Agree Realty Corporation — Form 10-Q Summary
Business context and reporting period
Agree Realty Corporation is a self-managed REIT focused on owning, developing, acquiring and managing retail properties under long-term net leases to national tenants. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
- Portfolio: 85 properties in 20 states, approximately 3.8 million square feet, 91.1% leased, with approximately 12 years of weighted-average remaining lease term.
- Tenant concentration: approximately 87% of annualized base rent came from national tenants; Walgreens, Kmart and CVS/Caremark represented approximately 52% collectively.
- Shares outstanding at November 3, 2011: 9,851,914.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenues | $15.1 million | $8.8 million | $35.0 million | $26.5 million |
| Income from operations | $(2.9) million | $5.3 million | $8.1 million | $15.9 million |
| Net income attributable to Agree | $(1.8) million | $4.4 million | $6.4 million | $18.2 million |
| Basic EPS | $(0.19) | $0.46 | $0.67 | $2.03 |
| Funds from operations | $0.04 million | $6.0 million | $11.8 million | $18.0 million |
| Operating cash flow | Not separately reported | Not separately reported | $16.6 million | $18.3 million |
- Q3 revenue increased 72% year over year, primarily from acquisitions, rent increases and recognition of $5.7 million of deferred revenue related to a terminated Ann Arbor lease. Nine-month revenue increased 32%.
- Operating results were reduced by a $13.5 million real estate impairment charge, principally related to former Borders properties. The charge drove the Q3 operating loss and materially reduced nine-month earnings and FFO.
- Q3 included a $2.4 million gain on extinguishment of debt related to the release of the Lawrence, Kansas mortgage.
- Q3 dividend declared was $0.40 per share; nine-month dividends declared were $1.20 per share.
- Cash and cash equivalents were $0.9 million at September 30, 2011, versus $0.6 million at December 31, 2010.
Balance sheet, debt and liquidity
- Total assets were $282.0 million at September 30, 2011, compared with $285.0 million at December 31, 2010. Net real estate investments were $262.3 million.
- Total liabilities were $119.4 million and total stockholders’ equity was $162.6 million at September 30, 2011.
- Mortgages payable totaled $65.7 million, including $42.4 million of fixed-rate debt and $23.3 million of variable-rate mortgage debt. Notes payable totaled $43.4 million.
- Management reported indebtedness of approximately 33% of total market capitalization and stated that it expects to maintain adequate liquidity for operations and dividends for at least the next 12 months.
- Nine-month cash flow used in investing activities was $14.2 million, including $20.5 million for real estate acquisitions and $6.5 million of property-sale proceeds. Financing activities used $2.1 million after dividends, mortgage payments and credit-facility activity.
- In October 2011, the company replaced its maturing credit facilities with an $85 million unsecured revolving facility, expandable to $135 million. The facility matures in October 2014 and may be extended to October 2016 subject to conditions. As of October 26, 2011, $54 million was drawn at an anticipated rate of 185 basis points over LIBOR.
- An interest-rate swap effectively fixed $24.5 million of variable-rate borrowings at 3.744%; its September 30, 2011 liability was $0.8 million. A 100-basis-point increase in variable rates was estimated to increase annual interest expense by approximately $0.4 million.
Material changes, outlook and risks
- The most significant change was the impact of Borders’ Chapter 11 bankruptcy and liquidation. Six additional Borders stores closed or rejected leases during September 2011, leaving one Borders-leased property, the corporate headquarters, at approximately $0.8 million of annualized base rent.
- Five mortgaged former Borders properties were in default as of the filing date. The related non-recourse loans totaled approximately $14.7 million, while the properties had approximately $18.4 million of book value after $3.2 million of third-quarter impairments. Four loans were cross-defaulted and cross-collateralized.
- Management was negotiating with lenders and warned that unsuccessful restructuring could lead to foreclosure and loss of the properties. The filing provides no assurance that negotiations will have a favorable outcome.
- Two former Borders properties were under contract for an aggregate $4.6 million, subject to due diligence and customary closing conditions; completion was not assured.
- Management expected to continue acquisitions and pre-leased developments, initially financed through the new revolving facility, with possible later refinancing through long-term debt or equity.
- No formal earnings or FFO guidance was provided. Management stated that no additional development-fee projects were currently anticipated.
- Key ongoing risks include tenant bankruptcies and vacancies, property re-leasing, debt maturities and defaults, interest-rate changes, refinancing availability, covenant compliance and real estate valuation assumptions.
Important facts for investors to verify
- Resolution of the five Borders-related mortgage defaults, including any foreclosure, restructuring, deficiency or cross-default consequences.
- Whether the two former Borders property sales close and the amount of proceeds realized.
- Sustainability of recurring rental income after the $5.7 million deferred-revenue recognition and continued Borders-related rent reductions and vacancies.
- Availability under, borrowing costs and covenant compliance for the new $85 million revolving credit facility.
- Portfolio occupancy, tenant concentration and the ability to re-lease former Borders locations.
- Cash available for dividends relative to operating cash flow, recurring FFO and scheduled debt service.