Business Context and Reporting Period
Company: Agree Realty Corporation (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2008
Business Overview: Agree Realty is a self-administered REIT focused on owning, developing, and managing retail properties net-leased to national tenants. As of September 30, 2008, the portfolio consisted of 68 properties (56 freestanding, 12 shopping centers) totaling approximately 3.4 million square feet, with a 99.2% occupancy rate. Approximately 88.5% of annualized base rent is derived from national tenants, with significant concentration in Borders Group (29%), Walgreen Co. (26%), and Kmart Corporation (12%).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $9,029,401 | $26,586,257 |
| Net Income | $3,848,784 | $11,194,194 |
| Earnings Per Share (Diluted) | $0.50 | $1.46 |
| Funds from Operations (FFO) | $5,531,617 | $16,117,835 |
| Net Cash Provided by Operating Activities | N/A | $15,622,111 |
| Net Cash Used in Investing Activities | N/A | ($17,001,026) |
| Net Cash Provided by Financing Activities | N/A | $993,293 |
| Cash and Cash Equivalents (End of Period) | $159,017 | $159,017 |
| Total Debt (Mortgages + Notes) | $97,714,932 | $97,714,932 |
| Dividend Declared Per Share | $0.50 | $1.50 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7% for the three months ended September 30, 2008, compared to the same period in 2007, driven primarily by the completion of several Walgreens developments and land leases. For the nine-month period, revenues increased 5%.
- Net Income: Net income rose 6% for the quarter and 3% for the nine-month period compared to 2007. This growth was offset by higher interest expenses and general and administrative costs.
- Expense Increases:
- Interest Expense: Increased 8% for the quarter and 7% for the nine months due to increased borrowings to fund property development.
- General & Administrative: Increased 8% for the quarter and 11% for the nine months, largely due to higher compensation and stock-based awards.
- Depreciation: Increased 8% for the quarter and 7% for the nine months due to new properties placed in service.
- Debt Structure: On July 14, 2008, the Company obtained a $24.8 million term loan secured by seven retail properties. Proceeds were used to repay amounts outstanding under the Credit Facility. Total mortgage indebtedness stood at approximately $68.5 million, with a weighted average interest rate of 5.68%.
Outlook, Risks, and Contingencies
- Liquidity and Capital Resources: The Company maintains a $55 million Credit Facility and a $5 million Line of Credit. As of September 30, 2008, $26.5 million was outstanding under the Credit Facility and $2.7 million under the Line of Credit. Management believes cash flow from operations and available credit lines are sufficient to fund operations and dividends for the next 12 months.
- Development Pipeline: Three development projects and one redevelopment project were under construction as of September 30, 2008, expected to add 43,920 square feet. Estimated additional funding required is $5.6 million.
- Internal Control Weakness: Management identified a material weakness in internal controls over financial reporting. The Chief Financial Officer is the sole employee with significant knowledge of GAAP and controls the general ledger, reconciliation, and financial statement preparation, resulting in a lack of segregation of duties. Third-party consultants have been engaged to mitigate this risk.
- Market Risk: The Company is exposed to interest rate risk. A 100 basis point increase in interest rates on variable-rate debt would result in an annual increase in interest expense of approximately $540,000.
- Tenant Concentration: Approximately 67% of annualized base rent is derived from the top three tenants (Borders, Walgreens, Kmart), creating concentration risk.
Investor Verification Checklist
- Internal Controls: Verify the progress of remediation efforts regarding the material weakness in segregation of duties and financial reporting controls.
- Tenant Solvency: Monitor the financial health of major tenants, specifically Borders Group, Walgreen Co., and Kmart Corporation, given the high concentration of rental income.
- Debt Maturity and Rates: Review the terms of the $24.8 million term loan and the $55 million Credit Facility, noting the floating rate exposure (LIBOR + 150 bps) and upcoming maturities.
- Development Costs: Track the completion and cost overruns of the four projects currently under construction, which require an estimated $5.6 million in additional funding.
- Dividend Coverage: Confirm that Funds from Operations (FFO) continue to cover the declared dividend rate of $0.50 per share ($2.00 annualized).