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ADC > SEC Filings for ADC > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for AGREE REALTY CORP

Form 10-Q for AGREE REALTY CORP


2-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Overview

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 June 30, 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. As of June 30, 2013, approximately 97% of our annualized base rent was derived from national and regional tenants and approximately 45% of our annualized base rent was derived from our top four tenants: Walgreens Co. ("Walgreens") - 28%; Kmart Corporation ("Kmart") - 7%; CVS Caremark Corporation ("CVS") - 6%; and Walmart Stores, Inc. ("Walmart") - 5%.

As of June 30, 2013, our portfolio consisted of 120 properties, located in 32 states containing an aggregate of approximately 3.5 million square feet of gross leasable area ("GLA"). As of June 30, 2013, our portfolio included 111 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 July 1, 2013 to December 31, 2013, we have five leases that are scheduled to expire assuming that the tenants do not exercise their renewal option or terminate the leases prior to the contractual expiration date. These leases represent 79,245 square feet of GLA and $368,412 of annualized base rent.

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 focused on development based on the returns we have been able to achieve. Development 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 targeting properties net leased to industry leading retail tenants in order to expand and diversify our portfolio. Since our initial public offering in 1994, we have developed 58 of our 120 properties, including 49 of our 111 freestanding single tenant properties and all nine of our community shopping centers. As of June 30, 2013, the properties that we developed accounted for 55% 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 on April 3, 2013, and a Walgreens in Rancho Cordova, California. Additionally, in May 2013, we completed development of a Wawa in Pinellas Park, Florida, which opened on May 29, 2013. Total development cost for the three projects was approximately $12 million. Our development activity continues for the following three projects. In September 2012, we announced that we had closed on the acquisition of a parcel of land in Casselberry, Florida for development of a Wawa expected to be completed during the third quarter of 2013. In December 2012, we acquired a building in Ann Arbor, Michigan for redevelopment. This redevelopment, which is pre-leased to Walgreens, is expected to be completed during the first half of 2014. In April 2013, we announced that we had closed on the acquisition of a parcel of land in St. Petersburg, Florida for the development of a Wawa. Rent is anticipated to commence at this property during the first half of 2014.

At June 30, 2013, our construction in progress balance totaled approximately $12.5 million.

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 June 30, 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 June 30, 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 ($19,082) and $3,960 for the three months ended June 30, 2013 and 2012, respectively and ($20,204) and $8,160 for the six months ended June 30, 2013 and 2012, respectively, and $17,700 for the year ended December 31, 2012.

Results of Operations

Comparison of Three Months Ended June 30, 2013 to Three Months Ended June 30, 2012

Minimum rental revenue increased $2,277,000, or 29%, to $10,262,000 in 2013, compared to $7,985,000 in 2012. Rental revenue increased $1,767,000 due to the acquisition of 15 single tenant net leased properties subsequent to March 31, 2012, $258,000 due to the completed development of five properties subsequent to March 31, 2012, and $252,000 as a result of other rent adjustments.

Operating cost reimbursements increased $34,000, or 6%, to $646,000 in 2013, compared to $612,000 in 2012.

Other income was $0 in 2013, compared to $28,000 in 2012.

Real estate taxes increased $67,000, or 14%, to $559,000 in 2013, compared to $492,000 in 2012. Real estate taxes increased $120,000 due to the acquisition of properties offset by other decreases of $53,000.

Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) increased $80,000, or 36%, to $302,000 in 2013, compared to $222,000 in 2012. The increase was the result of an increase in shopping center maintenance costs of $48,000, an increase in snow removal costs of $32,000, and an increase in utilities cost of $9,000 offset by a decrease in insurance cost of $9,000.

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 $166,000, or 12%, to $1,595,000 in 2013, compared to $1,429,000 in 2012. The increase in general and administrative expenses was the result of increased employee costs of $91,000, increased legal and accounting costs of $79,000 and other increased costs of $37,000 offset by decreased business tax costs of $43,000. General and administrative expenses as a percentage of total rental income (minimum and percentage rents) decreased from 16.54% for 2012 to 15.54% for 2013.

Depreciation and amortization increased $620,000, or 37%, to $2,291,000 in 2013, compared to $1,671,000 in 2012. The increase was the result of the acquisition of 34 properties in 2012 and 2013 and the completion of three development projects in 2013.

We recognized a gain of $1,159,000 on the sale of assets in 2012.

Interest expense increased $379,000, or 33%, to $1,525,000 in 2013, compared to $1,146,000, 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 $0 in 2013 compared to $439,000 in 2012, as a result of the sale of six properties during 2012; one in May, one in June, two in August, and another in September.

Our net income decreased $561,000 or 11%, to $4,529,000 in 2013 from $5,090,000 in 2012 as a result of the foregoing factors.

Comparison of Six Months Ended June 30, 2013 to Six Months Ended June 30, 2012

Minimum rental revenue increased $4,096,000, or 26%, to $19,898,000 in 2013, compared to $15,802,000 in 2012. Rental revenue increased $3,462,000 due to the acquisition of 34 single tenant net leased properties subsequent to December 31, 2011, $331,000 due to the completed development of five properties subsequent to December 31, 2011, and $303,000 as a result of other rent adjustments.

