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ADC > SEC Filings for ADC > Form 10-Q on 3-May-2013All Recent SEC Filings

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Quarterly Report


Forward-Looking Statements

This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and described our future plans, strategies and expectations, are generally identifiable by use of the words "anticipate," "estimate," "should," "expect," "believe," "intend," "may," "will," "seek," "could," "project," or similar expressions. Forward-looking statements in this report include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations, our strategic plans and objectives, occupancy and leasing rates and trends, liquidity and ability to refinance our indebtedness as it matures, anticipated expenditures of capital, and other matters. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations, include but are not limited to: the global and national economic conditions and changes in general economic, financial and real estate market conditions; changes in our business strategy; risks that our acquisition and development projects will fail to perform as expected; the potential need to fund improvements or other capital expenditures out of operating cash flow; financing risks, such as the inability to obtain debt or equity financing on favorable terms or at all; the level and volatility of interest rates; our ability to re-lease space as leases expire; loss or bankruptcy of one or more of our major retail tenants; a failure of our properties to generate additional income to offset increases in operating expenses; our ability to maintain our qualification as a real estate investment trust ("REIT") for federal income tax purposes and the limitations imposed on our business by our status as a REIT; and other factors discussed in Item 1A. "Risk Factors" and elsewhere in this report and in subsequent filings with the Securities and Exchange Commission ("SEC") including our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. We caution you that any such statements are based on currently available operational, financial and competitive information, and that you should not place undue reliance on these forward-looking statements, which reflect our management's opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.


Agree Realty Corporation is a fully-integrated, self-administered and self-managed REIT. In this report, the terms "Company," "we," "our" and "us" and similar terms refer to Agree Realty Corporation and/or its majority owned operating partnership, Agree Limited Partnership ("Operating Partnership") and/or its majority owned and controlled subsidiaries, including its qualified taxable REIT subsidiaries ("TRS"), as the context may require. Our assets are held by and all of our operations are conducted through, directly or indirectly, the Operating Partnership, of which we are the sole general partner and in which we held a 97.44% and 97.05% interest as of March 31, 2013 and December 31, 2012, respectively. Under the partnership agreement of the Operating Partnership, we, as the sole general partner, have exclusive responsibility and discretion in the management and control of the Operating Partnership. We are operating so as to qualify as a REIT for federal income tax purposes.

We are primarily engaged in the acquisition and development of single tenant properties net leased to industry leading retail tenants. We were incorporated in December 1993 to continue and expand the business founded in 1971 by our current Executive Chairman of the Board of Directors, Richard Agree. We specialize in acquiring and developing single tenant net leased retail properties for industry leading retail tenants. As of March 31, 2013, approximately 97% of our annualized base rent was derived from national and regional tenants and approximately 42% of our annualized base rent was derived from our top three tenants: Walgreens Co. ("Walgreens") - 29%; Kmart Corporation ("Kmart") - 7% and CVS Caremark Corporation ("CVS") - 6%.

As of March 31, 2013, our portfolio consisted of 113 properties, located in 30 states containing an aggregate of approximately 3.3 million square feet of gross leasable area ("GLA"). As of March 31, 2013, our portfolio included 104 freestanding single tenant net leased properties and nine community shopping centers that were 97% leased in aggregate with a weighted average lease term of approximately 12 years remaining. All of our freestanding property tenants and the majority of our community shopping center tenants have triple-net leases, which require the tenant to be responsible for property operating expenses, including property taxes, insurance and maintenance. We believe this strategy provides a generally consistent source of income and cash for distributions.

During the period from April 1, 2013 to December 31, 2013, we have seven leases that are scheduled to expire assuming that the tenants do not exercise the renewal option or terminate the leases prior to the contractual expiration date. These leases represent 89,795 square feet of GLA and $476,812 of annualized base rent. During the first quarter of 2013, Kmart exercised five-year extension options at Central Michigan Commons in Mt. Pleasant, Michigan and Capital Plaza in Frankfort, Kentucky. The Central Michigan Commons store is 80,399 square feet and the Capital Plaza store is 80,192 square feet. The extended lease for the Central Michigan Commons store will expire on August 31, 2018 and for the Capital Plaza store will expire on September 30, 2018. In addition, during the first quarter of 2013, Fashion Bug vacated approximately 40,000 square feet of space at four separate shopping centers. We are working with replacement tenants for the vacated spaces.

We expect to continue to grow our asset base through the development and acquisition of single tenant net leased retail properties that are leased on a long-term basis to industry leading retail tenants. Historically we have focused on development because we believed, based on the historical returns we have been able to achieve, it generally has provided us a higher return on investment than the acquisition of similarly located properties. However, beginning in 2010, we commenced a strategic acquisition program to acquire retail properties net leased to industry leading retail tenants. Since our initial public offering in 1994, we have developed 55 of our 113 properties, including 46 of our 104 freestanding single tenant properties and all nine of our community shopping centers. As of March 31, 2013, the properties that we developed accounted for 57% of our annualized base rent. We expect to continue to expand our existing tenant relationships and diversify our tenant base to include other quality industry leading retail tenants through the development and acquisition of net leased properties.

