ADC

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, 2003
Business Overview: The Company operates and expands retail property assets, primarily community shopping centers. As of September 30, 2003, it held a 90.52% interest in its Operating Partnership. A significant portion of rental income (19%) is derived from 15 leases with Kmart Corporation.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14% year-over-year, driven by a 14% increase in minimum rents ($2.19M increase). This was due to rental increases on existing properties, acquisitions of joint venture interests, and new developments.
• Expense Increases: Property operating expenses rose 37% ($403K increase) primarily due to higher insurance costs ($185K) and maintenance costs ($179K). General and administrative expenses increased 14% due to compensation and property management costs.
• Debt Reduction: Total debt decreased significantly from $115.3M to $82.5M. In August 2003, the Company raised approximately $43.2M via a common stock offering to repay $37M in mortgages prior to maturity.
• One-Time Charges: The Company recorded a $961,334 charge for the early extinguishment of debt, comprising a $555,000 pre-payment penalty and $406,000 in written-off unamortized costs.
• Discontinued Operations: The Company sold a shopping center in Winter Garden, Florida, in October 2003 (subsequent event). Results for this property are classified as discontinued operations, contributing $422,671 to net income for the nine-month period.

Guidance, Outlook, and Risks

• Kmart Exposure: Kmart emerged from bankruptcy in May 2003 but closed one store on Company property in Lakeland, Florida (approx. $480K annual rent). Management estimates 9-12 months to re-let the space. Rent reductions of $300K annually were agreed upon for two other Kmart locations.
• Liquidity and Capital Resources: The Company maintains a $50M Credit Facility (matures 2009) with $39M outstanding as of September 30, 2003. A $5M line of credit is also available. Management intends to maintain a debt-to-market capitalization ratio of 65% or less, aiming to refinance to 50% or less over time.
• Dividends: A quarterly dividend of $0.485 per share was declared for the quarter ended September 30, 2003.
• Development: One development project is under construction, expected to complete in Q4 2003, requiring an additional $2.5M in funding.
• Market Risk: The Company is exposed to interest rate risk on variable-rate debt. A 10% adverse change in interest rates would increase interest expense by approximately $103,000.

Investor Verification Checklist

• Kmart Re-leasing: Verify the timeline and success of re-leasing the vacant Kmart anchor in Lakeland, Florida, and the impact of co-tenancy clauses on other tenants.
• Debt Refinancing: Monitor the Company's ability to refinance short-term construction and acquisition financing with long-term debt to meet the 50% debt-to-capitalization target.
• Operating Cost Pass-Through: Confirm that increases in property operating expenses (insurance, maintenance) are fully reimbursed by tenants as per lease agreements.
• Discontinued Operations: Review the final sale proceeds and tax implications of the Winter Garden, Florida property sale completed in October 2003.
• Cash Position: Note the low cash balance ($234K) relative to the $39M outstanding on the credit facility; verify reliance on the credit line for liquidity.