
|
|
| |||
Real estate taxes |
| 7,611 |
| 5,696 | |||
Property operating expenses |
| 4,477 |
| 3,541 | |||
Land lease expense |
| 402 |
| 346 | |||
General and administrative |
| 7,622 |
| 6,879 | |||
Depreciation and amortization |
| 28,561 |
| 21,489 | |||
Provision for impairment |
| 1,015 |
| — | |||
Total Operating Expenses |
| 49,688 |
| 37,951 | |||
Gain (loss) on sale of assets, net |
| 2,310 |
| 2,945 | |||
Gain (loss) on involuntary conversion, net | (25) | 117 | |||||
Income from Operations |
| 50,939 |
| 42,940 | |||
|
|
|
| ||||
Other (Expense) Income |
|
|
|
| |||
Interest expense, net |
| (13,931) |
| (11,653) | |||
Income tax (expense) benefit | (719) | (1,009) | |||||
Net Income |
| 36,289 |
| 30,278 | |||
|
|
|
| ||||
Less net income attributable to non-controlling interest |
| 176 |
| 166 | |||
Net income attributable to Agree Realty Corporation | 36,113 | 30,112 | |||||
Less Series A preferred stock dividends |
| 1,859 |
| — | |||
Net Income Attributable to Common Stockholders | $ | 34,254 | $ | 30,112 | |||
|
|
|
| ||||
Net Income Per Share Attributable to Common Stockholders |
|
|
|
| |||
Basic | $ | 0.48 | $ | 0.48 | |||
Diluted | $ | 0.48 | $ | 0.48 | |||
|
|
|
| ||||
Other Comprehensive Income |
|
|
|
| |||
Net income | $ | 36,289 | $ | 30,278 | |||
Amortization of interest rate swaps | 82 | 500 | |||||
Change in fair value and settlement of interest rate swaps |
| 20,581 |
| 25,146 | |||
Total comprehensive income (loss) |
| 56,952 |
| 55,924 | |||
Less comprehensive income (loss) attributable to non-controlling interest |
| 276 |
| 304 | |||
|
|
|
| ||||
Comprehensive Income (Loss) Attributable to Agree Realty Corporation | $ | 56,676 | $ | 55,620 | |||
|
|
|
| ||||
Weighted Average Number of Common Shares Outstanding - Basic |
| 71,228,930 |
| 62,828,897 | |||
|
|
|
| ||||
Weighted Average Number of Common Shares Outstanding - Diluted |
| 71,336,103 |
| 62,940,360 | |||
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)
| Accumulated | ||||||||||||||||||||||||
| Dividends in | Other | |||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional | excess of net | Comprehensive | Non-Controlling | Total | ||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Paid-In Capital |
| income |
| Income (Loss) |
| Interest |
| Equity | |||||||
Balance, December 31, 2021 | 7,000 | $ | 175,000 | 71,285,311 | $ | 7 | $ | 3,395,549 | $ | (147,366) | $ | (5,503) | $ | 1,629 | $ | 3,419,316 | |||||||||
Issuance of common stock, net of issuance costs | — | — | 3,791,964 | 1 | 250,683 | — | — | — | 250,684 | ||||||||||||||||
Repurchase of common shares | — | — | (28,117) | — | (1,745) | — | — | — | (1,745) | ||||||||||||||||
Issuance of stock under the 2020 Omnibus Incentive Plan | — | — | 125,422 | — | 648 | — | — | — | 648 | ||||||||||||||||
Stock-based compensation | — | — | — | — | 1,635 | — | — | — | 1,635 | ||||||||||||||||
Series A preferred dividends declared for the period | — | (1,859) | — | — | — | — | — | — | (1,859) | ||||||||||||||||
Dividends and distributions declared for the period | — | — | — | — | — | (49,653) | — | (237) | (49,890) | ||||||||||||||||
Amortization, changes in fair value, and settlement of interest rate swaps | — | — | — | — | — | — | 20,563 | 100 | 20,663 | ||||||||||||||||
Net income | — | 1,859 | — | — | — | 34,254 | — | 176 | 36,289 | ||||||||||||||||
Balance, March 31, 2022 | 7,000 | $ | 175,000 | 75,174,580 | $ | 8 | $ | 3,646,770 | $ | (162,765) | $ | 15,060 | $ | 1,668 | $ | 3,675,741 | |||||||||
Cash dividends declared per depositary share of Series A preferred stock: | |||||||||||||||||||||||||
For the three months ended March 31, 2022 | $ | 0.266 | |||||||||||||||||||||||
Cash dividends declared per common share: | |||||||||||||||||||||||||
For the three months ended March 31, 2022 | $ | 0.681 | |||||||||||||||||||||||
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)
| Accumulated | |||||||||||||||||||
| Dividends in | Other | ||||||||||||||||||
| Common Stock | Additional | excess of net | Comprehensive | Non-Controlling | Total | ||||||||||||||
|
| Shares |
| Amount |
| Paid-In Capital |
| income |
| Income (Loss) |
| Interest |
| Equity | ||||||
Balance, December 31, 2020 | 60,021,483 | $ | 6 | $ | 2,652,090 | $ | (91,343) | $ | (36,266) | $ | 1,762 | $ | 2,526,249 | |||||||
Issuance of common stock, net of issuance costs | 4,028,410 | — | 258,105 | — | — | — | 258,105 | |||||||||||||
Repurchase of common shares | (27,594) | — | (1,780) | — | — | — | (1,780) | |||||||||||||
Issuance of restricted stock under the 2020 Omnibus Incentive Plan | 128,066 | — | 298 | — | — | — | 298 | |||||||||||||
Forfeiture of restricted stock | (4,587) | — | (92) | — | — | — | (92) | |||||||||||||
Stock-based compensation | — | — | 1,293 | — | — | — | 1,293 | |||||||||||||
Dividends and distributions declared for the period | — | — | — | (39,906) | — | (215) | (40,121) | |||||||||||||
Amortization, changes in fair value, and settlement of interest rate swaps | — | — | — | — | 25,506 | 140 | 25,646 | |||||||||||||
Net income | — | — | — | 30,112 | — | 166 | 30,278 | |||||||||||||
Balance, March 31, 2021 | 64,145,778 | $ | 6 | $ | 2,909,914 | $ | (101,137) | $ | (10,760) | $ | 1,853 | $ | 2,799,876 | |||||||
Cash dividends declared per common share: | ||||||||||||||||||||
For the three months ended March 31, 2021 | $ | 0.621 | ||||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
5
AGREE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended | ||||||
| March 31, 2022 |
| March 31, 2021 | |||
Cash Flows from Operating Activities |
|
|
|
| ||
Net income | $ | 36,289 | $ | 30,278 | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
| ||||
Depreciation and amortization |
| 28,561 |
| 21,489 | ||
Amortization from above (below) market lease intangibles, net | 8,178 | 4,756 | ||||
Amortization from financing and credit facility costs |
| 1,061 |
| 425 | ||
Stock-based compensation |
| 1,635 |
| 1,499 | ||
Provision for impairment | 1,015 | — | ||||
Gain (loss) on settlement of interest rate swaps | — | 501 | ||||
(Gain) loss on sale of assets |
| (2,310) |
| (2,945) | ||
(Increase) decrease in accounts receivable |
| (5,980) |
| (2,932) | ||
(Increase) decrease in other assets |
| (4,708) |
| 6,803 | ||
Increase (decrease) in accounts payable, accrued expenses, and other liabilities | (2,274) | (14,079) | ||||
Net Cash Provided by Operating Activities |
| 61,467 |
| 45,795 | ||
|
|
|
| |||
Cash Flows from Investing Activities |
|
|
|
| ||
Acquisition of real estate investments and other assets |
| (413,098) |
| (397,044) | ||
Development of real estate investments and other assets, net of reimbursements |
| |||||
(including capitalized interest of $112 in 2022 and $75 in 2021) |
| (33,291) |
| 1,683 | ||
Payment of leasing costs |
| (45) |
| (240) | ||
Net proceeds from sale of assets |
| 7,643 |
| 8,422 | ||
Net Cash Used in Investing Activities |
| (438,791) |
| (387,179) | ||
|
|
|
| |||
Cash Flows from Financing Activities |
|
|
| |||
Proceeds from common stock offerings, net | 250,684 | 258,105 | ||||
Repurchase of common shares |
| (1,745) |
| (1,780) | ||
Unsecured revolving credit facility borrowings (repayments), net |
| 160,000 |
| 146,000 | ||
Payments of mortgage notes payable |
| (209) |
| (195) | ||
Payment of Series A preferred dividends | (1,859) | — | ||||
Payment of common stock dividends |
| (48,771) |
| (60,957) | ||
Distributions to non-controlling interest |
| (237) |
| (359) | ||
Payments for financing costs |
| (23) |
| (16) | ||
Net Cash Provided by Financing Activities |
| 357,840 |
| 340,798 | ||
|
|
|
| |||
Net Increase (Decrease) in Cash and Cash Equivalents and Cash Held in Escrow |
| (19,484) |
| (586) | ||
Cash and cash equivalents and cash held in escrow, beginning of period |
| 45,250 |
| 7,955 | ||
Cash and cash equivalents and cash held in escrow, end of period | $ | 25,766 | $ | 7,369 | ||
|
|
|
| |||
Supplemental Disclosure of Cash Flow Information |
|
|
|
| ||
Cash paid for interest (net of amounts capitalized) | $ | 13,367 | $ | 15,836 | ||
Cash paid for income tax | $ | 1,336 | $ | 1,794 | ||
|
|
| ||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities |
|
|
|
| ||
Lease right of use assets added under new ground leases | $ | — | $ | 6,302 | ||
Series A preferred dividends declared and unpaid | $ | 620 | $ | — | ||
Common stock dividends and limited partners' distributions declared and unpaid | $ | 17,143 | $ | 13,350 | ||
Change in accrual of development, construction and other real estate investment costs | $ | 411 | $ | 7,179 | ||
See accompanying notes to Condensed Consolidated Financial Statements.