Operating cost reimbursements increased $88,000, or 8%, to $1,237,000 in 2013, compared to $1,149,000 in 2012.

Other income was $0 in 2013, compared to $45,000 in 2012.

Real estate taxes increased $57,000, or 6%, to $1,025,000 in 2013, compared to $968,000 in 2012. Real estate taxes increased $150,000 due to the acquisition of properties offset by other decreases of $93,000.

Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) increased $102,000, or 18%, to $659,000 in 2013, compared to $557,000 in 2012. The increase was the result of an increase in shopping center maintenance costs of $54,000, an increase in snow removal costs of $59,000, an increase in utilities cost of $8,000 offset by a decrease in insurance cost of $19,000.

Land lease payments decreased $148,000, or 41%, to $214,000 in 2013, compared to $362,000 in 2012 due to the acquisition of property previously leased.

General and administrative expenses increased by $245,000, or 9%, to $3,081,000 in 2013, compared to $2,836,000 in 2012. The increase in general and administrative expenses was the result of increased employee costs of $166,000, increased legal and accounting costs of $61,000 and other increased costs of $61,000 offset by decreased business tax costs of $43,000. General and administrative expenses as a percentage of total rental income (minimum and percentage rents) decreased from 16.44% for 2012 to 15.46% for 2013.

Depreciation and amortization increased $1,095,000, or 35%, to $4,242,000 in 2013, compared to $3,147,000 in 2012. The increase was the result of the acquisition of 34 properties in 2012 and 2013 and the completion of three development projects in 2013.

We recognized a gain of $946,000 on the disposition of one property in January 2013 and a gain of $2,067,000 on the sale of assets in 2012.

Interest expense increased $683,000, or 30%, to $2,965,000 in 2013, compared to $2,282,000, 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 $898,000 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 $90,000 or 1%, to $9,922,000 in 2013 from $9,832,000 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 $5,500,000. 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 $5,465,000 to $14,226,000 for the six months ended June 30, 2013, compared to $8,761,000 for the six months ended June 30, 2012. Cash used in investing activities increased by $21,708,000 to ($44,037,000) in 2013, compared to ($22,329,000) in 2012. Cash provided by financing activities increased $17,583,000 to $29,766,000 in 2013, compared to $12,183,000 in 2012.

On May 8, 2013, we filed articles of amendment to our charter increasing the number of authorized shares of our common stock, par value $.0001 per share, from 15,850,000 to 28,000,000; increasing the number of authorized shares of our preferred stock, par value $.0001 per share, from 150,000 to 4,000,000; and increasing the number of authorized shares of our excess stock, par value $.0001 per share, from 4,000,000 to 8,000,000. The amendment to the charter was previously approved by our Board of Directors, subject to stockholder approval, and approved by our stockholders at the annual meeting of stockholders held on May 6, 2013. In addition, on July 31, 2013, we filed articles supplementary to our charter reclassifying and designating authorized but unissued shares of our excess stock as additional shares of our preferred stock, authorized but unissued shares of our preferred stock as additional shares of our excess stock, and authorized but unissued shares of our preferred stock as additional shares of our Series A Junior Participating Preferred Stock, with the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption as set forth in our charter.

After giving effect to the foregoing amendment and articles supplementary, we have the authority to issue 40,000,000 shares of capital stock, par value $0.0001 per share, of which 28,000,000 shares are classified as shares of common stock, 4,000,000 shares are classified as shares of preferred stock (including 200,000 shares that are classified as shares of our Series A Junior Participating Preferred Stock), and 8,000,000 shares are classified as shares of excess stock.

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 June 30, 2013, our ratio of indebtedness to total enterprise value was approximately 28%.

Dividends

During the quarter ended June 30, 2013, we declared a quarterly dividend of $0.41 per share. We paid the dividend on July 9, 2013 to holders of record on June 28, 2013.

Debt

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 June 30, 2013, we had $40,639,930 in principal amount outstanding under the Credit Facility bearing a weighted average interest rate of 1.82%, and $44,360,070 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 June 30, 2013.

As of June 30, 2013, we had total mortgage indebtedness of $115,668,239. Including our mortgages that have been swapped to a fixed interest rate, the weighted average interest rate on our mortgage debt is 4.40%.

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 June 30, 2013, the mortgage debt of $22,318,478 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.

Capitalization

As of June 30, 2013, our total enterprise value was approximately $557 million. Enterprise value consisted of $156 million of total indebtedness (including construction or acquisition financing, property related mortgages and the Credit Facility), and $401 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 $29.52 per share on June 28, 2013). Our ratio of indebtedness to total enterprise value was approximately 28% at June 30, 2013.

At June 30, 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 13,585,023 shares of common stock outstanding at June 30, 2013, with a market value of approximately $401 million.

We completed an underwritten public offering of 1,725,000 shares of common stock in January 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 June 30, 2013,
for the periods presented below (in thousands).



                                                     July 1, 2013 - June       July 1, 2014 - June       July 1, 2016 - June
                                       Total              30, 2014                  30, 2016                  30, 2018             Thereafter
Mortgages payable                    $  115,668     $              12,739     $              15,967     $              50,679     $     36,283
Note payable                             40,640                         -                    40,640                         -                -
Land lease obligation                    10,569                       416                       832                       850            8,471
. . .
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