Strong showing yields another example of sector strength amid turmoil elsewhere
Michigan-based Agree Realty Corp. on Wednesday released its fourth quarter earnings report, yielding another example of the relative strength of the retail industry amid otherwise choppy economic conditions in the real estate landscape.
The real estate investment trust beat Wall Street estimates, reporting earnings per share of 95 cents for its fourth quarter ended Dec. 31, 2022 – up from 91 cents for the comparable period the prior year. Revenues of $116.5 million represented an increase of 27.48% year-over-year. The showing also beat analysts’ estimates of $115.1 million, by 1.25%.
Amid the strong showing, analysts noted the REIT’s revenue grew at a faster pace than earnings, which signals a decline in profit margins.
Joey Agree, president and CEO of his namesake firm, started the earnings presentation in upbeat fashion: “I’m pleased to report that 2022 was another record year for our company,” he said. “Notable milestones over the past 12 months included record investment activity over $1.7 billion, surpassing our record high by 20%; the addition of over 440 high-quality net lease properties to our growing portfolio; the commencement of a record 28 development and Partner Capital Solutions projects for total committed capital of nearly $110 million; the receiving of an upgraded investment grade credit rating of Baa1 from Moody’s Investors Service; and positioning our balance sheet to execute in 2023 without the need for additional capital, while raising approximately $1.7 billion, including $1.3 billion of equity.”
Closing the year with strong liquidity
“We closed 2022 with approximately $1.5 billion of liquidity at year-end, including more than 550 million of outstanding forward equity available at our election,” Agree said. “Including our forward equity, pro forma net debt to recurring EBITDA was approximately 3.1 times at 12/31. As demonstrated by our fourth quarter acquisition activity, cap rates crept higher, but our bid-ask spread remains as sellers are slow to adjust to current market dynamics. As always, we remain disciplined to our investment strategy, and refrain from going up the risk curve via credit or residual risk to create the appearance of a quickly expanding cap rate environment.”
He expounded on the strategy: “Similarly, we will not chase cap rates down to levels that fail to create sufficient spreads to drive appropriate returns for our shareholders. Our focus remains on the best retailers in the country with strong balance sheets to allow them to withstand the current macroeconomic environment regardless of the level of deterioration. Our team is doing a terrific job navigating this environment, leveraging our strong industrywide relationships and track record while uncovering opportunities to add to our growing portfolio. Our pipeline includes both smaller one-off transactions and larger sale leasebacks with our leading retail partners.”
The upshot: “Given that pipeline, I am confident our team will be able to source north of $1 billion of acquisition activity at spreads that are appropriately accretive,” Agree predicted. “During the fourth quarter, we invested approximately $421 million across 157 properties via our three external growth platforms – 131 of the properties originated through our acquisition platform, representing acquisition volume of approximately $405 million. The properties acquired during the quarter are leased to best-in-class operators in the auto parts, tire and auto service, home improvement, dollar store, off-price retail, convenience store, and farm and rural supply sectors, among others.
“The acquired properties had a weighted average cap rate of 6.4% and a weighted average remaining lease term of 10.6 years. Over 73% of the acquired rents were derived from investment grade retail tenants. For the full year 2022, nearly 70% of the annualized base rent acquired was derived from leading investment grade retailers, while ground leases represented more than 5% of rents acquired. Moving on to our development and PCS platforms, we again had a record year with 31 projects, either completed or under construction, representing over $118 million of committed capital.”
Peter Coughenour, chief financial officer, underscored the company’s strong liquidity position: “Our capital markets activities during 2022 provided us with approximately $1.5 billion of liquidity at year-end, including $557 million of outstanding forward equity, $900 million of availability on the revolver and $29 million of cash on hand,” he told shareholders. “Our existing liquidity, plus free cash flow after the dividend of approximately $85 million and any disposition proceeds, enable us to opportunistically execute our growth strategy in 2023 without the need for additional capital. As of December 31, pro forma for the settlement of the $557 million of outstanding forward equity, our net debt to recurring EBITDA was approximately 3.1 times. Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was 4.4 times.”
Agree Realty operates as a fully integrated REIT primarily focused on the ownership, acquisition, development, and management of retail properties net leased to industry- leading tenants. Some of its properties in the portfolio include 24 Hour Fitness, 7-Eleven, Wawa, PetSmart, among others.