6
AGREE REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022
(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 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 99.5% common equity interest as of March 31, 2022. There is a one-for-one relationship between the limited partnership interests in the Operating Partnership (“Operating Partnership Common Units”) owned by the Company and shares of Company common stock outstanding. The Company also owns a Series A preferred equity interest in the Operating Partnership. This preferred equity interest corresponds on a one-for-one basis to the Company’s Series A Preferred Stock (see Note 6– Common and Preferred Stock), providing guaranteed income and distributions to the Company equal to the dividends payable on that stock. Under the agreement of limited partnership 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” or “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, 2022 may not be indicative of the results that may be expected for the year ending December 31, 2022. Amounts as of December 31, 2021 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, 2021.
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 99.5% of the Operating Partnership’s common equity as of March 31, 2022 and December 31, 2021, as well as the Series A preferred equity interest. All material intercompany accounts and transactions have been eliminated, including the Company’s Series A preferred equity interest in the Operating Partnership.
7
At March 31, 2022 and December 31, 2021, the non-controlling interest in the Operating Partnership consisted of a 0.5% ownership interest in the Operating Partnership held by the Company’s founder and chairman. The Operating Partnership Common 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 Common Units held by others for cash based on the current trading price of its shares. Assuming the exchange of all non-controlling Operating Partnership Common Units, there would have been 75,522,199 shares of common stock outstanding at March 31, 2022.
Significant Risks and Uncertainties
One of the most significant risks and uncertainties continues to be the potential adverse effect of the ongoing pandemic of the novel coronavirus, or COVID-19, and its variants. The outbreak of COVID-19 has significantly, adversely impacted economic activity and has contributed to significant volatility and negative pressure in financial markets. Although the duration and severity of this pandemic are still uncertain, there is reason to believe that the success of vaccination efforts and therapeutics in the U.S. will have a positive impact on businesses, as federal, state and local restrictions are lifted. However, the virus’s variants, its surges and resurgences in the population, and challenges related to vaccine immunization are still having a very fluid and continuously evolving impact on businesses and consumers.
The COVID-19 pandemic could still 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 impacting our tenants’ businesses, financial condition and liquidity and may cause tenants to be unable to fully meet their obligations to us. Certain tenants have sought to modify such obligations and may seek additional relief and additional tenants may seek modifications of such obligations, resulting in increases in uncollectible receivables and reductions in rental income; |
| ● | the negative financial impact of the pandemic which could impact our future compliance with financial covenants of our credit facility and other debt agreements; and |
| ● | weaker economic conditions which could cause us to recognize impairment in value of our tangible or intangible assets. |
During the quarter ended March 31, 2022, the Company collected substantially all rent payments originally contracted for in the period. However, the extent to which the COVID-19 pandemic impacts our operations and those of our tenants will still depend on future developments which are uncertain, including the scope, severity and remaining 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 Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business and geographies. However, as a result of the many uncertainties surrounding the COVID-19 pandemic, we are not able to fully predict the impact that it ultimately will have on our financial condition, results of operations and cash flows.
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 real estate held for sale based on specific criteria as outlined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, Property, Plant & Equipment. Properties classified as real estate 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 real estate 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 did not classify any operating properties as real estate held for sale
8
at March 31, 2022 and classified one operating property as real estate held for sale as of December 31, 2021, the assets for which are separately presented in the Condensed Consolidated Balance Sheets.
Real estate held for sale consisted of the following as of March 31, 2022 and December 31, 2021 (presented in thousands):
|
| March 31, 2022 |
| December 31, 2021 | ||
Land | $ | — | $ | 4,485 | ||
Lease intangibles - asset | — | 1,213 | ||||
| — |
| 5,698 | |||
Accumulated depreciation and amortization, net |
| — |
| (22) | ||
Total Real Estate Held for Sale, net | $ | — | $ | 5,676 | ||
Subsequent to quarter-end, a property that did not qualify as held for sale as of March 31, 2022 was sold at a price of $14.0 million, which approximated its carrying value.
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 various 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 tangible and intangible assets and liabilities of an acquired property, land is valued based upon comparable market data or independent appraisals. Buildings are valued on an as-if vacant basis based on a cost approach utilizing estimates of cost and the economic age of the building or an income approach utilizing various market data. 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, in which case 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 adjustment to 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 to rental income.
9
The following schedule summarizes the Company’s amortization of lease intangibles for the three months ended March 31, 2022 and 2021 (presented in thousands):
The following schedule represents estimated future amortization of lease intangibles as of March 31, 2022 (presented 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 through 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 deposit and checking accounts. Cash held in escrows primarily relates to proposed like-kind exchange transactions pursued under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) and funds restricted through a mortgage agreement. The account balances 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 $24.0 million and $44.0 million in cash and cash equivalents and cash held in escrow as of March 31, 2022 and December 31, 2021, respectively, in excess of the FDIC insured limit.
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Per the requirements of ASU 2016-18 (Topic 230, Statement of Cash Flows) the following table provides a reconciliation of cash and cash equivalents and cash held in escrow, both as reported within the Condensed Consolidated Balance Sheets, to the total of the cash and cash equivalents and cash held in escrow as reported within the Condensed Consolidated Statements of Cash Flows (presented in thousands):
|
| March 31, 2022 |
| December 31, 2021 | ||
Cash and cash equivalents | $ | 24,888 | $ | 43,252 | ||
Cash held in escrow |
| 878 |
| 1,998 | ||
Total of cash and cash equivalents and cash held in escrow | $ | 25,766 | $ | 45,250 | ||
Revenue Recognition and Accounts Receivable
The Company leases real estate to its tenants under long-term net leases which are accounted 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 the Condensed Consolidated Balance Sheets. The balance of straight-line rent receivables at March 31, 2022 and December 31, 2021 was $44.0 million and $40.9 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. The Company’s assessment has specifically included the impact of the COVID-19 pandemic, which represents a material risk to collectability (see Significant Risks and Uncertainties above). In the event that collectability with respect to any tenant changes, the Company recognizes an adjustment to rental revenue. The Company’s review of collectability of charges under its operating leases also includes any accrued rental revenue related to the straight-line method of reporting rental revenue.
As of March 31, 2022, the Company has three tenants where collection is no longer considered probable. For these tenants, the Company is recording rental income on a cash basis and has written off any outstanding receivables, including straight-line rent receivables. Adjustments to rental revenue related to potentially uncollectible charges under these tenant leases had an immaterial impact to Rental Income and Net Income for the three months ended March 31, 2022.
In addition to the tenant-specific collectability assessment performed, the Company also recognizes a general allowance, as a reduction to rental revenue, for its operating lease receivables which are not expected to be fully collectible based on the potential for settlement of arrears. As of March 31, 2022 and December 31, 2021, this allowance was $0.8 million.
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 reimbursement revenue is estimated each period and is recognized as rental revenue in the period the recoverable costs are incurred and accrued, and the related revenue is earned. The balance of unbilled operating cost reimbursement receivable at March 31, 2022 and December 31, 2021 was $7.7 million and $9.1 million, respectively.
The Company has adopted the practical expedient in FASB ASC 842, Leases (“ASC 842”) that allows lessors to combine non-lease components with the lease components when the timing and patterns of transfer for the lease and non-lease components are the same and the lease is classified as an operating lease. As a result, all rentals and reimbursements
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pursuant to tenant leases are reflected as one line, “Rental Income,” in the Condensed Consolidated Statement of Operations and Comprehensive Income.
Earnings per Share
Earnings per share of common stock 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 share of common stock. 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 shares of common stock outstanding less unvested restricted shares. Diluted earnings per share is computed by dividing net income by the weighted average shares of common stock and potentially dilutive securities in accordance with the treasury stock method.
The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted net earnings per share of common stock for each of the periods presented (presented in thousands, except for share data):
For the three months ended March 31, 2022, 76,623 shares of common stock related to the 2021 at-the-market (“ATM”) forward equity offerings, 4,733 shares of restricted common stock (“restricted shares”) granted in 2020 and 2021, and 1,078 performance units granted in 2022 were anti-dilutive and were not included in the computation of diluted earnings per share.
For the three months ended March 31, 2021, 3,397 shares of common stock related to the 2020 ATM forward equity offerings, 664 shares of common stock related to the 2021 ATM forward equity offerings, and 6,920 shares of restricted shares 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.
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To account for the forward sale agreements, the Company considers the accounting guidance governing financial instruments and derivatives. To date, the Company has concluded that its forward sale agreements are not liabilities as they do not embody obligations to repurchase its 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 its shares. The Company then evaluates whether the agreements meet the derivatives and hedging guidance scope exception to be accounted for as equity instruments. The Company has 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 the Company’s own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to its 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.
Equity Offering Costs
Underwriting commissions and offering costs of equity offerings have been reflected as a reduction of additional paid-in-capital in our Condensed Consolidated Balance Sheets.
Income Taxes
The Company has made an election to be taxed as a REIT under Sections 856 through 860 of 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 covered in the Condensed Consolidated Financial Statements, the Company believes it has qualified as a REIT. Accordingly, no provision has been made for federal income taxes. 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 stockholders 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 entities 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.
The Company regularly analyzes its various federal and state filing positions and only recognizes the income tax effect in its financial statements when certain criteria regarding uncertain income tax positions have been met. The Company believes that its 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 the Condensed Consolidated Financial Statements.
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, among other things, 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 Condensed Consolidated
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Financial Statements contained in this Quarterly Report on Form 10-Q.
Reclassifications
Certain reclassifications of prior period amounts have been made in the consolidated financial statements and footnotes in order to conform to the current presentation.
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.
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, ASC 820 Fair Value Measurement. 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 guidance describes a fair value hierarchy based on 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 on quoted prices in active markets for identical assets or liabilities.
Level 2 – Valuation is based on inputs other than Level 1 inputs 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.
Recent Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). The guidance in ASU 2020-06 simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments in the ASU 2020-06 also simplify the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The amendments in ASU 2020-06 are effective for the Company for fiscal years beginning after December
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15, 2021. The adoption of this guidance on January 1, 2022 did not have a material impact the Company’s financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”). 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. 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.
