ADC

Agree Realty Corporation (AGREE) - 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2010. Agree Realty Corporation is a self-administered and self-managed Real Estate Investment Trust (REIT) focused on the ownership, development, and management of retail properties net-leased to national tenants. As of June 30, 2010, the portfolio consisted of 74 properties (62 freestanding, 12 community shopping centers) totaling approximately 3.5 million square feet, with a 99.2% occupancy rate. Top tenants include Walgreen Co. (29%), Borders Group, Inc. (27%), and Kmart Corporation (11%).

Key Financial Metrics

Note: Net Income for the six months ended June 30, 2010 includes a one-time gain of $5,328,333 from the sale of a discontinued asset.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 4.5% year-over-year, driven by new developments (Walgreens, Chase) and acquisitions (CVS), partially offset by the closure of a Circuit City store.
• Profitability: Net income attributable to the company increased 68% ($13.86M vs $8.25M). This surge is primarily due to a $5.33 million gain on the sale of a Borders property in Santa Barbara, California, classified as discontinued operations.
• Operating Expenses: General and administrative expenses increased 9% ($2.45M vs $2.25M) due to increased "chasing costs" for Florida properties and income tax expenses in taxable REIT subsidiaries (TRS).
• Debt Reduction: Total indebtedness decreased significantly from $104.6M to $75.3M. The company utilized proceeds from a secondary common stock offering ($31.1M) to pay down amounts outstanding under its credit facilities.
• Dividends: Dividends declared per share increased to $1.02 for the six-month period compared to $1.00 in the prior year.

Guidance, Outlook, and Risks

• Capital Strategy: The company intends to maintain a debt-to-market capitalization ratio of 65% or less (currently approx. 32%). Liquidity is supported by operating cash flows, a $55 million Credit Facility (currently $0 outstanding), and a $5 million Line of Credit ($1.7M outstanding).
• Development Focus: Management continues to prioritize development of pre-leased properties over acquisitions, believing it yields higher returns. 82.7% of annualized base rent is derived from developed properties.
• Risk Factors: Key risks include the ongoing U.S. recession, global credit crisis, inability to obtain financing, interest rate volatility, and the potential bankruptcy of major tenants (specifically noted regarding Borders Group, Inc.).
• Discontinued Operations: The company sold a Borders property in March 2010 and has classified another single-tenant property in Ocala, Florida, as "held for sale."

Investor Verification Checklist

• Gain on Sale Impact: Verify the sustainability of earnings by excluding the $5.33M one-time gain from the Borders property sale when assessing core operational performance.
• Tenant Concentration: Assess the risk exposure to Borders Group, Inc. (27% of rent), given the company's recent sale of a Borders property and the tenant's known financial distress.
• Debt Maturity: Review the maturity schedule of the $23.9M variable-rate mortgage (maturing July 2013) and the effectiveness of the interest rate swap hedging $24.5M of that debt.
• Development Pipeline: Confirm the status of "Property under development" ($9.7M) and the timeline for capitalizing these assets into revenue-generating properties.
• FFO vs. Net Income: Compare Funds from Operations ($11.96M) against Net Income to understand the impact of depreciation and non-cash items on the company's cash-generating ability.