Agree Realty(ADC) - 2022 Q4 - Annual Report

Part I Item 1: Business Agree Realty Corporation is a REIT specializing in net-leased retail properties, with a large, highly occupied portfolio - Portfolio Overview as of December 31, 2022 | Metric | Value | | :--- | :--- | | Number of Properties | 1,839 | | Locations | 48 states | | Gross Leasable Area (GLA) | Approx. 38.1 million sq. ft. | | Occupancy Rate | Approx. 99.7% | | Weighted Avg. Remaining Lease Term | Approx. 8.8 years | | Annualized Base Rent from Investment Grade Tenants | Approx. 67.8% | - 2022 Investment and Disposition Activity | Activity | Value (Approx.) | | :--- | :--- | | Total Investments | $1.62 billion | | Acquired Properties | 434 properties for $1.6 billion | | Developed Properties | 7 properties for $22.5 million | | Asset Sales (Net Proceeds) | $44.9 million | - The company's business strategy is centered on three external growth platforms: traditional development, Partner Capital Solutions (PCS), and acquisitions, all focused on acquiring properties net leased to national or large regional retailers in sectors resistant to e-commerce and recessions[35][36][37] - In 2022, the company enhanced its ESG program by developing a three-year action plan with a third-party consultant, focusing on improving oversight, risk management, policies, and reporting[69] Recent Developments The company increased its monthly common stock dividend twice in 2022 and raised significant capital through equity and debt offerings - The company increased its monthly common stock dividend twice in 2022, from $0.227 to $0.234 in April, and again to $0.240 in October, resulting in an annualized dividend of $2.88 per share[24] - During 2022, the company raised approximately $1.26 billion in net proceeds from equity financing activities, including two follow-on public offerings and settlements under its ATM programs, to fund portfolio growth[27][29] - In August 2022, the Operating Partnership issued $300 million of 4.80% Senior Unsecured Public Notes due 2032, with a blended all-in rate of 3.96% after considering terminated swap agreements[32] Business Strategies The company's investment criteria are guided by four core principles, focusing on omni-channel critical and e-commerce resistant retailers - The company's investment criteria are guided by four core principles: focusing on omni-channel critical and e-commerce resistant retailers, maintaining a recession-resistant portfolio, avoiding tenants with private equity sponsorship, and adhering to strong real estate fundamentals[46] - Capital Structure Ratios as of December 31, 2022 | Ratio | Value | | :--- | :--- | | Total Debt to Enterprise Value | Approx. 23.0% | | Total Debt to Total Gross Assets | Approx. 27.9% | - As of year-end 2022, total debt was $1.96 billion, comprising $1.81 billion in unsecured notes (3.31% weighted average rate), $100.0 million in floating-rate borrowings (5.14% rate), and $50.4 million in secured mortgage debt (3.94% weighted average rate)[45][48] Human Capital and ESG The company expanded its workforce to support portfolio growth and enhanced its sustainability efforts - The company's full-time employee count grew from 57 at the end of 2021 to 76 at the end of 2022 to support portfolio growth[58] - The company offers comprehensive benefits, including paying 100% of medical, short-term, long-term, and life insurance premiums for team members and their families[68] - In 2022, the company enhanced its sustainability efforts by introducing green lease language into its standard lease forms and executing leases with green clauses with several tenants[71] - The Board of Directors consists of nine members, seven of whom are independent, with five new independent directors added since 2018, and a Lead Independent Director appointed in 2019[79] Item 1A: Risk Factors The company faces various business, financial, and structural risks, including geographic and sector concentrations and REIT status challenges - The company's portfolio has significant geographic concentration in Texas (7.3% of annualized base rent), Ohio (5.7%), Florida (5.6%), Michigan (5.6%), and Illinois (5.5%), making it susceptible to adverse economic conditions in these states[91] - There is a notable concentration of tenants in specific retail sectors, with home improvement (9.1%), grocery stores (8.9%), and tire and auto service (8.9%) representing the largest shares of annualized contractual base rent[92] - The company's charter contains a 9.8% ownership limit on its common and aggregate stock, and its staggered board structure may delay or prevent a change of control transaction[126][127] - Failure to maintain REIT qualification would result in significant adverse tax consequences, including being subject to federal income tax at regular corporate rates and being unable to deduct dividends paid to stockholders[138][139] Item 