ADC

Business Context and Reporting Period

Company: Agree Realty Corporation (REIT)
Reporting Period: Fiscal year ended December 31, 1997
Business Overview: Agree Realty is a self-administered REIT that develops, acquires, and operates retail properties leased primarily to national and regional retailers under net leases. As of December 31, 1997, the portfolio consisted of 34 properties (13 shopping centers and 21 free-standing) totaling approximately 3.1 million square feet of gross leasable area (GLA) across 12 states. The portfolio was 98% leased, with 93% of base rental income derived from national and regional tenants.

Key Financial Metrics

Note: Total Debt includes Mortgages Payable ($50.95M), Construction Loans ($5.58M), and Notes Payable ($8.64M).

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 12% to $18.2 million, driven by a 12% increase in rental income ($16.2 million) due to the development and acquisition of five properties in 1996.
• Profitability: Net income increased 40% to $5.2 million. Income before minority interest rose $1.5 million, primarily due to reduced interest expense.
• Interest Expense: Decreased 9% to $5.55 million. This reduction resulted from using proceeds of a $31.9 million equity offering in May/June 1997 to repay outstanding indebtedness.
• Operating Expenses: Real estate taxes increased 20% due to new properties, while property operating expenses decreased 5% due to lower snow removal and utility costs.
• Development Income: Development fee income dropped significantly to $57,000 from $509,000 in 1996 as the company completed development of four joint venture properties in the prior year.

Guidance, Outlook, and Risks

Outlook and Strategy:

• Growth: The company completed two properties in late 1997 and has one project under construction (expected Q2 1998 completion). Two additional projects in Tulsa, OK, and Pontiac, MI, are planned with a budgeted cost of $7.4 million.
• Capital Structure: Management intends to maintain a debt-to-market capitalization ratio of 65% or less, with a target of 50% or less after refinancing short-term construction debt. As of year-end, the ratio was 38%.
• Liquidity: The company maintains a $50 million Credit Facility (matures 2000) and a $5 million Line of Credit (matures 1998) to fund acquisitions and development.

Risks and Contingencies:

• Tenant Concentration: The top five tenants (Kmart, Borders, Roundy's, Walgreen, Fashion Bug) represented 73% of base rental income. Kmart alone accounted for 31% of income and 38% of future minimum rentals.
• Joint Venture Leases: Seven joint venture properties leased to Borders have initial terms expiring in November 2000. Future rent levels depend on refinancing or purchase options exercised by Borders.
• Environmental: While Phase I studies revealed no hazardous substances, the company carries no insurance for environmental liabilities.
• Year 2000: Management believes Year 2000 compliance costs will be immaterial.

Investor Verification Checklist

• Debt Maturities: Verify the refinancing plan for the $8.4 million mortgage maturing in 1999 and the $50 million Credit Facility maturing in 2000.
• Borders Joint Ventures: Confirm the status of the seven Borders joint ventures and the likelihood of lease extensions or refinancing prior to the November 2000 expiration.
• Kmart Exposure: Assess the financial health of Kmart, given it represents 31% of current rental income.
• Development Pipeline: Monitor the completion and leasing status of the Pontiac, MI, and Tulsa, OK, projects to ensure projected FFO growth.
• Dividend Sustainability: Review cash flow from operations against the $1.82 per share dividend payout to ensure REIT distribution requirements are met without excessive leverage.