Business Context and Reporting Period
Company: Agree Realty Corporation (REIT)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010
Business Overview: Agree Realty is a self-administered REIT focused on owning, developing, and managing retail properties net-leased to national tenants. As of March 31, 2010, the portfolio consisted of 72 properties (60 freestanding, 12 community centers) totaling approximately 3.5 million square feet, with a 98.1% occupancy rate. Top tenants include Walgreen Co. (31%), Borders Group, Inc. (27%), and Kmart Corporation (11%).
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $9,522,332 | $9,060,712 |
| Net Income (Total) | $9,968,480 | $4,317,065 |
| Net Income (Attributable to Agree Realty) | $9,566,088 | $4,010,646 |
| Earnings Per Share (Diluted) | $1.18 | $0.52 |
| Funds from Operations (FFO) | $6,056,613 | $5,694,407 |
| Operating Cash Flow | $5,072,378 | $5,456,334 |
| Total Debt (Mortgages + Notes) | $104,368,443 | $104,552,802 |
| Cash and Cash Equivalents | $565,298 | $688,675 |
| Restricted Cash | $9,772,416 | $0 |
Material Changes vs. Prior Period
- Net Income Surge: Net income attributable to the company increased 138% to $9.6 million, primarily driven by a one-time $5.33 million gain on the sale of a Borders Group property in Santa Barbara, California.
- Revenue Growth: Total revenues increased 5% to $9.5 million. Minimum rents rose 1% due to new developments (Walgreens, Chase), partially offset by the closure of a Circuit City store. Development fee income of $397,000 was recognized in 2010, compared to none in 2009.
- Expense Trends: Interest expense increased 13% to $1.27 million due to funding for five properties developed in 2009. Property operating expenses decreased 14% largely due to lower snow removal costs.
- Liquidity: Operating cash flow decreased slightly by $384,000. Investing cash outflows decreased significantly as property acquisition spending dropped from $1.24 million in 2009 to $235,000 in 2010.
Outlook, Risks, and Unusual Items
- Subsequent Event (Equity Raise): On April 16, 2010, the company completed a secondary offering of 1,495,000 shares, raising approximately $31.1 million. Proceeds were used to pay down credit facilities.
- Dividends: A quarterly dividend of $0.51 per share was declared for the period, an increase from $0.50 in the prior year.
- Debt Management: The company maintains a target debt-to-market capitalization ratio of 65% or less; the ratio was approximately 53% as of March 31, 2010. A $55 million credit facility and a $5 million line of credit are available for acquisitions and development.
- Risks: Management highlights risks related to the ongoing U.S. recession, global credit crisis, tenant bankruptcy (specifically noting Borders Group as a major tenant), and interest rate volatility. An interest rate swap hedges $24.5 million of variable-rate debt.
- Unusual Items: The significant gain on the sale of the Borders property is classified as discontinued operations and is not indicative of recurring operating performance.
Investor Verification Checklist
- Discontinued Operations: Verify the impact of the $5.33 million gain on the Borders property sale on Net Income vs. Funds from Operations (FFO).
- Tenant Concentration: Assess the risk exposure given that 69% of annualized base rent comes from the top three tenants (Walgreens, Borders, Kmart), with Borders facing significant financial distress at the time.
- Capital Structure: Confirm the utilization of the $31.1 million equity raise proceeds to reduce the $29.8 million outstanding on notes payable and credit facilities.
- Restricted Cash: Investigate the $9.77 million in restricted cash held in escrow for real estate acquisitions and the timeline for deployment.
- Lease Expirations: Review the 30 leases expiring between 2010 and 2011 representing $1.8 million in annualized base rent.