1B: Unresolved Staff Comments The company reports that there are no unresolved comments from the SEC staff - There are no unresolved staff comments[166] Item 2: Properties Agree Realty's portfolio includes 1,839 properties across 48 states, totaling 38.1 million sq. ft., diversified by tenant, sector, and geography - Top 5 Tenants by Annualized Base Rent (as of Dec 31, 2022) | Tenant | Annualized Base Rent ($ thousands) | % of Total | | :--- | :--- | :--- | | Walmart | $31,924 | 6.8% | | Dollar General | $23,465 | 5.0% | | Tractor Supply | $20,649 | 4.4% | | Best Buy | $19,515 | 4.1% | | Dollar Tree | $14,240 | 3.0% | - Top 5 Sectors by Annualized Base Rent (as of Dec 31, 2022) | Tenant Sector | Annualized Base Rent ($ thousands) | % of Total | | :--- | :--- | :--- | | Home Improvement | $42,754 | 9.1% | | Grocery Stores | $41,884 | 8.9% | | Tire and Auto Service | $41,612 | 8.9% | | Dollar Stores | $36,241 | 7.7% | | Convenience Stores | $35,842 | 7.6% | - Top 5 States by Annualized Base Rent (as of Dec 31, 2022) | State | Annualized Base Rent ($ thousands) | % of Total | | :--- | :--- | :--- | | Texas | $34,202 | 7.3% | | Ohio | $26,661 | 5.7% | | Florida | $26,317 | 5.6% | | Michigan | $26,139 | 5.6% | | Illinois | $26,069 | 5.5% | - During 2022, the company had 31 development or PCS projects completed or under construction, with anticipated total costs of approximately $118.5 million, and 24 projects remained under construction at year-end[177][252] Item 3: Legal Proceedings The company is not involved in any material litigation beyond routine business proceedings, which are expected to be covered by insurance - The Company is not presently involved in any litigation, nor is any litigation threatened, that is expected to have a material adverse effect on its financial condition or results of operations[178][180] Item 4: Mine Safety Disclosures This item is not applicable to the company - Not applicable[181] Part II Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with an intent to pay regular dividends to maintain REIT status - As of February 13, 2023, there were 90,173,424 shares of common stock outstanding[182] - To maintain its REIT status, the company must distribute at least 90% of its REIT taxable income to stockholders[183] Item 6: [Reserved] This item is reserved and contains no information Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations The company's real estate portfolio grew significantly, driving increased rental income and net income, supported by strong capital and liquidity - Comparison of Operations (Year Ended Dec 31) | Metric ($ in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Rental Income | $429,632 | $339,067 | 27% | | Total Revenues | $429,814 | $339,323 | 27% | | Interest Expense | $63,435 | $50,378 | 26% | | Net Income | $153,035 | $122,876 | 25% | | Net Income Attributable to Common Stockholders | $145,000 | $120,125 | 21% | - Non-GAAP Performance Metrics (Per Diluted Share) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Funds from Operations (FFO) | $3.45 | $3.00 | 15.0% | | Core Funds from Operations (Core FFO) | $3.87 | $3.58 | 8.1% | | Adjusted Funds from Operations (AFFO) | $3.83 | $3.51 | 9.1% | - The company's real estate investment portfolio grew from 1,404 properties ($4.37 billion net investment) at year-end 2021 to 1,839 properties ($5.74 billion net investment) at year-end 2022[193][194] - As of December 31, 2022, the company had $900.0 million available for future borrowings under its $1.0 billion revolving credit facility[212] Item 7A: Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate exposure on its debt portfolio, managed through monitoring and occasional hedging, with no outstanding derivatives - The company's principal market risk is interest rate risk from its borrowing activities, managed by monitoring its variable-rate debt and using hedging instruments when advantageous[271][276] - As of December 31, 2022, the company had no derivative instruments outstanding[277] - Debt Fair Value vs. Carrying Value (as of Dec 31, 2022) | Debt Instrument | Carrying Value | Fair Value (Est.) | | :--- | :--- | :--- | | Senior Unsecured Notes | $1.79 billion | $1.54 billion | | Mortgage Notes Payable | $48.0 million | $45.4 million | | Revolving Credit Facility | $100.0 million | Approx. $100.0 million | Item 8: Financial Statements and Supplementary Data This section refers to the consolidated financial statements and supplementary data, included from page F-1 of the report - The financial statements and supplementary data are listed in the Index to the Financial Statements and Financial Statement Schedules appearing on Page F-1 of this Annual Report on Form 10-K[278] Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[279] Item 9A: Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures are effective as of the end of the period covered by this