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, 2022, the Company’s portfolio was approximately 99.6% leased and had a weighted average remaining lease term (excluding extension options) of approximately 9.1 years. A significant majority of its properties are leased to national tenants and approximately 67.8% 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, places 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 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 842 to the combined component.
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The following table includes information regarding contractual lease payments for the Company’s operating leases for which it is the lessor, for the three months ended March 31, 2022 and 2021. (presented in thousands)
At March 31, 2022, future non-variable lease payments to be received from the Company’s operating leases for the remainder of 2022, the following four years, and thereafter are as follows (presented in thousands):
| 2022 | |||||||||||||||||||||
Year Ending December 31, |
| (remaining) |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| Thereafter |
| Total | ||||||||
Future non-variable lease payments | $ | 285,903 |
| $ | 376,785 |
| $ | 365,734 |
| $ | 353,794 |
| $ | 335,943 | $ | 1,859,443 |
| $ | 3,577,602 | |||
Deferred Revenue
As of March 31, 2022 and December 31, 2021, there was $13.5 million in deferred revenues resulting from rents paid in advance.
Land Lease Obligations
The Company is the lessee under land lease agreements for certain of its properties. ASC 842 requires a lessee to recognize right of use assets and lease obligation liabilities that arise from leases, whether qualifying as operating or finance. As of March 31, 2022 and December 31, 2021, the Company had $59.5 million and $59.7 million, respectively, of right of use assets, net, recognized within Other Assets in the Condensed Consolidated Balance Sheets, while the corresponding lease obligations, net, of $24.0 million and $24.1 million, respectively, were recognized within Accounts Payable, Accrued Expenses, and Other Liabilities on the Condensed Consolidated Balance Sheets as of these dates.
The Company’s land leases do not include any 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. Certain of the Company’s land leases qualify as finance leases as a result of purchase options that are reasonably certain of being exercised or automatic transfer of title to the Company at the end of the lease term.
Amortization of right of use assets for operating land leases is classified as land lease expense and was $0.4 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively. There was no amortization of right of use assets for finance land leases, as the underlying leased asset (land) has an infinite life. Interest expense on finance land leases was less than $0.1 million during the three months ended March 31, 2022 and March 31, 2021.
In calculating its lease obligations under 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.
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The following tables include information on the Company’s land leases for which it is the lessee, for the three months ended March 31, 2022 and 2021.
Three Months Ended | ||||||||
| March 31, 2022 |
|
| March 31, 2021 |
| |||
Operating leases: | ||||||||
Operating cash outflows | $ | 298 | $ | 267 | ||||
Weighted-average remaining lease term - operating leases (years) | 33.7 | 36.3 | ||||||
Finance leases: | ||||||||
Operating cash outflows | $ | 64 | $ | 22 | ||||
Financing cash outflows | $ | 20 | $ | 34 | ||||
Weighted-average remaining lease term - finance leases (years) | 2.5 | 3.5 | ||||||
Supplemental Disclosure: | ||||||||
Right-of-use assets obtained in exchange for new lease liabilities | $ | — | $ | 6,302 | ||||
Right-of-use assets net change | $ | — | $ | 6,302 | ||||
The weighted-average discount rate used in computing operating and finance lease obligations approximated 4%at March 31, 2022 and 2021.
Maturity Analysis of Lease Liabilities for Operating Leases (presented in thousands)
Maturity Analysis of Lease Liabilities for Finance Leases (presented in thousands)
Note 4 – Real Estate Investments
Real Estate Portfolio
As of March 31, 2022, the Company owned 1,510 properties, with a total gross leasable area (“GLA”) of approximately 31.0 million square feet. Net Real Estate Investments totaled $4.7 billion as of March 31, 2022. As of December 31, 2021, the Company owned 1,404 properties, with a total GLA of approximately 29.1 million square feet. Net Real Estate Investments totaled $4.4 billion as of December 31, 2021.
Acquisitions
During the three months ended March 31, 2022, the Company purchased 106 retail net lease assets for approximately $409.8 million, which includes acquisition and closing costs. These properties are located in 32 states and are leased for a weighted average lease term of approximately 9.2 years.
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The aggregate acquisitions for the three months ended March 31, 2022 were allocated $99.8 million to land, $249.2 million to buildings and improvements, and $60.8 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 2022 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, 2022.
Developments
During the three months ended March 31, 2022, the Company commenced 15 development or Partner Capital Solutions projects. At March 31, 2022, the Company had 17 development or Partner Capital Solutions projects under construction.
Dispositions
During the three months ended March 31, 2022, the Company sold one property, which was classified as held for sale as of December 31, 2021, for net proceeds of $7.6 million and recorded a net gain of $2.3 million.
Provisions for Impairment
As a result of the Company’s review of real estate investments, it recognized a $1.0 million provision for impairment for the three months ended March 31, 2022. There was no impairment recognized during the three months ended March 31, 2021. The estimated fair value of the impaired real estate assets at their time of impairment during 2022 was $1.8 million.
Note 5 – Debt
As of March 31, 2022, the Company had total gross indebtedness of $1.86 billion, including (i) $32.4 million of mortgage notes payable; (ii) $1.51 billion of senior unsecured notes; and (iii) $320.0 million of borrowings outstanding under the Revolving Credit Facility (defined below) as of March 31, 2022.
Mortgage Notes Payable
As of March 31, 2022, the Company had total gross mortgage indebtedness of $32.4 million, which was collateralized by related real estate and tenants’ leases with an aggregate net book value of $38.7 million. The weighted average interest rate on the Company’s mortgage notes payable was 4.04% as of March 31, 2022 and 4.16% as of December 31, 2021.
Mortgage notes payable consisted of the following (presented in thousands):
The mortgage loans encumbering the Company’s properties are generally non-recourse, subject to certain exceptions for which we 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
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by the borrower, either directly or indirectly, and certain environmental liabilities. At March 31, 2022, there were no mortgage loans with partial recourse to the Company.
The Company has entered into mortgage loans that 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 we default 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
In May 2021, the Company used the net proceeds from the offering of the 2028 Senior Unsecured Public Notes and the 2033 Senior Unsecured Public Notes (see Senior Unsecured Notes below) to repay all amounts outstanding under its unsecured term loans and settle the related swap agreements. During the three months ended June 30, 2021, the Company incurred a charge of $14.6 million upon this repayment and settlement, including swap termination costs of $13.4 million and the write-off of previously unamortized debt issuance costs of $1.2 million.
Senior Unsecured Notes
The following table presents the senior unsecured notes balance net of unamortized debt issuance costs and original issue discount as of March 31, 2022, and December 31, 2021 (presented in thousands):
|
| March 31, 2022 |
| December 31, 2021 | ||
2025 Senior Unsecured Notes | $ | 50,000 | $ | 50,000 | ||
2027 Senior Unsecured Notes |
| 50,000 |
| 50,000 | ||
2028 Senior Unsecured Public Notes |
| 350,000 |
| 350,000 | ||
2028 Senior Unsecured Notes | 60,000 | 60,000 | ||||
2029 Senior Unsecured Notes |
| 100,000 |
| 100,000 | ||
2030 Senior Unsecured Notes |
| 125,000 |
| 125,000 | ||
2030 Senior Unsecured Public Notes | 350,000 | 350,000 | ||||
2031 Senior Unsecured Notes | 125,000 | 125,000 | ||||
2033 Senior Unsecured Public Notes |
| 300,000 | 300,000 | |||
Total Principal |
| 1,510,000 |
| 1,510,000 | ||
Unamortized debt issuance costs and original issue discount, net |
| (14,350) |
| (14,800) | ||
Total | $ | 1,495,650 | $ | 1,495,200 | ||
In May 2015, the Company and the Operating Partnership completed a private placement of $100 million principal amount of senior unsecured notes. The senior unsecured notes were sold in two series; $50 million of 4.16% notes due May 2025 (the “2025 Senior Unsecured Notes”) and $50 million of 4.26% notes due May 2027 (the “2027 Senior Unsecured Notes”).
In July 2016, the Company and the Operating Partnership completed a private placement of $60 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 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 million aggregate principal amount of 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 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 million of long-term debt until maturity.
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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 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 million aggregate principal amount of 2031 Senior Unsecured Notes is 4.42%.
All of the senior unsecured notes described in the preceding paragraphs 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 August 2020, the Operating Partnership completed an underwritten public offering of $350 million aggregate principal amount of 2.900% Notes due 2030 (the “2030 Senior Unsecured Public Notes”). The 2030 Senior Unsecured Public Notes are fully and unconditionally guaranteed by Agree Realty Corporation and certain wholly owned subsidiaries of the Operating Partnership. The terms of the 2030 Senior Unsecured Public Notes are governed by an indenture, dated August 17, 2020, among the Operating Partnership, the Company and U.S. Bank National Association, as trustee (as amended and supplemented by an officer’s certificate dated August 17, 2020, the “Indenture”). The Indenture contains various restrictive covenants, including limitations on the ability of the guarantors and the issuer to incur additional indebtedness and requirements to maintain a pool of unencumbered assets. The Company terminated related swap agreements of $200 million that hedged the 2030 Senior Unsecured Public Notes, paying $23.4 million upon termination. Considering the effect of the terminated swap agreements, the blended all-in rate to the Company for the $350 million aggregate principal amount of 2030 Senior Unsecured Public Notes is 3.49%.
