Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ADC > SEC Filings for ADC > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for AGREE REALTY CORP

Form 10-Q for AGREE REALTY CORP


1-Nov-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 September 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 net leased properties 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 September 30, 2013, approximately 97% of our annualized base rent was derived from national and regional tenants and approximately 48% of our annualized base rent was derived from our top five tenants: Walgreens Co. ("Walgreens") - 26%; Kmart Corporation ("Kmart") - 6%; CVS Caremark Corporation ("CVS") - 6%; Wawa - 5%; and Walmart Stores, Inc. ("Walmart") - 5%.

As of September 30, 2013, our portfolio consisted of 128 properties, located in 33 states containing an aggregate of approximately 3.8 million square feet of gross leasable area ("GLA"). As of September 30, 2013, our portfolio included 119 freestanding net leased properties and nine community shopping centers that were 98% 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 October 1, 2013 to December 31, 2013, we have three leases that are scheduled to expire. One of these leases will be extended for a period of five years, another will be on a month to month basis until relocation of the tenant within the shopping center, at which time the lease will be extended for a period of five years, and the third lease, representing 42,241 square feet of GLA and $159,203 of annualized base rent will not be extended, however, we are currently in negotiations with a new tenant to occupy this space. These three leases represent 71,645 square feet of GLA and $296,212 of annualized base rent.

We expect to continue to grow our asset base through the development and acquisition of 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 59 of our 129 properties, including 50 of our 119 freestanding net leased properties and all nine of our community shopping centers. As of September 30, 2013, the properties that we developed accounted for 52% 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 July 2013, we completed development of a Wawa in Casselberry, Florida, which opened on July 24, 2013. Total development cost for the project was approximately $2,800,000. Our development activity continues for the following two projects. 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 closed on the acquisition of a parcel of land in St. Petersburg, Florida for the development of a Wawa. Rent is anticipated to commence for this property during the first half of 2014.

We announced our first Joint Venture Capital Solutions project during the second quarter of 2013. We closed on a 4.2 acre parcel of land for the development of a 55,000 square foot Hobby Lobby store in Grand Forks, North Dakota. Hobby Lobby executed a 15 year lease for the property. Construction has been completed and Hobby Lobby opened on October 11, 2013. We provided the necessary capital and are the sole owner of the project upon completion.

Subsequent to quarter end, the Company announced its second Joint Venture Capital Solutions project. The Company closed on a 4.5 acre parcel of land for the development of a 62,450 square foot project in New Lenox, Illinois. TJ Maxx, Ross Dress for Less and Petco have executed 10 year net leases. The total project cost is estimated at approximately $8 million. The project is expected to be completed in late 2014.

At September 30, 2013, our construction in progress balance totaled approximately $12,800,000.

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 September 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. During 2013, we recorded an impairment charge of $450,000 related to the carrying value of our real estate assets.

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 September 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 $0 and $1,968 for the three months ended September 30, 2013 and 2012, respectively and ($20,204) and $27,285 for the nine months ended September 30, 2013 and 2012, respectively, and $17,700 for the year ended December 31, 2012.

Results of Operations

Comparison of Three Months Ended September 30, 2013 to Three Months Ended September 30, 2012
Minimum rental revenue increased $2,048,000, or 24%, to $10,684,000 in 2013, compared to $8,636,000 in 2012. Rental revenue increased $1,735,000 due to the acquisition of net leased properties subsequent to June 30, 2012 and increased $360,000 due to the completed development of properties subsequent to June 30, 2012, offset by a decrease of $47,000 as a result of other rent adjustments.

Operating cost reimbursements increased $359,000, or 66%, to $901,000 in 2013, compared to $542,000 in 2012. Operating cost reimbursements increased due to the change in real estate taxes and property operating expenses explained below.

Other income was $2,000 in 2013, compared to $15,000 in 2012.

Real estate taxes increased $265,000, or 67%, to $660,000 in 2013, compared to $395,000 in 2012. Real estate taxes increased $256,000 due to the acquisition of properties and increased $9,000 due to other adjustments.

Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) increased $72,000, or 28%, to $326,000 in 2013, compared to $254,000 in 2012. The increase was the result of an increase in shopping center maintenance costs of $46,000, an increase in parking lot repair costs of $15,000, and an increase in other costs of $11,000.

Land lease payments were $107,000 in 2013, compared to $106,000 in 2012.

General and administrative expenses increased by $271,000, or 21%, to $1,588,000 in 2013, compared to $1,317,000 in 2012. The increase in general and administrative expenses was the result of acquisition costs of $270,000, increased employee costs of $104,000, offset by decreased business tax costs of $98,000 and a decrease in other costs of $5,000. General and administrative expenses as a percentage of total rental income (minimum and percentage rents) increased from 14.71% for 2012 to 15.53% for 2013.

Depreciation and amortization increased $535,000, or 33%, to $2,176,000 in 2013, compared to $1,641,000 in 2012. The increase was the result of the acquisition of properties in 2012 and 2013 and the completion of development projects in 2013.

We incurred an impairment charge of $450,000 in 2013 as a result of writing down the carrying value of our real estate assets related to a shopping center under contract for sale that was not classified as held for sale due to contingencies associated with the contract. There was no impairment charge in 2012.

