Business Context and Reporting Period
Company: Agree Realty Corporation (REIT)
Reporting Period: Quarter and six months ended June 30, 2008
Business Overview: A self-administered REIT focused on owning, developing, and managing retail properties net-leased to national tenants. As of June 30, 2008, the portfolio consisted of 67 properties (55 freestanding, 12 shopping centers) totaling approximately 3.4 million square feet, with 99.3% occupancy. Top tenants include Borders Group (30%), Walgreen Co. (25%), and Kmart Corporation (12%).
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $8,789,101 | $17,556,856 |
| Net Income | $3,766,458 | $7,345,410 |
| Earnings Per Share (Diluted) | $0.49 | $0.96 |
| Funds from Operations (FFO) | $5,420,445 | $10,586,218 |
| Net Cash Provided by Operating Activities | N/A | $10,616,741 |
| Cash and Cash Equivalents | $180,737 | $180,737 |
| Total Debt (Mortgages + Notes) | $92,157,947 | $92,157,947 |
| Dividend Declared Per Share | $0.50 | $1.00 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 5% for the six months ended June 30, 2008, compared to the same period in 2007. This was driven by the completion of several development projects (including Walgreens locations) which added approximately $893,000 in revenue, partially offset by redevelopment activities at a shopping center in Big Rapids, Michigan.
- Expense Increases: General and administrative expenses rose 13% year-over-year for the six-month period, primarily due to increased compensation and stock awards. Interest expense increased 7% due to higher borrowings to fund property development.
- Net Income: Net income increased 2% for the six-month period to $7.35 million, reflecting the revenue growth from new developments outweighing the increase in operating and interest expenses.
- Debt Structure: Notes payable increased from $36.8 million to $47.75 million, reflecting increased utilization of the Credit Facility and Line of Credit to fund acquisitions and development.
Outlook, Risks, and Unusual Items
- Liquidity and Capital Resources: The company maintains a $55 million Credit Facility and a $5 million Line of Credit. As of June 30, 2008, the debt-to-market capitalization ratio was approximately 49%, well below the 65% target. Management believes cash flow from operations and existing credit facilities are sufficient to meet obligations for the next 12 months.
- Subsequent Event: In July 2008, the company secured a $24.8 million term loan collateralized by seven retail properties. Proceeds were used to pay down amounts outstanding under the Credit Facility.
- Internal Controls: Management identified a material weakness in internal controls over financial reporting as of December 31, 2007, which persisted through June 30, 2008. The weakness involves a lack of segregation of duties, with the CFO being the sole employee with significant GAAP knowledge and control over the general ledger. Independent consultants have been engaged to mitigate this risk.
- Risk Factors: Key risks include concentration of tenants (top three tenants represent 67% of rent), interest rate volatility on variable-rate debt, and the potential failure of development projects to perform as expected.
Investor Verification Checklist
- Tenant Concentration: Verify the financial health of top tenants (Borders, Walgreens, Kmart), as they represent the majority of rental income.
- Internal Control Remediation: Monitor progress on fixing the material weakness regarding segregation of duties in financial reporting.
- Debt Maturity and Rates: Review the terms of the new $24.8 million term loan and the variable-rate exposure on the remaining $47.75 million in notes payable.
- Development Pipeline: Assess the completion status and funding requirements for the three development projects under construction (estimated $5.65 million remaining).
- Dividend Coverage: Confirm that FFO continues to cover the quarterly dividend of $0.50 per share.