In May 2021, the Operating Partnership completed an underwritten public offering of $350 million aggregate principal amount of 2.000% Notes due 2028 (the “2028 Senior Unsecured Public Notes”) and $300 million in aggregate principal amount of 2.600% Notes due 2033 (the “2033 Senior Unsecured Public Notes”). The 2028 Senior Unsecured Public Notes and the 2033 Senior Unsecured Public Notes are fully and unconditionally guaranteed by Agree Realty Corporation and certain wholly owned subsidiaries of the Operating Partnership. The terms of the 2028 Senior Unsecured Public Notes and the 2033 Senior Unsecured Public Notes are governed by an indenture, dated August 17, 2020, among the Operating Partnership, the Company and U.S. Bank National Association, as trustee (as amended and supplemented by an officer’s certificate dated May 14, 2021, the “Indenture”). The Indenture contains various restrictive covenants, including limitations on the ability of the guarantors and the Operating Partnership to incur additional indebtedness and requirements to maintain a pool of unencumbered assets. The Company terminated related swap agreements of $300 million notional amount that hedged the 2033 Senior Unsecured Public Notes, receiving $16.7 million upon termination. Considering the effect of the terminated swap agreements, the blended all-in rates to the Company for the $350 million aggregate principal amount of the 2028 Senior Unsecured Public Notes and the $300 million aggregate principal amount of the 2033 Senior Unsecured Public Notes are 2.11% and 2.13%, respectively.
Senior Unsecured Revolving Credit Facility
In December 2019, the Company entered into a Second Amended and Restated Revolving Credit and Term Loan Agreement. This agreement provided for a $500 million unsecured revolving credit facility. It also provided for a $65 million unsecured term loan facility and a $35 million unsecured term loan facility. All amounts outstanding under these unsecured term loan facilities were repaid in May 2021 (see Unsecured Term Loan Facilities above) and cannot be reborrowed against.
In December 2021, the Company entered into a Third Amended and Restated Revolving Credit Agreement which increases its senior unsecured revolving credit facility (the “Revolving Credit Facility”) to $1.0 billion. The Revolving Credit Facility includes an accordion option that allows the Company to request additional lender commitments up to a total of $1.75 billion. The Revolving Credit Facility will mature in January 2026 with Company options to extend the maturity date to January 2027.
The Revolving Credit Facility’s interest rate is based on a pricing grid with a range of 72.5 to 140 basis points over LIBOR, determined by the Company’s credit ratings. The margins for the Revolving Credit Facility are subject to improvement based on the Company's leverage ratio, provided its credit ratings meet a certain threshold. Based on the Company's credit ratings and leverage ratio at the time of closing, pricing on the Revolving Credit Facility was 77.5 basis points over LIBOR.
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In connection with the Company's ongoing environmental, social and governance (“ESG”) initiatives, pricing may be reduced if specific ESG ratings are achieved.
The Company and Richard Agree, the Executive Chairman of the Company, are parties to a Reimbursement Agreement dated November 18, 2014 (the “Reimbursement Agreement”). 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 credit facility is less than $14.0 million.
Debt Maturities
The following table presents scheduled principal payments related to the Company’s debt as of March 31, 2022 (presented in thousands):
| Scheduled |
| Balloon |
| ||||
| Principal | Payment | Total | |||||
Remainder of 2022 | $ | 643 | $ | — | $ | 643 | ||
2023 |
| 905 |
| 28,262 |
| 29,167 | ||
2024 |
| 963 |
| — |
| 963 | ||
2025 |
| 1,026 |
| 50,000 |
| 51,026 | ||
2026 (1) | 629 | 320,000 | 320,629 | |||||
Thereafter |
| — |
| 1,460,000 |
| 1,460,000 | ||
Total scheduled principal payments | 4,166 | 1,858,262 | 1,862,428 | |||||
Original issue discount, net | — | (8,651) | (8,651) | |||||
Total | $ | 4,166 | $ | 1,849,611 | $ | 1,853,777 | ||
(1) | The Revolving Credit Facility matures in January 2026, with options to extend the maturity to January 2027. The Revolving Credit Facility had an outstanding balance of $320.0 million as of March 31, 2022. |
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, 2022, 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, 2022.
Note 6 – Common and Preferred Stock
Shelf Registration
On May 27, 2020, the Company filed an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission registering an unspecified amount of common stock, preferred stock, depositary shares, warrants and guarantees of debt securities of the Operating Partnership, as well as an unspecified amount of debt securities of the Operating Partnership, at an indeterminate aggregate initial offering price. The Company may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.
Follow-on Common Stock Offerings
In January 2021, the Company completed a follow-on public offering of 3,450,000 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 450,000 shares of common stock. The
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offering resulted in net proceeds to the Company of approximately $221.4 million, after deducting fees and offering expenses payable by the Company.
In June 2021, the Company completed a follow-on public offering of 4,600,000 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 600,000 shares of common stock. The offering resulted in net proceeds to the Company of approximately $327.0 million, after deducting fees and offering expenses payable by the Company.
In December 2021, the Company completed a follow-on public offering of 5,750,000 shares of common stock, including the full exercise of the underwriters' option to purchase additional 750,000 shares, in connection with forward sale agreements. Upon settlement, the offering is anticipated to raise net proceeds of approximately $374.8 million after deducting fees and expenses and making certain other adjustments as provided in the equity distribution agreements. As of March 31, 2022, the Company settled 1,666,668 shares of these December 2021 forward sale agreements, realizing net proceeds of $107.7 million.
Preferred Stock Offering
In September 2021, the Company completed an underwritten public offering of depositary shares (the “Depositary Shares”), each representing th of a share of Series A Preferred Stock, which resulted in net proceeds to the Company of approximately $170.3 million, after deducting the underwriting discounts and commissions and costs payable by the Company. At the closing, the Company issued 7,000 shares of Series A Preferred Stock to the depositary, resulting in the issuance of 7,000,000 Depositary Shares. The Company contributed the net proceeds from the sale of the Depositary Shares to the Operating Partnership in exchange for 7,000 Series A Preferred Units corresponding to the number of shares of Series A Preferred Stock underlying the Depositary Shares.
Dividends on the Series A Preferred Shares will be payable monthly in arrears on the first day of each month (or, if not on a business day, on the next succeeding business day). The dividend rate is 4.25% per annum of the $25,000 (equivalent to $25.00 per Depositary Share) liquidation preference. The first pro-rated dividend on the Series A Preferred Shares was paid on October 1, 2021, and was in an amount equivalent to $0.04132 per Depositary Share. Subsequent dividends on the Series A Preferred Shares have been and will be in the amount of $0.08854 per Depositary Share, equivalent to $1.0625 per annum.
The Company may not redeem the Series A Preferred Shares before September 2026, except in limited circumstances to preserve its status as a real estate investment trust for federal income tax purposes and except in certain circumstances upon the occurrence of a change of control of the Company. Beginning in September 2026, the Company, at its option, may redeem the Series A Preferred Shares, in whole or from time to time in part, by paying $25.00 per Depositary Share, plus any accrued and unpaid dividends. Upon the occurrence of a change in control of the Company, if the Company does not otherwise redeem the Series A Preferred Shares, the holders have a right to convert their shares into common stock of the Company at the $25.00 per share liquidation value, plus any accrued and unpaid dividends. This conversion value is limited by a share cap if the Company’s stock price falls below a certain threshold.
2021 ATM Program
In February 2021, the Company entered into a new $500.0 million ATM program (the “2021 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 has entered into forward sale agreements through the 2021 ATM Program, as described below.
As of March 31, 2022, the Company had entered into forward sale agreements to sell an aggregate of 2,125,296 shares of common stock. The Company has settled the entirety of these forward sale agreements as of March 31, 2022 for net proceeds of approximately $143.1 million.
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Note 7 – Dividends and Distribution Payable
During the three months ended March 31, 2022, the Company declared monthly dividends of $0.227 per common share for January, February and March 2022. Holders of Operating Partnership Common Units are entitled to an equal distribution per Operating Partnership Common Unit held. The dividends and distributions payable for January and February were paid during the quarter, while the March amounts were recorded as liabilities on the Condensed Consolidated Balance Sheets at March 31, 2022. The March dividends and distributions were paid on April 14, 2022.
During the three months ended March 31, 2022, the Company declared monthly dividends on the Series A Preferred Shares in the amount of $.08854 per Depositary Share for January, February, and March 2022. The dividends payable for January and February were paid during the quarter, while the March dividend was recorded as a liability on the Condensed Consolidated Balance Sheet at March 31, 2022 and was paid on April 1, 2022.
Note 8 – Income Taxes
Uncertain Tax Positions
The Company is subject to the provisions of FASB ASC Topic 740-10 (“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 ASC 740-10. The Company’s federal income tax returns are open for examination by taxing authorities for all tax years after December 31, 2018. 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. The Company has no material interest or penalties relating to income taxes recognized for the three months ended March 31, 2022 and 2021.
Income Tax Expense
The Company recognized total federal and state tax expense of approximately $0.7 million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively. The income tax expense recorded in 2021 includes additional tax expense of approximately $0.5 million relating to the true-up of 2020 expense upon filing of the annual tax returns.
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 swaps as part of its interest rate risk management strategy. Interest rate swaps 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.
Hedges of 2022 Planned Debt Issuance
In May and July 2021, 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 $300 million of long-term debt. The Company hedged its exposure to the variability in future cash flows for a forecasted
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issuance of long-term debt over a maximum period ending December 2022. As of March 31, 2022, these interest rate swaps were valued as an asset of approximately $19.1 million.
2021 Settlements Hedging 2021 Debt Issuances
In August 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 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 ending February 2022. In May 2021, the Company terminated the swap agreements upon the debt issuance, receiving $8.0 million upon termination. This settlement was included as a component of accumulated OCI, to be recognized as an adjustment to income over the term of the debt.
In December 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 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 ending February 2022. In May 2021, the Company terminated the swap agreements upon the debt issuance, receiving $5.6 million upon termination. This settlement was included as a component of accumulated OCI, to be recognized as an adjustment to income over the term of the debt.
In February 2021, 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 hedged its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending February 2022. In May 2021, the Company terminated the swap agreements upon the debt issuance, receiving $3.1 million upon termination. This settlement was included as a component of accumulated OCI, to be recognized as an adjustment to income over the term of the debt.
2021 Settlements – Extinguishment of Term Loans
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 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company received 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 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. In May 2021, the Company terminated the swap agreements upon the payoff of the related term loan, paying $0.3 million upon termination. This settlement was recognized as an expense during the three months ended June 30, 2021.