We recognized a loss of $321,000 on the sale of assets in 2012.

Interest expense increased $299,000, or 22%, to $1,634,000 in 2013, compared to $1,344,000, 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 $210,000 in 2012, as a result of the sale of three properties during 2012; two in August, and another in September.

Our net income increased $621,000, or 15%, to $4,646,000 in 2013 from $4,025,000 in 2012 as a result of the foregoing factors.

Comparison of Nine Months Ended September 30, 2013 to Nine Months Ended September 30, 2012
Minimum rental revenue increased $6,144,000, or 25%, to $30,582,000 in 2013, compared to $24,438,000 in 2012. Rental revenue increased $5,245,000 due to the acquisition of net leased properties subsequent to December 31, 2011, increased $691,000 due to the completed development of properties subsequent to December 31, 2011, and increased $208,000 as a result of other rent adjustments.

Operating cost reimbursements increased $447,000, or 26%, to $2,138,000 in 2013, compared to $1,691,000 in 2012. Operating cost reimbursements increased due to the change in real estate taxes and property operating expenses explained below.

Other income was $2,000 in 2013, compared to $60,000 in 2012.

Real estate taxes increased $322,000, or 24%, to $1,685,000 in 2013, compared to $1,363,000 in 2012. Real estate taxes increased $313,000 due to the acquisition of properties and increased $9,000 due to other adjustments.

Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) increased $174,000, or 21%, to $985,000 in 2013, compared to $811,000 in 2012. The increase was the result of an increase in shopping center maintenance costs of $54,000, an increase in parking lot repair costs of $15,000, an increase in parking lot striping costs of $16,000, and an increase in other costs of $89,000.

Land lease payments decreased $147,000, or 31%, to $321,000 in 2013, compared to $468,000 in 2012 due to the acquisition of property previously leased.

General and administrative expenses increased by $516,000, or 12%, to $4,669,000 in 2013, compared to $4,153,000 in 2012. The increase in general and administrative expenses was the result of acquisition costs of $270,000, increased employee costs of $261,000, increased accounting costs of $60,000 and other increased costs of $65,000 offset by decreased business tax costs of $140,000. General and administrative expenses as a percentage of total rental income (minimum and percentage rents) decreased from 15.90% for 2012 to 15.26% for 2013.

Depreciation and amortization increased $1,630,000, or 34%, to $6,418,000 in 2013, compared to $4,788,000 in 2012. The increase was the result of the acquisition of properties in 2012 and 2013 and the completion of development projects in 2013.

We incurred an impairment charge of $450,000 in 2013 as a result of writing down the carrying value of our real estate assets related to a shopping center under contract for sale that was not classified as held for sale due to contingencies associated with the contract. There was no impairment charge in 2012.

We recognized a gain of $946,000 on the disposition of one property in January 2013 and a gain of $1,747,000 on the sale of assets in 2012.

Interest expense increased $973,000, or 27%, to $4,599,000 in 2013, compared to $3,626,000 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 $1,107,000 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 $710,000 or 5%, to $14,567,000 in 2013 from $13,857,000 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 $6,876,000 to $21,216,000 for the nine months ended September 30, 2013, compared to $14,340,000 for the nine months ended September 30, 2012. Cash used in investing activities increased by $41,246,000 to ($74,059,000) in 2013, compared to ($32,813,000) in 2012. Cash provided by financing activities increased $40,384,000 to $57,398,000 in 2013, compared to $17,014,000 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.

As of September 30, 2013, 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 September 30, 2013, our ratio of indebtedness to total enterprise value was approximately 32%.

Dividends
During the quarter ended September 30, 2013, we declared a quarterly dividend of $0.41 per share. We paid the dividend on October 8, 2013 to holders of record on September 30, 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 September 30, 2013, we had $40,000,000 in principal amount outstanding under the Credit Facility bearing a weighted average interest rate of 1.92%, and $45,000,000 was available for borrowing (subject to customary conditions to borrowing).

In September 2013, the Operating Partnership entered into a $35,000,000 seven year unsecured term loan ("Unsecured Term Loan"), which is guaranteed by our Company. The Unsecured Term Loan includes an accordion feature providing the opportunity to borrow up to an additional $35,000,000 under the same loan agreement, subject to customary conditions. The Unsecured Term Loan matures on September 29, 2020. Borrowings under the Unsecured Term Loan bear interest at LIBOR plus a spread of 165 to 225 basis points depending on our leverage ratio. In conjunction with the closing of the loan, we entered into a seven year interest rate swap agreement resulting in a fixed interest rate of 3.85%, based on the current spread. We used the proceeds from the Unsecured Term Loan to pay down amounts outstanding under the Credit Facility.

The Credit Facility and Unsecured Term Loan contain 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 September 30, 2013.

As of September 30, 2013, we had total mortgage indebtedness of $114,789,938. Including our mortgages that have been swapped to a fixed interest rate, the weighted average interest rate on our mortgage debt is 4.39%.

The mortgage loans encumbering our properties are generally non-recourse, subject to certain exceptions for which we 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 September 30, 2013, the mortgage debt of $22,168,118 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 . . .

  Add ADC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ADC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.