ADC

Business Context and Reporting Period

Company: Agree Realty Corporation (AGREE)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Quarter and six months ended June 30, 2007

Business Overview: Agree Realty is a self-administered REIT focused on developing, acquiring, and managing retail properties net-leased to national tenants. As of June 30, 2007, the portfolio consisted of 61 properties (49 freestanding, 12 community shopping centers) totaling approximately 3.4 million square feet, with a 99.7% occupancy rate. Approximately 89% of annualized base rent is derived from national tenants, with the top three tenants (Borders, Walgreen, and Kmart) accounting for 67% of rent.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.4% year-over-year. Minimum rents rose $367,000 (2.4%) due to the development of a Walgreens at Capital Plaza Shopping Center and the acquisition of a Rite Aid Drug Store in late 2006.
• Expense Management: General and administrative expenses decreased 5% to $1.97 million, driven by reduced legal, auditing, and property-related expenses, partially offset by higher compensation costs. Land lease payments decreased 13% following the purchase of the fee interest in a Lawrence, Kansas property.
• Profitability: Net income increased 5.2% to $7.21 million. Income from operations grew 4.3% to $10.16 million.
• Capital Expenditures: Investing activities showed a significant increase in cash used for real estate acquisitions ($6.03 million in 2007 vs. $0.53 million in 2006).
• Liquidity: Cash and cash equivalents decreased by $302,096 during the six-month period, primarily due to capital expenditures and dividend payments, partially offset by net borrowings of $5.7 million under the line of credit.

Guidance, Outlook, and Risks

• Dividends: A quarterly dividend of $0.49 per share was declared for the quarter ended June 30, 2007, paid on July 12, 2007.
• Development Pipeline: Three development projects are under construction, expected to add 43,290 square feet of GLA by Q1 2008. Estimated additional funding required is $6.47 million, to be funded via the Credit Facility.
• Debt Policy: The company intends to maintain a ratio of total debt to total market capitalization of 65% or less. As of June 30, 2007, total mortgage indebtedness was $47.1 million (fixed rate, avg 6.64%), with $26.2 million in variable rate notes outstanding.
• Internal Controls: Management identified a material weakness in internal controls over financial reporting. The Chief Financial Officer is the sole employee with significant GAAP knowledge and handles all aspects of financial reporting, lacking segregation of duties. Consequently, disclosure controls and procedures were deemed not effective.
• Market Risk: The company is exposed to interest rate risk. A 10% adverse change in interest rates on variable-rate debt would increase interest expense by approximately $168,000.

Investor Verification Checklist

• Tenant Concentration: Verify the financial health of the top three tenants (Borders, Walgreen, Kmart), which collectively represent 67% of annualized base rent.
• Internal Control Remediation: Monitor progress on remedying the material weakness regarding segregation of duties in financial reporting.
• Debt Maturity Profile: Review the $26.2 million in variable-rate notes and the $50 million Credit Facility maturing in 2009 to assess refinancing risks.
• Development Execution: Track the completion and leasing status of the three projects under construction scheduled for completion in late 2007/early 2008.
• Liquidity Position: Note the low cash balance ($161,634) relative to operating needs and reliance on credit facilities for working capital and development funding.