In June 2016, 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 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company received 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 million of variable-rate borrowings to fixed-rate borrowings from August 1, 2016 to July 1, 2023. In May 2021, the Company terminated the swap agreements upon the payoff of the related term loan, paying $1.0 million upon termination. This settlement was recognized as an expense during the three months ended June 30, 2021.
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 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company received 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 converted $100 million of variable-rate borrowings to fixed-rate borrowings from December 27, 2018 to January 15, 2026. In May 2021, the Company terminated the swap agreements upon the payoff of the related term loan, paying $9.2 million upon termination. This settlement was recognized as an expense during the three months ended June 30, 2021.
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 million in variable-rate borrowings. Under the terms of the interest rate
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swap agreements, the Company received from the counterparty interest on the notional amount based on one month LIBOR and pays to the counterparty a fixed rate of 1.4275%. This swap effectively converted $65 million of variable-rate borrowings to fixed-rate borrowings from July 12, 2021 to January 12, 2024. In May 2021, the Company terminated the swap agreements upon the payoff of the related term loan, paying $1.8 million upon termination. This settlement was recognized as an expense during the three months ended June 30, 2021.
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 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 1.4265%. This swap effectively converted $35 million of variable-rate borrowings to fixed-rate borrowings from September 29, 2020 to January 12, 2024. In May 2021, the Company terminated the swap agreements upon the payoff of the related term loan, paying $1.1 million upon termination. This settlement was recognized as an expense during the three months ended June 30, 2021.
Recognition
Companies are required to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. The Company recognizes its derivatives within Other Assets, net and Accounts Payable, Accrued Expenses and Other Liabilities on the Condensed Consolidated Balance Sheets.
The Company 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).
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 $0.3 million will be reclassified as an increase to interest expense.
During the three months ended June 30, 2021, the Company accelerated the reclassification of amounts in accumulated OCI into expense given that the hedged forecasted transactions were no longer likely to occur. During 2021, the Company accelerated a loss of $13.4 million out of OCI into earnings due to missed forecasted transactions associated with terminated swap agreements in connection with the early payoff of the hedged term loans (see 2021 Settlements - Extinguishment of Term Loans above).
The Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (presented in thousands, except number of instruments):
Number of Instruments 1 | Notional 1 | |||||||||
March 31, | December 31, | March 31, | December 31, | |||||||
Interest Rate Derivatives |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||
Interest rate swap |
| 3 |
| 3 | $ | 300,000 | $ | 300,000 | ||
1 Number of Instruments and total Notional disclosed includes all interest rate swap agreements outstanding at the balance sheet date, including forward-starting swaps prior to their effective date.
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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 (presented in thousands).
Asset Derivatives | ||||||
March 31, 2022 | December 31, 2021 | |||||
| Fair Value |
| Fair Value | |||
Derivatives designated as cash flow hedges: |
|
|
|
| ||
Other Assets, net | $ | 19,114 | $ | 1,868 | ||
Liability Derivatives | ||||||
March 31, 2022 | December 31, 2021 | |||||
| Fair Value |
| Fair Value | |||
Derivatives designated as cash flow hedges: |
|
|
|
| ||
Accounts Payable, Accrued Expenses, and Other Liabilities | $ | — | $ | 3,335 | ||
The table below presents the effect of the Company’s derivative financial instruments in the Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2022 and 2021 (presented 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, 2022.
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 the Company’s default on the indebtedness.
As of March 31, 2022, the fair value of derivatives in a net asset position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $19.2 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.
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, 2022 and December 31, 2021. 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 (presented in thousands):
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Offsetting of Derivative Assets as of March 31, 2022
Offsetting of Derivative Liabilities as of March 31, 2022
Net Amounts of | ||||||||||||||||||
| Gross Amounts |
| Liabilities | |||||||||||||||
| Offset in the |
| presented in the |
| Gross Amounts Not Offset in the | |||||||||||||
| Gross Amounts |
| Statement of |
| Statement of |
| Statement of Financial Position | |||||||||||
| of Recognized |
| Financial |
| Financial |
| Financial |
| Cash Collateral | |||||||||
| Liabilities |
| Position |
| Position |
| Instruments |
| Posted |
| Net Amount | |||||||
Derivatives | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||
Offsetting of Derivative Assets as of December 31, 2021
Offsetting of Derivative Liabilities as of December 31, 2021
Net Amounts of | ||||||||||||||||||
| Gross Amounts |
| Liabilities | |||||||||||||||
| Offset in the |
| presented in the |
| Gross Amounts Not Offset in the | |||||||||||||
| Gross Amounts |
| Statement of |
| Statement of |
| Statement of Financial Position | |||||||||||
| of Recognized |
| Financial |
| Financial |
| Financial |
| Cash Collateral | |||||||||
| Liabilities |
| Position |
| Position |
| Instruments |
| Posted |
| Net Amount | |||||||
Derivatives | $ | 3,335 | $ | — | $ | 3,335 | $ | (1,679) | $ | — | $ | 1,656 | ||||||
Note 10 – Fair Value Measurements
Assets and Liabilities Measured at Fair Value
The Company accounts for fair values in accordance with 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 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).
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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, 2022, 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, 2022 and December 31, 2021 (in thousands):
Other Financial Instruments
The carrying values of cash and cash equivalents, cash held in escrow, 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
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information for similar transactions, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument.
The Company determined that the valuation of its Senior Unsecured Notes and Revolving Credit Facility are classified as Level 2 of the fair value hierarchy and its fixed rate mortgages are classified as Level 3 of the fair value hierarchy. The Senior Unsecured Notes had carrying values of $1.50 billion as of March 31, 2022 and December 31, 2021 and had fair values of $1.45 billion and $1.57 billion, respectively. The Revolving Credit Facility’s fair value is estimated to be equal to the carrying values of $320.0 million and $160.0 million as of March 31, 2022 and December 31, 2021, respectively. The Mortgage Notes Payable had carrying values of $32.2 million and $32.6 million as of March 31, 2022 and December 31, 2021, respectively, and had fair values of $33.1 million and $33.9 million as of those dates.
Note 11 – Equity Incentive Plan
In May 2020, the Company’s stockholders approved the Agree Realty Corporation 2020 Omnibus Incentive Plan (the “2020 Plan”), which replaced the Agree Realty Corporation 2014 Omnibus Equity Incentive Plan (the “2014 Plan”). The 2020 Plan provides for the award to employees, directors and consultants of the Company of options, restricted stock, restricted stock units, stock appreciation rights, performance awards (which may take the form of performance units or performance shares) and other awards to acquire up to an aggregate of 700,000 shares of the Company’s common stock. All subsequent awards of equity or equity rights will be granted under the 2020 Plan, and no further awards will be made under the 2014 Plan. As of March 31, 2022; 328,713 shares of common stock were available for issuance under the 2020 Plan.
Restricted Stock - Employees
Shares of restricted common stock (“restricted shares”) have been granted to certain employees.
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 share 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. The Company recognized expense relating to restricted share grants of $1.0 million and $0.9 million for the three months ended March 31, 2022 and 2021.
As of March 31, 2022, there was $12.4 million of total unrecognized compensation costs related to the outstanding restricted shares, which is expected to be recognized over a weighted average period of 3.8 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 $1.7 million and $1.8 million for the three months ended March 31, 2022 and March 31, 2021, respectively.
Restricted share activity is summarized as follows:
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Performance Units and Shares
Performance units were granted to certain executive officers during 2021, 2020 and 2019, while performance shares were granted prior to those years. Performance units or shares 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 constituents in 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 and shares 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 units and shares vest within five years of the original award date.
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. Compensation expense related to performance units or shares is determined at the grant date and is not adjusted throughout the measurement or vesting periods.
The Monte Carlo simulation pricing model for issued grants utilizes the following assumptions: (i) expected term (equal to the remaining performance measurement period at the grant date), (ii) volatility (based on historical volatility), and (iii) risk-free rate (interpolated based on 2- and 3-year rates). The Company used 0% for the forfeiture rate for determining the fair value of performance units and shares.
During the years ended December 31, 2022, 2021 and 2020 the following assumptions were used:
Three Months Ended March 31, | 2022 | 2021 | 2020 | |||||||
Expected term (years) | 2.9 | 2.9 | 2.9 | |||||||
Volatility | 33.5 | % | 33.9 | % | 18.4 | % | ||||
Risk-free rate | 1.8 | % | 0.2 | % | 1.3 | % | ||||
The Company recognized expense related to performance units and shares for which the three-year performance period has not yet been completed of $0.3 million and $0.2 million for the three months ended March 31, 2022 and 2021. As of March 31, 2022, there was $4.6 million of total unrecognized compensation costs related to performance units and shares for which the three-year performance period has not yet been completed, which is expected to be recognized over a weighted average period of 4.0 years.
The Company recognized expense related to performance units and shares for which the three-year performance period was completed of $0.1 million for each of the three months ended March 31, 2022 and 2021. As of March 31, 2022, there was $0.4 million of total unrecognized compensation costs related to performance units and shares for which the three-year performance period has been completed, which is expected to be recognized over a weighted average period of 1.2 years.
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Performance unit and shares activity is summarized as follows:
Shares |
| Weighted Average | |||
Outstanding | Grant Date | ||||
(in thousands) | Fair Value | ||||
Performance shares - three-year performance period completed but not yet vested at December 31, 2021 |
| 27 | $ | 55.29 | |
Shares earned at completion of three-year performance period (1) |
| 28 | $ | 65.66 | |
Shares vested | (23) | $ | 54.83 | ||
Performance shares - three-year performance period completed but not yet vested March 31, 2022 | 32 | $ | 57.90 | ||
(1)Performance shares granted in 2019 for which the three-year performance period was completed in 2022 paid out at the 106% performance level | |||||
Restricted Stock - Directors
During the three months ended March 31, 2022, 10,636 shares of restricted common stock (“restricted shares”) were granted to independent members of the Company’s board of directors at a weighted average grant date fair value of $62.62 per share.
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 the 2022 calendar year commensurate with the board members’ annual services to the Company.
