ADC

Business Context and Reporting Period

Company: Agree Realty Corporation (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2004
Overview: The Company operates and expands retail properties, primarily community shopping centers. As of March 31, 2004, the Company held a 90.57% interest in Agree Limited Partnership. The portfolio includes 14 leases with Kmart Corporation, representing 16.8% of annual base rent. The Company sold a shopping center in Winter Garden, Florida, in October 2003, which is reported as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 8.3% to $7.25 million. Minimum rents rose 7.4% ($439,000) driven by acquisitions and joint venture buyouts, partially offset by a 41% decrease in percentage rents.
• Profitability: Net income increased 29% to $2.90 million. Income from continuing operations rose 33% to $3.20 million, primarily due to increased rental income and a 30% reduction in interest expense.
• Interest Expense: Decreased significantly from $1.58 million to $1.10 million due to reduced borrowings following the August 2003 equity offering.
• Operating Expenses: Total operating expenses increased 8% to $3.04 million. Property operating expenses rose 14% largely due to increased snow removal costs ($93,000 increase).
• Discontinued Operations: Q1 2003 included $150,538 of income from discontinued operations (Winter Garden property), whereas Q1 2004 had none.

Outlook, Risks, and Management Commentary

• Kmart Exposure: The Company has 14 leases with Kmart. One Kmart store in Lakeland, Florida, closed in April 2003. The Company has leased the space to a department store, with rent commencement expected in October 2004, requiring approximately $600,000 in capital expenditures. A rent reduction of $150,000 per year was agreed upon for a Kmart store in Perrysburg, Ohio.
• Liquidity and Capital Resources: The Company maintains a $50 million credit facility (matures Nov 2006) with $24 million outstanding and a $5 million line of credit (matures June 2004) with $2.9 million outstanding. Cash flow from operations is expected to fund short-term needs and dividends.
• Debt Policy: The Company targets a debt-to-market capitalization ratio of 65% or less, intending to refinance short-term debt to lower this ratio to 50% or less over time.
• Development: One development project adding 13,650 sq. ft. is under construction, expected to complete in Q4 2004, requiring an additional $2.2 million in funding.
• Risks: Key risks include the performance of acquisition/development projects, financing availability, interest rate volatility, and the potential loss or bankruptcy of major tenants (specifically Kmart).

Investor Verification Checklist

• Kmart Lease Status: Verify the execution of the new lease for the Lakeland, Florida property and the timeline for rent commencement (expected Oct 2004).
• Co-Tenancy Clauses: Monitor if tenants in the Lakeland center exercise termination options due to the Kmart closure.
• Debt Maturities: Review the $5 million line of credit maturing June 30, 2004, and confirm renewal terms.
• Capital Expenditures: Track the $600,000 capital spend required for the Lakeland re-letting and the $2.2 million needed for the new development project.
• Interest Rate Sensitivity: Assess the impact of a 10% adverse change in interest rates on variable debt, estimated to increase interest expense by $75,000.