ADC

Business Context and Reporting Period

Company: Agree Realty Corporation (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 1999
Business Overview: The Company operates and expands a retail property business through its Operating Partnership, Agree Limited Partnership. As of June 30, 1999, the Company held an 86.63% interest in the Operating Partnership. The portfolio consists of retail shopping centers, with three development projects under construction expected to add 68,000 square feet by the fourth quarter of 1999.

Key Financial Metrics

Note: Total Debt calculated as Mortgage Payable ($53,530,848) + Construction Loans ($12,702,599) + Notes Payable ($23,658,232).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14% to $10.76 million, driven by a 14% increase in rental income ($9.51 million) due to the acquisition and development of five properties in 1998 and one in 1999.
• Expense Increases:
  • Real estate taxes rose 17% to $844,000 due to new properties.
  • Property operating expenses increased 26% to $662,000, primarily due to a $121,000 increase in snow removal costs.
  • General and administrative expenses rose 23% to $671,000, attributed to higher compensation and state/local taxes.
  • Interest expense increased 14% to $2.78 million due to additional borrowing for acquisitions and development.
• Liquidity Position: Cash and cash equivalents decreased significantly from $994,159 at year-end 1998 to $13,721 at June 30, 1999. This was driven by a net decrease in cash of $980,438, resulting from heavy investing activities ($5.4 million used for real estate acquisitions) and financing activities ($1.5 million used).
• Debt Structure: The Company secured $12.39 million in new mortgage financing and $8.59 million in new construction loans during the period, while reducing line-of-credit borrowings by $11.5 million.

Guidance, Outlook, and Risks

• Outlook: Management expects the completion of three development projects in Q4 1999 to positively impact cash flow and FFO. The Company intends to maintain a total debt-to-market capitalization ratio of 65% or less, with a target of 50% or less after refinancing short-term debt.
• Dividends: A quarterly dividend of $0.46 per share was declared and paid on July 15, 1999.
• Financing Strategy: The Company plans to refinance short-term construction and acquisition financing with long-term debt or equity. It currently has a $50 million Credit Facility (with $23.16 million outstanding) and a $5 million Line of Credit (with $0.5 million outstanding).
• Risks:
  • Interest Rate Risk: The Company has variable rate debt (Notes Payable). A 10% adverse change in interest rates would increase annual interest expense by approximately $161,000.
  • Year 2000 Compliance: While internal systems are compliant, the Company faces potential operational risks if major tenants, vendors, or banks fail to achieve Y2K compliance.
  • Tenant Concentration: Risk of loss or bankruptcy of major retail tenants affecting income.

Investor Verification Checklist

• Cash Position: Verify the sustainability of operations given the cash balance dropped to $13,721, relying heavily on the $50 million Credit Facility for liquidity.
• Debt Maturities: Review the scheduled annual maturities of mortgages payable (starting with $1.22 million in 2000) and the maturity of the $5 million Line of Credit in October 1999.
• Development Costs: Confirm the $6.5 million additional funding required for the three projects under construction and the source of these funds.
• FFO vs. Net Income: Note that FFO ($5.96 million) is significantly higher than Net Income ($3.35 million) due to the exclusion of depreciation and amortization, a standard metric for REIT performance.
• Variable Rate Exposure: Assess the impact of rising LIBOR rates on the $23.66 million Notes Payable and construction loans.