The Company estimates the fair value of board members’ restricted share grants at the date of grant and amortizes those amounts into expense on a straight-line basis over the one-year vesting period. The Company recognized expense relating to restricted share grants to the board members of $0.2 million for the three months ended March 31, 2022.
As of March 31, 2022, there was $0.5 million of total unrecognized compensation costs related to the board members’ outstanding restricted shares, which is expected to be recognized over the remainder of 2022. The Company used 0% for the forfeiture rate for determining the fair value of this restricted stock.
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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, 2022 through the date on which these financial statements were issued to determine whether any of these events required disclosure in the financial statements.
There were no reportable subsequent events or transactions.
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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”), a Maryland corporation, including the respective notes thereto, which are included in this Quarterly Report on Form 10-Q. The terms the “Company,” “Management,” “we,” “our” and “us” refer to Agree Realty Corporation and all of its consolidated subsidiaries, including Agree Limited Partnership (the “Operating Partnership”), a Delaware limited partnership.
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 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 the COVID-19 pandemic. Additional factors which may cause actual results to differ materially from current expectations include, but are not limited to: the factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, 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; the Company’s concentration with certain tenants and in certain markets, which may make the Company more susceptible to adverse events; changes in the Company’s business strategy; risks that the Company’s acquisition and development projects will fail to perform as expected; adverse changes and disruption in the retail sector and the financing stability of the Company’s tenants, which could impact tenants’ ability to pay rent and expense reimbursement; the Company’s 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; the Company’s ability to renew or re-lease space as leases expire; limitations in the Company’s tenants’ leases on real estate tax, insurance and operating cost reimbursement obligations; loss or bankruptcy of one or more of the Company’s major tenants, and bankruptcy laws that may limit the Company’s remedies if a tenant becomes bankrupt and rejects its leases; potential liability for environmental contamination, which could result in substantial costs; the Company’s level of indebtedness, which could reduce funds available for other business purposes and reduce the Company’s operational flexibility; covenants in the Company’s credit agreements and unsecured notes, 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 the Company’s 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 the Company’s results of operations; the Company’s hedging strategies, which may not be successful in mitigating the Company’s risks associated with interest rates; legislative or regulatory changes, including changes to laws governing real estate investment trusts (“REITs”); the Company’s ability to maintain its qualification as a REIT for federal income tax purposes and the
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limitations imposed on its business by its status as a REIT; and the Company’s failure to qualify as a REIT for federal income tax purposes, which could adversely affect the Company’s operations and ability to make distributions.
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, the Operating Partnership, of which the Company is the sole general partner in which it held a 99.5% common interest as of March 31, 2022. Refer to Note 1- Organization in the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q for further information on the ownership structure. Under the agreement of limited partnership 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.
As of March 31, 2022, the Company’s portfolio consisted of 1,510 properties located in 47 states and totaling approximately 31.0 million square feet of GLA. The portfolio was approximately 99.6% leased and had a weighted average remaining lease term of approximately 9.1 years. A significant majority of the Company’s properties are leased to national tenants and approximately 67.8% of our annualized base rent was derived from tenants, or parent entities thereof, with an investment grade credit rating from S&P Global Ratings (acting through Standard & Poor’s Financial Services, LLC), 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.
The Company elected to be taxed as a REIT for federal income tax purposes commencing with the 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 continue to closely monitor the impact of the novel coronavirus (“COVID-19”) pandemic on all aspects of our business and geographies, including how it is impacting our tenants and business partners. We are unable to predict the full impact that the COVID-19 pandemic will ultimately 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. 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.
We continue to actively manage our response in collaboration with tenants, government officials and business partners and to assess 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 I, Item 1A titled “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Results of Operations
Overall
The Company’s real estate investment portfolio grew from approximately $3.6 billion in gross investment amount representing 1,213 properties with 24.2 million square feet of GLA as of March 31, 2021 to approximately $4.7 billion in gross investment amount representing 1,510 properties with 31.0 million square feet of GLA at March 31, 2022. 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 2022 on acquisitions that were made during 2021. Similarly, the full rental income impact of acquisitions made
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during 2022 to-date will not be seen until the remainder of 2022 and 2023.
Acquisitions
During the three months ended March 31, 2022, the Company acquired 106 retail net lease assets for approximately $409.8 million, which includes acquisition and closing costs. These properties are located in 32 states and are leased to 42 different tenants operating in 20 diverse retail sectors for a weighted average lease term of approximately 9.2 years. The underwritten weighted-average capitalization rate on the Company’s first quarter 2022 acquisitions was approximately 6.0%.1
Dispositions
During the three months ended March 31, 2022, the Company sold one property, which was classified as held for sale as of December 31, 2021 for net proceeds of $7.6 million and recorded a net gain of $2.3 million. The capitalization rate on the Company’s first quarter 2022 disposition was approximately 4.2%.1
Development and Partner Capital Solutions
During the three months ended March 31, 2022, the Company commenced 15 development or Partner Capital Solutions projects. At March 31, 2022, the Company had 17 development or Partner Capital Solutions projects under construction. During the three months ended March 31, 2022, the Company completed one development or Partner Capital Solutions project.
Comparison of Three Months Ended March 31, 2022 to Three Months Ended March 31, 2021
Three Months Ended | Variance | |||||||||||
| March 31, 2022 |
| March 31, 2021 |
| (in dollars) |
| (percentage) | |||||
Rental Income | $ | 98,312 | $ | 77,760 | $ | 20,552 | 26 | % | ||||
Real Estate Tax Expense | $ | 7,611 | $ | 5,696 | $ | 1,915 | 34 | % | ||||
Property Operating Expense | $ | 4,477 | $ | 3,541 | $ | 936 | 26 | % | ||||
Depreciation and Amortization Expense | $ | 28,561 | $ | 21,489 | $ | 7,072 | 33 | % | ||||
The variances in rental income, real estate tax expense, property operating expense and depreciation and amortization expense shown above were due to the acquisitions and the ownership of an increased number of properties during the three months ended March 31, 2022 compared to the three months ended March 31, 2021, as further described under Results of Operations - Overall above.
General and administrative expenses increased $0.7 million, or 11%, to $7.6 million for the three months ended March 31, 2022, compared to $6.9 million for the three months ended March 31, 2021. 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 7.8% in the first quarter of 2022 from 8.8% in the first quarter of 2021.
Interest expense increased $2.2 million, or 20%, to $13.9 million for the three months ended March 31, 2022, compared to $11.7 million for the three months ended March 31, 2021. The increase in interest expense was primarily a result of higher levels of borrowings in the first quarter of 2022 in comparison to the first quarter of 2021. Borrowings increased in order to finance the acquisition and development of additional properties.
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.
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Gain on sale of assets decreased $0.6 million, or 22%, to $2.3 million for the three months ended March 31, 2022, compared to $2.9 million for the three months ended March 31, 2021. 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 decreased $0.3 million, or 29%, to $0.7 million for the three months ended March 31, 2022, compared to $1.0 million for the three months ended March 31, 2021. The decrease in income tax expense was primarily due to additional tax expense of approximately $0.5 million, relating to the true-up of 2020 expense upon filing of the annual tax returns that was recognized in the first three months of 2021.
Net income increased $6.0 million, or 20%, to $36.3 million for the three months ended March 31, 2022, compared to $30.3 million for the three months ended March 31, 2021. The change was the result of the items discussed above. After allocation of income to preferred stockholders, net income attributable to common stockholders increased $4.2 million, or 14% to $34.3 million for the three months ended March 31, 2022, compared to $30.1 million for the three months ended March 31, 2021. The allocation of income to the preferred stockholders began upon the September 2021 issuance of the Series A Preferred Stock – see Liquidity and Capital Resources - Equity below.
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 its stockholders and holders of the units of the Operating Partnership (the “Operating Partnership Common 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, 2022, available cash and cash equivalents, including cash held in escrow, was $25.8 million. As of March 31, 2022, the Company had $320.0 million outstanding on its revolving credit facility and $680.0 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, and the issuance of debt and common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity.
We continually evaluate alternative financing and believe that we 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, is 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 I, Item 1A titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and in the other reports the Company has filed with the Securities and Exchange Commission (“SEC’).
The full impact of the COVID-19 pandemic on the Company’s rental revenue and, as a result, future cash from operations cannot be determined at present.
Capitalization
As of March 31, 2022, the Company’s total enterprise value was approximately $7.0 billion. Total enterprise value consisted of $5.0 billion of common equity (based on the March 31, 2022 closing price of Company’s common stock on the NYSE of $66.36 per common share and assuming the conversion of Operating Partnership Common Units), $175.0 million of preferred equity (stated at liquidation value) and $1.9 billion of total debt including (i) $320.0 million of borrowings under its revolving credit facility; (ii) $1.5 billion of senior unsecured notes; (iii) $32.4 million of mortgage notes payable, less (iv) cash and cash equivalents and cash held in escrow of $25.8 million. The Company’s total debt to enterprise value was 26.5% at March 31, 2022.
At March 31, 2022, the non-controlling interest in the Operating Partnership consisted of a 0.5% common ownership interest in the Operating Partnership. The Operating Partnership Common Units may, under certain circumstances, be
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exchanged for shares of Company 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 Common Units held by others for cash based on the current trading price of our shares. Assuming the exchange of all Operating Partnership Common Units, there would have been 75,522,199 shares of common stock outstanding at March 31, 2022.
Equity
Shelf Registration
The Company has filed with the SEC an automatic shelf registration statement on Form S-3, registering an unspecified amount of common stock, preferred stock, depositary shares, warrants and guarantees of debt securities of the Operating Partnership, as well as an unspecified amount of debt securities of the Operating Partnership, at an indeterminate aggregate initial offering price. The Company may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering.
Follow-on Common Stock Offerings
In January 2021, the Company completed a follow-on public offering of 3,450,000 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 450,000 shares of common stock. The offering resulted in net proceeds to the Company of approximately $221.4 million, after deducting fees and offering expenses payable by the Company.