In April 2013, we completed development of a Wawa in Kissimmee, Florida, which opened April 3, 2013, and a Walgreens in Rancho Cordova, California. Total development cost for the two projects was approximately $8 million. Additionally, development continues for three projects. In August 2012, we purchased a parcel of land in Pinellas Park, Florida to be developed for Wawa under a ground lease with us. Rent is anticipated to commence in the second quarter of 2013. In September 2012, we announced that we had closed on the acquisition of a parcel of land in Casselberry, Florida for a development expected to be completed by the fourth quarter of 2013. In December 2012, we acquired a building in Ann Arbor, Michigan for redevelopment. The redevelopment, which is pre-leased to the industry leader in the retail pharmacy sector, is expected to be completed by the second quarter of 2014. The purchase price was $5.8 million.

Our construction in progress balance totaled approximately $21.2 million at March 31, 2013.

The following should be read in conjunction with the Interim Consolidated Financial Statements of Agree Realty Corporation, including the respective notes thereto, which are included in this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements

As of March 31, 2013, the impact of recent accounting pronouncements on our business is not considered to be material.

Critical Accounting Policies

Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments. For example, significant estimates and assumptions have been made with respect to revenue recognition, capitalization of costs related to real estate investments, potential impairment of real estate investments, operating cost reimbursements, and taxable income.

Minimum rental income attributable to leases is recorded on a straight-line basis over the lease term. Certain leases provide for additional percentage rents based on tenants' sales volumes. These percentage rents are recognized when determinable by us.

Real estate assets are stated at cost less accumulated depreciation. All costs related to planning, development and construction of buildings prior to the date they become operational, including interest and real estate taxes during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed. The viability of all projects under construction or development is regularly evaluated under applicable accounting requirements, including requirements relating to abandonment of assets or changes in use. To the extent a project, or individual components of the project, are no longer considered to have value, the related capitalized costs are charged against operations. Subsequent to the completion of construction, expenditures for property maintenance are charged to operations as incurred, while significant renovations are capitalized. Depreciation of the buildings is recorded in accordance with the straight-line method using an estimated useful life of 40 years.

We evaluate real estate for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value and such excess carrying value is charged to income. The expected cash flows of a project are dependent on estimates and other factors subject to change, including (1) changes in the national, regional, and/or local economic climates,
(2) competition from other shopping centers, stores, clubs, mailings, and the internet, (3) increases in operating costs, (4) bankruptcy and/or other changes in the condition of third parties, including tenants, (5) expected holding period, and (6) availability of credit. These factors could cause our expected future cash flows from a project to change, and, as a result, an impairment could be considered to have occurred.

Substantially all of our leases contain provisions requiring tenants to pay as additional rent a proportionate share of operating expenses ("operating cost reimbursements") including real estate taxes, repairs and maintenance and insurance. The related revenue from tenant billings is recognized in the same period the expense is recorded.

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") since our 1994 tax year. As a result, we are not subject to federal income taxes to the extent that we distribute annually 100% of our REIT taxable income to our stockholders and satisfy certain other requirements for qualifying as a REIT.

We have established TRS entities pursuant to the provisions of the Internal Revenue Code. Our TRS entities are able to engage in activities resulting in income that would be nonqualifying income for a REIT. As a result, certain activities of our Company which occur within our TRS entities are subject to federal and state income taxes. As of March 31, 2013 and December 31, 2012, we had accrued a deferred income tax amount of $705,000. In addition, we have recognized income tax expense of $0 and $4,200 for the three months ended March 31, 2013 and 2012, respectively.

Results of Operations

Comparison of Three Months Ended March 31, 2013 to Three Months Ended March 31, 2012

Minimum rental revenue increased $1,819,000, or 23%, to $9,636,000 in 2013, compared to $7,817,000 in 2012. Rental revenue increased $1,695,000 due to the acquisition of 28 single tenant net leased properties subsequent to December 31, 2011, $73,000 due to the completed development of two properties in 2012, and $51,000 as a result of other rent adjustments.

Operating cost reimbursements increased $55,000, or 10%, to $592,000 in 2013, compared to $537,000 in 2012.

Other income was $0 in 2013, compared to $17,000 in 2012.

Real estate taxes decreased $10,000, or 2%, to $466,000 in 2013, compared to $476,000 in 2012. The change was related to single tenant properties.

Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) increased $22,000, or 7%, to $357,000 in 2013, compared to $335,000 in 2012.

Land lease payments decreased $74,000, or 41%, to $107,000 in 2013, compared to $181,000 in 2012 due to the acquisition of property previously leased.

