Agree Realty Corporation — Form 10-Q Summary
Business context and reporting period
Agree Realty Corporation is a self-managed REIT focused on owning, developing, acquiring and managing retail properties primarily leased to national tenants under net leases. This unaudited report covers the three and six months ended June 30, 2011, with comparisons to the corresponding 2010 periods.
At June 30, 2011, the portfolio consisted of 81 properties in 17 states totaling approximately 3.8 million square feet, with aggregate occupancy of 96.6% and approximately 11 years of weighted-average remaining lease term. National tenants generated approximately 87% of annualized base rent; Walgreens, Kmart and Borders represented approximately 34%, 11% and 9%, respectively.
Key financial metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Total revenue | $9.606 million | $8.759 million | $19.851 million | $17.736 million |
| Income from operations | $5.030 million | $5.214 million | $10.943 million | $10.614 million |
| Operating margin | 52.4% | 59.5% | 55.1% | 59.8% |
| Net income | $3.823 million | $4.431 million | $8.523 million | $14.400 million |
| Net income attributable to Agree | $3.693 million | $4.291 million | $8.233 million | $13.857 million |
| Diluted EPS | $0.38 | $0.46 | $0.85 | $1.59 |
| FFO | $5.431 million | $5.899 million | $11.749 million | $11.955 million |
| Dividend declared per share | $0.40 | $0.51 | $0.80 | $1.02 |
| Cash flow from operations | Not applicable | Not applicable | $11.307 million | $10.950 million |
At June 30, 2011, total assets were $281.4 million, net real estate investments were $266.6 million, cash and cash equivalents were $851,857, and total stockholders’ equity was $168.2 million. Mortgages payable totaled $68.8 million and notes payable totaled $27.3 million. The reported debt-to-total-market-capitalization ratio was approximately 30%.
Material changes versus the prior comparable period
- Second-quarter revenue increased 9.7%, primarily from property acquisitions, completed developments and higher operating cost reimbursements. Six-month revenue increased 11.9%.
- Second-quarter net income declined 13.7%, and six-month net income declined 40.8%, mainly because 2010 included a $5.328 million gain on the sale of a Borders property and higher discontinued-operation income.
- Six-month income from operations increased 3.1%, but operating margins declined because real estate taxes, property expenses, land lease payments, general and administrative costs, depreciation and amortization increased.
- General and administrative expense increased 27% in the quarter and 21% for the six months, including higher employee, legal and taxable REIT subsidiary costs.
- FFO declined 7.9% in the quarter and 1.7% for the six months, despite higher rental revenue.
- Five Borders stores were closed and leases rejected in April 2011. Borders-related rental reductions and closures reduced rental revenue by approximately $540,000 in the quarter and $955,000 for the six months versus the comparable periods.
- The Company acquired two retail assets during 2011 for approximately $4.7 million and sold two Borders stores in January 2011 for approximately $6.5 million.
Cash flow, debt and liquidity
- Operating cash flow increased to $11.307 million for the six months. Investing activities provided $2.262 million, including $6.523 million of property-sale proceeds, while financing activities used $13.311 million, including $9.236 million of dividends and distributions.
- The $55 million credit facility had $26.0 million outstanding at June 30, 2011 at a weighted-average rate of 1.23%, leaving approximately $29 million of stated capacity. The $5 million line of credit had $1.329 million outstanding at 2.50%.
- Both credit facilities matured in November 2011, and the Company was negotiating extensions or replacement facilities. Management expected higher interest-rate spreads on replacement facilities.
- Six Borders-related mortgage loans were in default or subject to default-related actions. The aggregate principal balance was approximately $17.1 million, secured by properties with a reported net book value plus accumulated depreciation of approximately $24.1 million.
- The four cross-defaulted and cross-collateralized loans had approximately $9.2 million outstanding. On August 2, 2011, the lender declared those loans in default and accelerated the obligations; default interest could be up to the applicable 6.20% rate plus 500 basis points, subject to legal limits.
- Management was negotiating with lenders and warned that failure to restructure the loans could result in foreclosure and loss of the mortgaged properties.
- An interest-rate swap effectively fixed $24.5 million of variable-rate borrowings at 3.744% through July 2013. The swap liability was $780,871 at June 30, 2011. Management estimated that a 100-basis-point increase in variable rates would increase annual interest expense by approximately $273,000.
Outlook, commentary, risks and unusual items
Management stated that operating cash flow and available credit were expected to fund operations and dividends for at least the next 12 months, but no formal earnings or FFO guidance was provided. The Company planned to continue acquiring and developing pre-leased retail properties and to refinance short-term acquisition and construction financing with longer-term debt or equity when available.
Borders received approval in July 2011 to liquidate its assets and leases, with the liquidation expected to conclude by September 2011. At June 30, 2011, Borders accounted for approximately $3.2 million, or 9%, of annualized base rent, excluding two subleases assigned to the Company effective July 1, 2011. Management expected additional store closures to negatively affect operating results and was marketing affected properties for re-tenanting or disposition.
Key risks include tenant concentration, Borders’ liquidation and potential vacancies, mortgage defaults and foreclosure, cross-default exposure, refinancing risk from the November 2011 credit-facility maturities, interest-rate risk, economic and real estate market conditions, and the ability to fund dividends and planned acquisitions. The filing states that internal controls were effective and that no material litigation was pending beyond ordinary-course matters.
Investor verification checklist
- Verify the status and ultimate restructuring, repayment or foreclosure outcome of the six Borders-related mortgage loans and the four accelerated cross-defaulted loans.
- Verify whether the $55 million credit facility and $5 million line of credit were extended or replaced after their November 2011 maturities, and assess the resulting interest-rate spreads and liquidity.
- Track Borders lease rejections, re-tenanting, vacancy periods, rent concessions and any impairment charges or changes in annualized base rent.
- Reconcile reported FFO and dividend levels with recurring property cash flow, particularly after excluding development fees, property sales and other non-recurring items.
- Review tenant concentration, portfolio occupancy, lease expirations and exposure to Walgreens, Kmart and other major tenants.
- Confirm the subsequent impact of the July 2011 Borders liquidation and any related events occurring after the filing date.