In June 2021, the Company completed a follow-on public offering of 4,600,000 shares of its common stock, which included the full exercise of the underwriters’ option to purchase an additional 600,000 shares of common stock. The offering resulted in net proceeds to the Company of approximately $327.0 million, after deducting fees and offering expenses payable by the Company.
In December 2021, the Company completed a follow-on public offering of 5,750,000 shares of common stock, including the full exercise of the underwriters' option to purchase additional 750,000 shares, in connection with forward sale agreements. Upon settlement, the offering is anticipated to raise net proceeds of approximately $374.8 million after deducting fees and expenses and making certain other adjustments as provided in the equity distribution agreements. During the quarter ended March 31, 2022, the Company settled 1,666,668 shares of these December 2021 forward sale agreements, realizing net proceeds of $107.7 million.
Preferred Stock Offering
In September 2021, the Company completed an underwritten public offering of depositary shares (the “Depositary Shares”), each representing 1/1,000th of a share of Series A Preferred Stock, which resulted in net proceeds to the Company of approximately $170.3 million, after deducting the underwriting discounts and commissions and costs payable by the Company. At the closing, the Company issued 7,000 shares of Series A Preferred Stock and 7,000,000 Depositary Shares. The Company contributed the net proceeds from the sale of the Depositary Shares to the Operating Partnership in exchange for 7,000 Series A Preferred Units corresponding to the number of shares of Series A Preferred Stock underlying the Depositary Shares.
Dividends on the Series A Preferred Shares are payable monthly in arrears on the first day of each month (or, if not on a business day, on the next succeeding business day). The dividend rate is 4.25% per annum of the $25,000 (equivalent to $25.00 per Depositary Share) liquidation preference. The first pro-rated dividend on the Series A Preferred Shares was paid on October 1, 2021, and was in an amount equivalent to $0.04132 per Depositary Share. Subsequent dividends on the Series A Preferred Shares are in the amount of $0.08854 per Depositary Share, equivalent to $1.0625 per annum.
The Company may not redeem the Series A Preferred Shares before September 2026 except in limited circumstances to preserve its status as a real estate investment trust for federal income tax purposes and except in certain circumstances
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upon the occurrence of a change of control of the Company. Beginning in September 2026, the Company, at its option, may redeem the Series A Preferred Shares, in whole or from time to time in part, by paying $25.00 per Depositary Share, plus any accrued and unpaid dividends. Upon the occurrence of a change in control of the Company, if the Company does not otherwise redeem the Series A Preferred Shares, the holders have a right to convert their shares into common stock of the Company at the $25.00 per share liquidation value, plus any accrued and unpaid dividends. This conversion value is limited by a share cap if the Company’s stock price falls below a certain threshold.
ATM Programs
In February 2021, the Company entered into a new $500.0 million ATM program (the “2021 ATM Program”) through which the Company, from time to time, may sell shares of common stock and/or enter into forward sale agreements. In addition to selling shares of common stock, the Company has entered into forward sale agreements through the 2021 ATM Program, as described below.
As of March 31, 2022, the Company had entered into forward sale agreements to sell an aggregate of 2,125,296 shares of common stock. The Company has settled the entirety of these forward sale agreements as of March 31, 2022, for net proceeds of $143.1 million.
After considering the 2,125,296 shares of common stock subject to forward sale agreements issued under the 2021 ATM Program, the Company had approximately $349.7 million of availability remaining under the 2021 ATM Program as of March 31, 2022.
Debt
The below table summarizes the Company’s outstanding debt as of March 31, 2022 and December 31, 2021 (presented in thousands):
All-in | Principal Amount Outstanding | ||||||||||
Senior Unsecured Revolving Credit Facility |
| Interest Rate |
| Maturity |
| March 31, 2022 |
| December 31, 2021 | |||
Revolving Credit Facility (1) |
| 1.23 | % | January 2026 | $ | 320,000 | $ | 160,000 | |||
Total Credit Facility | $ | 320,000 | $ | 160,000 | |||||||
Senior Unsecured Notes | |||||||||||
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 Public Notes (2) | 2.11 | % | June 2028 | 350,000 | 350,000 | ||||||
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 | |||
2030 Senior Unsecured Public Notes (2) |
| 3.49 | % | October 2030 |
| 350,000 |
| 350,000 | |||
2031 Senior Unsecured Notes |
| 4.42 | % | October 2031 | 125,000 | 125,000 | |||||
2033 Senior Unsecured Public Notes (2) | 2.13 | % | June 2033 | 300,000 | 300,000 | ||||||
Total Senior Unsecured Notes | $ | 1,510,000 | $ | 1,510,000 | |||||||
Mortgage Notes Payable | |||||||||||
CMBS Portfolio Loan |
| 3.60 | % | January 2023 | $ | 23,640 | $ | 23,640 | |||
Single Asset Mortgage Loan |
| 5.01 | % | September 2023 |
| 4,622 |
| 4,622 | |||
Portfolio Credit Tenant Lease |
| 6.27 | % | July 2026 |
| 4,166 |
| 4,373 | |||
Total Mortgage Notes Payable | $ | 32,428 | $ | 32,635 | |||||||
Total Principal Amount Outstanding | $ | 1,862,428 | $ | 1,702,635 | |||||||
| (1) | The annual interest rate of the Revolving Credit Facility (defined below) assumes one-month LIBOR as of March 31, 2022 of 0.45%. |
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| (2) | The principal amounts outstanding for the 2028 Senior Unsecured Public Notes, the 2030 Senior Unsecured Public Notes, and the 2033 Senior Unsecured Public Notes are presented excluding their original issue discounts. |
Senior Unsecured Revolving Credit Facility
In December 2019, the Company entered into a Second Amended and Restated Revolving Credit and Term Loan Agreement. This agreement provided for a $500 million unsecured revolving credit facility. It also provided for a $65 million unsecured term loan facility and a $35 million unsecured term loan facility. All amounts outstanding under these unsecured term loan facilities were repaid in May 2021 (see Unsecured Term Loan Facilities below) and cannot be reborrowed against.
In December 2021, the Company entered into a Third Amended and Restated Revolving Credit Agreement which increases its senior unsecured revolving credit facility (the “Revolving Credit Facility”) to $1.0 billion. The Revolving Credit Facility includes an accordion option that allows the Company to request additional lender commitments up to a total of $1.75 billion. The Revolving Credit Facility will mature in January 2026 with Company options to extend the maturity date to January 2027.
The Revolving Credit Facility’s interest rate is based on a pricing grid with a range of 72.5 to 140 basis points over LIBOR, determined by the Company’s credit ratings. The margins for the Revolving Credit Facility are subject to improvement based on the Company’s leverage ratio, provided its credit ratings meet a certain threshold. Based on the Company’s credit ratings and leverage ratio at the time of closing, pricing on the Revolving Credit Facility was 77.5 basis points over LIBOR. In connection with the Company’s ongoing environmental, social and governance (“ESG”) initiatives, pricing may be reduced if specific ESG ratings are achieved.
The Company and Richard Agree, the Executive Chairman of the Company, are parties to a Reimbursement Agreement dated November 18, 2014 (the “Reimbursement Agreement”). 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 May 2021, the Company used the net proceeds from the offering of the 2028 Senior Unsecured Public Notes and the 2033 Senior Unsecured Public Notes (see Senior Unsecured Notes below) to repay all amounts outstanding under its unsecured term loans and settle the related swap agreements. The Company incurred a charge of $14.6 million upon this repayment and settlement, including swap termination costs of $13.4 million and the write-off of previously unamortized debt issuance costs of $1.2 million.
Senior Unsecured Notes
In May 2015, the Company and the Operating Partnership completed a private placement of $100 million principal amount of senior unsecured notes. The senior unsecured notes were sold in two series; $50 million of 4.16% notes due May 2025 (the “2025 Senior Unsecured Notes”) and $50 million of 4.26% notes due May 2027 (the “2027 Senior Unsecured Notes”).
In July 2016, the Company and the Operating Partnership completed a private placement of $60 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 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 million aggregate principal amount of 4.32% senior unsecured notes due September 2030 (the “2030 Senior Unsecured Notes”).
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In October 2019, the Company and the Operating Partnership closed on a private placement of $125 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 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 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 million aggregate principal amount of 2031 Senior Unsecured Notes is 4.42%.
All of the senior unsecured notes described in the preceding paragraphs were sold to only institutional investors in private placements pursuant to Section 4(a)(2) of the Securities Act.
In August 2020, the Operating Partnership completed an underwritten public offering of $350 million in aggregate principal amount of 2.900% Senior Unsecured Public Notes due 2030 (the “2030 Senior Unsecured Public Notes”). The 2030 Senior Unsecured Public Notes are fully and unconditionally guaranteed by Agree Realty Corporation and certain wholly owned subsidiaries of the Operating Partnership. The terms of the 2030 Senior Unsecured Public Notes are governed by an indenture, dated August 17, 2020, among the Operating Partnership, the Company and U.S. Bank National Association, as trustee (as amended and supplemented by an officer’s certificate dated August 17, 2020, the “Indenture”). The Indenture contains various restrictive covenants, including limitations on the ability of the guarantors and the issuer to incur additional indebtedness and requirements to maintain a pool of unencumbered assets. The Company terminated related swap agreements of $200 million that hedged the 2030 Senior Unsecured Public Notes, paying $23.4 million upon termination. Considering the effect of the terminated swap agreements, the blended all-in rate to the Company for the $350 million aggregate principal amount of 2030 Senior Unsecured Notes is 3.49%.
