ADC

Business Context and Reporting Period

Company: Agree Realty Corporation (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2003
Business Overview: The Company operates and expands a retail property business through Agree Limited Partnership. It holds 16 leases with Kmart Corporation, which accounted for 20% of Annual Base Rent as of December 31, 2002. Kmart filed for Chapter 11 reorganization, creating uncertainty regarding store closures and lease terms.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 13.8% ($850,000) driven by a 13% increase in minimum rents ($735,000) and a 17% increase in operating cost reimbursements ($110,000). Growth was attributed to rental increases on existing properties, acquisitions of joint venture interests, and new development.
• Expense Increases: Total operating expenses rose 13.1% ($344,000). Notable increases included property operating expenses (21% increase due to higher insurance and maintenance costs) and general and administrative expenses (17% increase due to compensation and property management costs).
• Interest Expense: Increased 7% ($106,000) to $1,584,105 due to increased borrowings for acquisitions and development.
• Investing Activities: Net cash used in investing activities surged to $8.3 million (compared to $339,000 in 2002) primarily due to $8.4 million in real estate acquisitions.
• Liquidity: Cash and cash equivalents decreased by $910,567 during the quarter, ending at $185,043.

Outlook, Risks, and Management Commentary

• Kmart Bankruptcy Risk: Kmart intends to close one of the Company's stores in Lakeland, Florida, in Q2 2003. This will result in the loss of approximately $489,000 in annual rent and $110,000 in operating cost reimbursements. Management estimates a 6-12 month vacancy period. Additionally, rent reductions totaling $300,000 annually were agreed upon for two other Kmart locations.
• Co-tenancy Clauses: The closure of the Lakeland Kmart may trigger co-tenancy clauses for other tenants in that center, potentially reducing their rent or allowing lease termination.
• Liquidity and Capital Resources: The Company maintains a $50 million Credit Facility (matured August 2003, extendable) with $36.8 million outstanding. A $5 million working capital line of credit matures April 30, 2003. Management intends to maintain a debt-to-market capitalization ratio of 65% or less, aiming to refinance short-term debt to lower this ratio to 50% or less over time.
• Dividends: A quarterly dividend of $0.48 per share was declared and paid on April 15, 2003.
• Interest Rate Risk: A 10% adverse change in interest rates on variable-rate debt would increase interest expense by approximately $109,000.

Investor Verification Checklist

• Kmart Closure Impact: Verify the actual date of the Lakeland, Florida store closure and the timeline for re-leasing the space.
• Co-tenancy Triggers: Monitor if other tenants in the Lakeland center exercise termination options or rent reduction clauses following the Kmart closure.
• Debt Maturities: Confirm the renewal status of the $5 million line of credit maturing April 30, 2003, and the $50 million Credit Facility maturing August 2003.
• Refinancing Strategy: Track progress on refinancing short-term construction and acquisition debt with long-term fixed-rate debt to stabilize interest costs.
• Occupancy Rates: Monitor overall occupancy rates and rental income trends in the Community Shopping Centers anchored by Kmart.