General and administrative expenses increased by $79,000, or 6%, to $1,486,000 in 2013, compared to $1,407,000 in 2012. The increase in general and administrative expenses was the result of increased employee costs of $66,000, and other increased costs of $13,000. General and administrative expenses as a percentage of total rental income (minimum and percentage rents) decreased from 17.98% for 2012 to 15.39% for 2013.

Depreciation and amortization increased $475,000, or 32%, to $1,951,000 in 2013, compared to $1,476,000 in 2012. The increase was the result of the acquisition of 30 properties in 2012 and 2013.

We recognized a gain of $946,000 on the disposition of one property in January 2013 and a gain of $908,000 on the sale of assets in 2012.

Interest expense increased $304,000, or 27%, to $1,440,000 in 2013, compared to $1,136,000, in 2012. The increase in interest expense was a result of the higher level of borrowings due to the acquisition of properties.

Income from discontinued operations was $7,000 in 2013 compared to $459,000 in 2012, as a result of the sale of one property in January of 2013 and the sale of six properties during 2012; one in May, one in June, two in August, and another in September.

Our net income increased $650,000 or 14%, to $5,392,000 in 2013 from $4,742,000 in 2012 as a result of the foregoing factors.

Liquidity and Capital Resources

Our principal demands for liquidity are operations, distributions to our stockholders, debt repayment, development of new properties, redevelopment of existing properties and future property acquisitions. We intend to meet our short-term liquidity requirements, including capital expenditures related to the leasing and improvement of our properties, through cash flow provided by operations, our $85 million credit facility (the "Credit Facility") and additional financings. We believe that adequate cash flow will be available to fund our operations and pay dividends in accordance with REIT requirements for at least the next 12 months. We may obtain additional funds for future developments or acquisitions through other borrowings or the issuance of additional shares of common stock. Although market conditions have limited the availability of new sources of financing and capital, which may have an impact on our ability to obtain financing, we believe that these financing sources will enable us to generate funds sufficient to meet both our short-term and long-term capital needs.

We completed an underwritten public offering of 1,725,000 shares of common stock at a public offering price of $27.25 per share in January of 2013. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $45 million after deducting the underwriting discount and other expenses. We used the net proceeds of the offering to pay down amounts outstanding under the Credit Facility and for general corporate purposes.

We sold one single tenant property during 2013 for net proceeds of approximately $5,600,000. We will continue to evaluate our portfolio to identify opportunities to further diversify our holdings and improve asset quality while executing on our operating strategy.

Our cash flows from operations increased $3,044,000 to $6,867,000 for the three months ended March 31, 2013, compared to $3,823,000 for the three months ended March 31, 2012. Cash used in investing activities increased by $2,406,000 to ($11,506,000) in 2013, compared to ($9,100,000) in 2012. Cash provided by financing activities increased $829,000 to $4,568,000 in 2013, compared to $3,739,000 in 2012.

We intend to maintain a ratio of total indebtedness (including construction or acquisition financing) to total enterprise value (common equity, on a fully diluted basis, plus total indebtedness) of 65% or less. Nevertheless, we may operate with debt levels which are in excess of 65% of total enterprise value for extended periods of time. At March 31, 2013, our ratio of indebtedness to total enterprise value was approximately 23%.


During the quarter ended March 31, 2013, we declared a quarterly dividend of $0.41 per share. We paid the dividend on April 9, 2013 to holders of record on March 28, 2013.


The Operating Partnership has in place an $85 million unsecured revolving Credit Facility, which is guaranteed by our Company. Subject to customary conditions, at our option, total commitments under the Credit Facility may be increased up to an aggregate of $135 million. We intend to use borrowings under the Credit Facility for general corporate purposes, including working capital, development and acquisition activities, capital expenditures, repayment of indebtedness or other corporate activities. The Credit Facility matures on October 26, 2015, and may be extended, at our election, for two one-year terms to October 2017, subject to certain conditions. Borrowings under the Credit Facility bear interest at LIBOR plus a spread of 150 to 215 basis points depending on our leverage ratio. As of March 31, 2013, we had $9,000,000 in principal amount outstanding under the Credit Facility bearing a weighted average interest rate of 1.73%, and $76,000,000 was available for borrowing (subject to customary conditions to borrowing).

The Credit Facility contains customary covenants, including, among others, financial covenants regarding debt levels, total liabilities, tangible net worth, fixed charge coverage, unencumbered borrowing base properties and permitted investments. We were in compliance with the covenant terms at March 31, 2013.

As of March 31, 2013, we had total mortgage indebtedness of $116,526,115. Including our mortgages that have been swapped to a fixed interest rate, our weighted average interest rate on mortgage debt is 4.41%.