In May 2021, the Operating Partnership completed an underwritten public offering of $350 million aggregate principal amount of its 2.000% Notes due 2028 (the “2028 Senior Unsecured Public Notes”) and $300 million in aggregate principal amount of 2.600% Notes due 2033 (the “2033 Senior Unsecured Public Notes”). The 2028 Senior Unsecured Public Notes and the 2033 Senior Unsecured Public Notes are fully and unconditionally guaranteed by Agree Realty Corporation and certain wholly owned subsidiaries of the Operating Partnership. The terms of the 2028 Senior Unsecured Public Notes and the 2033 Senior Unsecured Public Notes are governed by an indenture, dated August 17, 2020, among the Operating Partnership, the Company and U.S. Bank National Association, as trustee (as amended and supplemented by an officer’s certificate dated May 14, 2021, the “Indenture”). The Indenture contains various restrictive covenants, including limitations on the ability of the guarantors and the issuer to incur additional indebtedness and requirements to maintain a pool of unencumbered assets. The Company terminated related swap agreements of $300 million that hedged the 2033 Senior Unsecured Public Notes, receiving $16.7 million upon termination. Considering the effect of the terminated swap agreements, the blended all-in rates to the Company for the $350 million aggregate principal amount of the 2028 Senior Unsecured Public Notes and the $300 million aggregate principal amount of the 2033 Senior Unsecured Public Notes are 2.11% and 2.13%, respectively.
Mortgage Notes Payable
As of March 31, 2022, the Company had total gross mortgage indebtedness of $32.4 million which was collateralized by related real estate and tenants’ leases with an aggregate net book value of $38.7 million. The weighted average interest rate on the Company’s mortgage notes payable was 4.04% as of March 31, 2022 and 4.16% as of December 31, 2021.
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.
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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, 2022, 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, 2022.
Cash Flows
Operating - Most 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, 2022 increased by $15.7 million over the same period in 2021, primarily due to the increase in the size of the Company’s real estate investment portfolio.
Investing - Net cash used in investing activities was $51.6 million higher during the three months ended March 31, 2022, compared to the same period in 2021. Acquisitions of properties during the first three months of 2022 were $16.1 million higher than the same period in 2021, due to overall increases in the level of acquisition activity. Development costs during the three months ended March 31, 2022 were $35.0 million higher than the same period in 2021, due to the timing of costs incurred related to the Company’s development activity. Proceeds from asset sales decreased by $0.8 million during the three months ended March 31, 2022 compared to the same period in 2021. Proceeds from asset sales are dependent on levels of disposition activity and the specific assets sold. Proceeds from asset sales are not necessarily comparable period-to-period.
Financing - Net cash provided by financing activities was $17.0 million higher during the three months ended March 31, 2022, compared to the same period in 2021. Net proceeds from the issuance of common stock decreased by $7.4 million during the three months ended March 31, 2022, compared to the same period in 2021. Net borrowings on the revolving credit facility increased by $14.0 million during the three months ended March 31, 2022, compared to the same period in 2021. Total dividends and distributions paid to its stockholders and non-controlling owners decreased by $10.4 million during the first three months of 2022, compared to the same period in 2021, due to the change from a quarterly dividend to a monthly dividend beginning in 2021. Dividends paid during the three month period ended March 31, 2022 included the monthly dividends declared in December 2021, January 2022, and February 2022. Dividends paid during the three month period ended March 31, 2021 included the quarterly dividend declared in December 2020 and the monthly dividend declared in January and February 2021. The Company’s annualized common dividend during the first quarter of 2022 is $2.72 per common share, a 9.7% increase over the annualized $2.48 per common share declared in the first quarter of 2021.
Material Cash Requirements
In conducting our business, the Company enters into contractual obligations, including those for debt and operating leases for land.
41
Detail on these obligations as of March 31, 2022, including expected settlement periods, is contained below (presented in thousands):
| (1) | The balloon payment balance includes the balance outstanding under the Revolving Credit Facility as of March 31, 2022. The Revolving Credit Facility matures in January 2026, with options to extend the maturity to extend its maturity date by six months up to two times, for a maximum maturity of January 2027. |
In addition to items reflected in the table above, the Company has issued preferred stock with cumulative cash dividends, as described under Equity – Preferred Stock Offering above.
During the first quarter 2022 the Company had 18 development or Partner Capital Solutions projects completed or under construction, for which 17 remain under construction as of March 31, 2022. Anticipated total costs for the 17 projects are approximately $50.7 million. These construction commitments will be funded using cash provided from operations, current capital resources on hand, and/or other sources of funding available to the Company.
The Company’s recurring obligations under its tenant leases for maintenance, taxes, and/or insurance will also be funded
through the cash sources available to the Company described earlier.
Dividends
During the quarter ended March 31, 2022, the Company declared monthly dividends of $0.227 per common share for January, February, and March 2022. The holder of the Operating Partnership Common Units is entitled to an equal distribution per Operating Partnership Common Unit held. The dividends and distributions payable for January and February were paid during the quarter. The March dividends and distributions were recorded as a liability on the Condensed Consolidated Balance Sheet at March 31, 2022, and were paid on April 14, 2022.
During the quarter ended March 31, 2022, the Company declared monthly dividends on the Series A Preferred Shares for January, February, and March 2022. The March dividend was recorded as a liability on the Condensed Consolidated Balance Sheet at March 31, 2022, and was paid on April 1, 2022.
Recent Accounting Pronouncements
Refer to Note 2 – Summary of Significant Accounting Policies in the condensed consolidated financial statements for a summary and anticipated impact of each accounting pronouncement on the Company’s financial statements.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity 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 or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is
42
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, 2021. The Company has not made any material changes to these policies during the periods covered by this Quarterly Report on Form 10-Q.
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 (i) noncash amortization of above- and below- market lease intangibles and (ii) certain infrequently occurring items that reduce or increase net income in accordance with GAAP. 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 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.
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Reconciliations
The following table provides a reconciliation of net income to FFO, Core FFO and AFFO for the three months ended March 31, 2022 and 2021 (presented in thousands):
Three Months Ended | ||||||||
|
| March 31, 2022 |
| March 31, 2021 | ||||
Reconciliation from Net Income to Funds from Operations | ||||||||
Net income | $ | 36,289 | $ | 30,278 | ||||
Less Series A preferred stock dividends | 1,859 | — | ||||||
Net income attributable to Operating Partnership common unitholders | 34,430 | 30,278 | ||||||
Depreciation of rental real estate assets |
| 19,470 |
| 15,292 | ||||
Amortization of lease intangibles - in-place leases and leasing costs |
| 8,924 |
| 6,050 | ||||
Provision for impairment |
| 1,015 |
| — | ||||
(Gain) loss on sale or involuntary conversion of assets, net |
| (2,285) |
| (3,062) | ||||
Funds from Operations - Operating Partnership common unitholders | $ | 61,554 | $ | 48,558 | ||||
Amortization of above (below) market lease intangibles, net | 8,178 | 4,756 | ||||||
Core Funds from Operations - Operating Partnership common unitholders | $ | 69,732 | $ | 53,314 | ||||
Straight-line accrued rent |
| (3,135) |
| (2,597) | ||||
Stock based compensation expense |
| 1,635 |
| 1,364 | ||||
Amortization of financing costs |
| 788 |
| 268 | ||||
Non-real estate depreciation |
| 167 |
| 147 | ||||
Adjusted Funds from Operations - Operating Partnership common unitholders | $ | 69,187 | $ | 52,496 | ||||
Funds from Operations per common share and partnership unit - diluted | $ | 0.86 | $ | 0.77 | ||||
Core Funds from Operations per common share and partnership unit - diluted | $ | 0.97 | $ | 0.84 | ||||
Adjusted Funds from Operations per common share and partnership unit - diluted | $ | 0.97 | $ | 0.83 | ||||
Weighted average shares and Operating Partnership common units outstanding | ||||||||
Basic | 71,576,549 |
| 63,176,516 | |||||
Diluted | 71,683,722 |
| 63,287,979 | |||||
Additional supplemental disclosure | ||||||||
Scheduled principal repayments | $ | 208 | $ | 195 | ||||
Capitalized interest | $ | 112 | $ | 75 | ||||
Capitalized building improvements | $ | 1,100 | $ | 174 | ||||
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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 our future financing requirements.
The Company’s interest rate risk is monitored using a variety of techniques. The table below presents the principal payments (presented in thousands) and the weighted average interest rates on outstanding debt, by year of expected maturity, to evaluate the expected cash flows and sensitivity to interest rate changes. Average interest rates shown reflect the impact of any swap agreements previously employed to fix interest rates.
| (1) | The balloon payment balance includes the balance outstanding under the Revolving Credit Facility as of March 31, 2022. The Revolving Credit Facility matures in January 2026, with options to extend the maturity date by six months up to two times, for a maximum maturity of January 2027. The interest rate shown is the average rate incurred during the three months ended March 31, 2022. |
The fair value is estimated to be $33.1 million and $1.45 billion for mortgage notes payable and senior unsecured notes, respectively, as of March 31, 2022. The fair value of the Revolving Credit Facility approximates its book value as it is variable rate debt.
The table above incorporates those exposures that exist as of March 31, 2022; 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 our variable rate debt and converting such debt to fixed rates when the Company deems 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 the Company 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 May 2021 and July 2021, 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 $300 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 ending December 2022. As of March 31, 2022, these interest rate swaps were valued as an asset of approximately $19.1 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, 2022.
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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 our principal executive officer and principal financial officer, of our 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 as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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.
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 under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
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.
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ITEM 6. Exhibits
* Filed herewith.
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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/ Peter Coughenour |
|
Peter Coughenour | |
Chief Financial Officer and Secretary | |
(Principal Financial Officer) | |
Date: May 3, 2022 |
|
48
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 ended March 31, 2022 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.
Date: May 3, 2022 |
| /s/ Joel N. Agree | |
| |
| |
| | Name: | Joel N. Agree |
| | Title: | President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter Coughenour, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31, 2022 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.
Date: May 3, 2022 |
| /s/ Peter Coughenour | |
| |
|
|
| | Name: | Peter Coughenour |
| | 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 ended March 31, 2022 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.
/s/ Joel N. Agree |
|
Joel N. Agree |
|
President and Chief Executive Officer |
|
|
|
May 3, 2022 |
|
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, 2022 of Agree Realty Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter Coughenour, Chief Financial 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.
/s/ Peter Coughenour |
|
Peter Coughenour |
|
Chief Financial Officer and Secretary |
|
|
|
May 3, 2022 |
|