Business Context and Reporting Period
Company: Agree Realty Corporation (AGREE REALTY CORP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Agree Realty is a fully-integrated, self-administered, and self-managed Real Estate Investment Trust (REIT) focused on the ownership, development, acquisition, and management of retail properties net-leased to national tenants. As of December 31, 2009, the portfolio consisted of 73 properties (61 freestanding and 12 community shopping centers) totaling approximately 3.5 million square feet of gross leasable area (GLA) across 16 states, primarily in Michigan. The portfolio was 98.1% leased with a weighted average remaining lease term of 10.3 years.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenue | $37,260,246 | $35,653,529 |
| Net Income | $17,994,036 | $16,282,038 |
| Net Income Attributable to Agree Realty | $17,043,990 | $15,017,427 |
| Funds from Operations (FFO) | $23,634,097 | $21,598,200 |
| Diluted Earnings Per Share | $2.14 | $1.95 |
| Cash Dividends Declared Per Share | $2.02 | $2.00 |
| Total Debt (Mortgages + Notes) | $104,552,802 | $100,568,697 |
| Cash and Cash Equivalents | $688,675 | $668,677 |
| Debt to Market Capitalization Ratio | 52.5% | 65.0% |
Material Changes Versus Prior Period
- Revenue Growth: Total revenue increased by 4.5% ($1.6 million) to $37.3 million. This was driven by the development of new properties (primarily Walgreen drug stores and a Chase bank branch) which added approximately $1.7 million in revenue, partially offset by a $569,000 decrease due to the closing of a Circuit City store.
- Net Income Increase: Net income rose 10.5% to $18.0 million. Key drivers included increased rental income from new developments and a significant decrease in interest expense ($544,000 or 11%) due to lower interest rates in 2009.
- Expense Management: Property operating expenses decreased by 14% ($247,000) due to lower snow removal and maintenance costs. However, General and Administrative expenses increased by 5% ($198,000) due to dead deal costs and compensation expenses.
- Portfolio Expansion: The company completed five new developments in 2009 (four Walgreens and one Chase bank) and commenced three additional Walgreen developments. No acquisitions or property sales occurred in 2009.
Guidance, Outlook, Risks, and Contingencies
Outlook and Strategy: Management intends to continue growing the asset base primarily through the development of retail properties pre-leased to national tenants. The company aims to maintain a debt-to-market capitalization ratio of 65% or less. Current market conditions have severely limited the availability of new financing, which may impact the ability to obtain construction financing for planned projects in the near term.
Key Risks:
- Tenant Concentration: Approximately 70% of annualized base rent is derived from three major tenants: Walgreen (30%), Borders Group (29%), and Kmart (11%). The filing explicitly notes that Borders reported a net loss of $187 million in 2008, and the loss of any of these tenants would have a material adverse effect.
- Economic Conditions: The global economic and financial crisis has tightened credit markets and reduced consumer spending, increasing the risk of tenant defaults and bankruptcy.
- Geographic Concentration: 42 of the 73 properties (57%) are located in Michigan, exposing the company to regional economic downturns.
- Financing Risk: The company relies on credit facilities for development funding. Lenders may fail to honor commitments due to market volatility.
Unusual Items: The company earned $410,000 in development fee income in 2009 related to a project in Oakland, California, which was not present in 2008.
Important Facts for Investor Verification
- Borders Group Financial Health: Verify the current financial status and bankruptcy risk of Borders Group, which accounts for 29% of annualized base rent and reported a significant loss in 2008.
- Lease Expirations: Review the lease expiration schedule; 5.3% of GLA and 3.0% of annualized base rent expire in 2010, with a significant portion (22.4% of GLA) expiring in 2015.
- Debt Maturities: Confirm refinancing plans for the $24.2 million variable-rate mortgage maturing in July 2013 and the $29 million credit facility maturing in November 2011.
- Development Pipeline: Assess the status of the three development projects under construction (Ann Arbor, St. Augustine Shores, Atlantic Beach) and the estimated $7.5 million funding required to complete them.
- REIT Compliance: Monitor the company's ability to maintain REIT status, which requires distributing at least 90% of taxable income, particularly given the concentration of income from a few tenants.