The mortgage loans encumbering the Company's properties are generally non-recourse, subject to certain exceptions for which the Company would be liable for any resulting losses incurred by the lender. These exceptions vary from loan to loan but generally include fraud or a material misrepresentation, misstatement or omission by the borrower, intentional or grossly negligent conduct by the borrower that harms the property or results in a loss to the lender, filing of a bankruptcy petition by the borrower, either directly or indirectly, and certain environmental liabilities. At March 31, 2013, the mortgage debt of $22,460,228 is recourse debt and is secured by a limited guaranty of payment and performance by us for approximately 50% of the loan amount. We have entered into mortgage loans which are secured by multiple properties and contain cross-default and cross-collateralization provisions. Cross-collateralization provisions allow a lender to foreclose on multiple properties in the event that we default under the loan. Cross-default provisions allow a lender to foreclose on the related property in the event a default is declared under another loan.


As of March 31, 2013, our total enterprise value was approximately $535 million. Enterprise value consisted of $126 million of total indebtedness (including construction or acquisition financing, property related mortgages and the Credit Facility), and $409 million of shares of common equity, including common stock and operating partnership units in the Operating Partnership ("OP units") (based on the closing price on the New York Stock Exchange of $30.10 per share on March 28, 2013). Our ratio of indebtedness to total enterprise value was approximately 23% at March 31, 2013.

At March 31, 2013, the non-controlling interest in the Operating Partnership represented a 2.56% ownership in the Operating Partnership. The OP units may, under certain circumstances, be exchanged for our shares of common stock on a one-for-one basis. We, as sole general partner of the Operating Partnership, have the option to settle exchanged OP units held by others for cash based on the current trading price of our shares. Assuming the exchange of all OP units, there would have been 13,589,463 shares of common stock outstanding at March 31, 2013, with a market value of approximately $409 million.

We completed an underwritten public offering of 1,725,000 shares of common stock in January of 2013 at a public offering price of $27.25 per share. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $45 million after deducting the underwriting discount and other expenses. We used the net proceeds from the offering to pay down amounts outstanding under the Credit Facility and for general corporate purposes.

Contractual Obligations

The following table outlines our contractual obligations, as of March 31, 2013
for the periods presented below (in thousands).

                                                          April 1, 2013 - March      April 1, 2014 - March       April 1, 2016 -
                                            Total               31, 2014                    31, 2016             March 31, 2018        Thereafter
Mortgages payable                         $  116,526     $                 3,534     $               16,476     $          34,637     $     61,879
Note payable                                   9,000                           -                      9,000                     -                -
Land lease obligation                         10,671                         416                        832                   850            8,573
Estimated interest payments on
mortgages and note payable                    27,112                       5,282                      8,972                 6,042            6,816
Total                                     $  163,309     $                 9,232     $               35,280     $          41,529     $     77,268

Estimated interest payments for mortgages payable are based on stated rates. Estimated interest payments for note payable are based on the interest rate in effect for the most recent quarter, which is assumed to be in effect through the respective maturity date.

We are constructing and plan to begin construction of additional pre-leased developments and may acquire additional properties, which will initially be financed by the Credit Facility. Additional funding required to complete current ongoing projects is estimated to be $3,097,000. We will periodically refinance short-term construction and acquisition financing with long-term debt and/or equity to the extent available.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet arrangements with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities.


Our leases generally contain provisions designed to mitigate the adverse impact of inflation on net income. These provisions include clauses enabling us to pass through to tenants certain operating costs, including real estate taxes, common area maintenance, utilities and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. Certain of our leases contain clauses enabling us to receive percentage rents based on tenants' gross sales, which generally increase as prices rise, and, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. In addition, expiring tenant leases permit us to seek increased rents upon re-lease at market rates if rents are below the then existing market rates.

Funds from Operations

Funds from Operations ("FFO") is defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") to mean net income computed in accordance with U.S. generally accepted accounting principles ("GAAP"), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. In addition, NAREIT has recently clarified the computation of FFO to exclude impairment charges on depreciable property. Management has restated FFO for prior periods presented accordingly. Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income by itself as the primary measure of our operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that use historical cost accounting is insufficient by itself.

FFO should not be considered as an alternative to net income as the primary indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. Further, while we adhere to the NAREIT definition of FFO, our presentation of FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that not all REITs use the same definition.

Adjusted Funds from Operations ("AFFO") is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. AFFO further adjusts FFO for certain non-cash items that reduce or increase net income in accordance with GAAP. AFFO should not be considered an alternative to net earnings, as an indication of our performance or to cash flow as a measure of liquidity or ability to make distributions. Management considers AFFO a useful supplemental measure of our performance. Our computation of AFFO may differ from the methodology for calculating AFFO used by other equity REITs, and therefore may not be comparable to such other REITs.

The following tables provide a reconciliation of FFO and AFFO to net income for the three months ended March 31, 2013 and 2012:

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