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, 2010
Business Overview: A self-administered REIT focused on owning, developing, and managing retail properties net-leased to national tenants. As of September 30, 2010, the portfolio consisted of 76 properties (64 freestanding, 12 shopping centers) totaling approximately 3.5 million square feet, with a 99.2% occupancy rate.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 |
Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenues | $9,287,767 | $27,968,020 |
| Net Income (Consolidated) | $4,540,568 | $18,940,508 |
| Net Income Attributable to Agree Realty | $4,391,608 | $18,249,095 |
| Earnings Per Share (Diluted) | $0.46 | $2.02 |
| Funds from Operations (FFO) | $6,019,613 | $17,975,012 |
| Cash Flow from Operations | N/A | $18,304,095 |
| Total Debt (Mortgages + Notes) | $80,456,772 | $80,456,772 |
| Cash and Cash Equivalents | $336,934 | $336,934 |
Note: Total Debt includes $72,559,375 in Mortgages Payable and $7,897,397 in Notes Payable as of September 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 2% for the nine months ended September 30, 2010, compared to the prior year. This was driven by new developments (Walgreens, Chase) and acquisitions (CVS), offset by the closure of a Circuit City store.
- Net Income Surge: Consolidated net income increased 41% ($5.5 million) for the nine-month period. This increase was primarily due to a one-time gain of $5,328,333 on the sale of a Borders property in Santa Barbara, California, classified as discontinued operations.
- Quarterly Performance: For the three months ended September 30, 2010, net income decreased slightly by 1% ($65,000) compared to the prior year quarter, as the gain on sale occurred in Q1 2010.
- Expense Trends: General and administrative expenses increased 8% year-over-year for the nine-month period due to higher employee costs and income tax expenses in taxable REIT subsidiaries (TRS). Interest expense increased 2% due to funding for property development.
Guidance, Outlook, and Risks
- Capital Strategy: The Company intends to maintain a debt-to-market capitalization ratio of 65% or less; the ratio was approximately 32% as of September 30, 2010. Liquidity is supported by a $55 million Credit Facility and a $5 million Line of Credit.
- Dividends: A quarterly dividend of $0.51 per share was declared for the quarter ended September 30, 2010.
- Subsequent Events: Following the reporting period, the Company disposed of a property in Ocala, Florida, and terminated a lease in Aventura, Florida, resulting in an aggregate net loss of approximately $600,000.
- Risk Factors: Key risks include the ongoing U.S. recession, global credit crisis, tenant bankruptcy (specifically noting high concentration with Borders at 27% of rent), and interest rate volatility. The Company utilizes an interest rate swap to hedge $24.5 million of variable-rate debt.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $5.3 million one-time gain on the Borders property sale from the nine-month net income.
- Tenant Concentration: Assess the risk exposure to top tenants, specifically Borders Group (27% of annualized base rent) and Walgreen Co. (29%), given the retail sector's volatility.
- Debt Maturities: Review the debt schedule, noting a significant balloon payment of approximately $22.3 million due on July 14, 2013, on a variable-rate mortgage.
- Subsequent Losses: Confirm the financial impact of the $600,000 net loss from transactions occurring after September 30, 2010.
- Development Pipeline: Evaluate the capital requirements for the 18 leases scheduled to expire between October 2010 and December 2011 and the Company's ability to re-lease or renew.