report[280] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO framework[283] - There were no changes in internal control over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[284] Item 9B: Other Information The company reports no other information under this item - None[286] Item 9C: Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[289] Part III Item 10: Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 proxy statement - Information for this item is incorporated by reference from the registrant's definitive proxy statement for the 2023 annual stockholder meeting[291] Item 11: Executive Compensation Information on executive and director compensation is incorporated by reference from the 2023 proxy statement - Information for this item is incorporated by reference from the registrant's definitive proxy statement for the 2023 annual stockholder meeting[292] Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans, with 333,048 securities available for future issuance, and other ownership information incorporated by reference - Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise | Weighted Avg. Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity Compensation Plans Approved by Security Holders | — | — | 333,048 | | Equity Compensation Plans Not Approved by Security Holders | — | — | — | | Total | — | — | 333,048 | Item 13: Certain Relationships and Related Transactions, and Director Independence Information on related person transactions and director independence is incorporated by reference from the 2023 proxy statement - Information for this item is incorporated by reference from the registrant's definitive proxy statement for the 2023 annual stockholder meeting[294] Item 14: Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2023 proxy statement - Information for this item is incorporated by reference from the registrant's definitive proxy statement for the 2023 annual stockholder meeting[295] Part IV Item 15: Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Annual Report on Form 10-K, including financial statements, schedules, and various exhibits - This section lists the financial statements, financial statement schedules (Schedule III – Real Estate and Accumulated Depreciation), and all exhibits filed with the Form 10-K[296][298] Item 16: Form 10-K Summary The company reports no summary under this item - None[311] Financial Statements and Schedules Report of Independent Registered Public Accounting Firm Grant Thornton LLP issued an unqualified opinion on the consolidated financial statements and internal control, noting fair value measurements in real estate acquisitions as a critical audit matter - The auditor, Grant Thornton LLP, expressed an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[316][324] - A critical audit matter was identified concerning the fair value measurements used in the purchase price allocation of real estate acquisitions, due to the challenging and subjective nature of management's assumptions, particularly regarding market land value and market rent[327][328][330] Consolidated Financial Statements The consolidated financial statements reflect significant growth in total assets to $6.71 billion and total revenues to $429.8 million in 2022 - Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Net Real Estate Investments | $5,741,068 | $4,367,111 | | Total Assets | $6,713,189 | $5,226,906 | | Total Liabilities | $2,082,799 | $1,807,590 | | Total Equity | $4,630,390 | $3,419,316 | - Consolidated Statement of Operations Highlights (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenues | $429,814 | $339,323 | $248,568 | | Total Operating Expenses | $216,987 | $164,165 | $123,440 | | Net Income | $153,035 | $122,876 | $91,972 | | Net Income Per Share - Diluted | $1.83 | $1.78 | $1.74 | Notes to Consolidated Financial Statements The notes detail the company's REIT structure, accounting policies, real estate investments including $1.6 billion in 2022 acquisitions, $1.96 billion gross indebtedness, and equity offerings - The company operates through Agree Limited Partnership (the "Operating Partnership"), in which it held a 99.6% common equity interest as of December 31, 2022[345] - During 2022, the company acquired 434 retail net lease assets for approximately $1.6 billion, including acquisition costs and the assumption of a $42.3 million mortgage note[419] - Gross Indebtedness as of December 31, 2022 (in thousands) | Debt Type | Amount | | :--- | :--- | | Mortgage Notes Payable | $50,400 | | Senior Unsecured Notes | $1,810,000 | | Revolving Credit Facility | $100,000 | | Total Gross Indebtedness | $1,960,400 | - In October 2022, the company completed a follow-on public offering for 5,750,000 shares in connection with forward sale agreements, with an anticipated net proceeds of approximately $380.7 million, and 1,600,000 of these shares had been settled as of year-end[455]