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-K on 7-Mar-2014All Recent SEC Filings

Show all filings for AGREE REALTY CORP

Form 10-K for AGREE REALTY CORP


7-Mar-2014

Annual Report


Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations

Overview
We were established to continue to operate and expand the retail property business of our predecessor. We commenced our operations in April 1994. Our assets are held by and all operations are conducted through, directly or indirectly, the Operating Partnership, of which we are the sole general partner and held a 97.72% interest as of December 31, 2013. We are operating so as to qualify as a REIT for federal income tax purposes.

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

Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") updated ASC
220 "Comprehensive Income" with ASU 2013-2 "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." This update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, ASU 2013-2 requires an entity to present, either on the face of the income statement or in the notes to financial statements, significant amounts reclassified out of accumulated other comprehensive income by respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in ASU 2013-2 do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments in ASU 2013-2 are effective prospectively for reporting periods beginning after December 31, 2012. The adoption of this guidance concerns disclosure only and did not have an impact on our consolidated financial statements.

In July 2013, the FASB updated ASC 815 "Derivatives and Hedging" with ASU 2013-10 "Inclusion of the Fed Funds Effective Swap Rate (of Overnight Index Swap Rate) as a Benchmark Interest rate for Hedge Accounting Purposes." ASU 2013-10 permits the Overnight Index Swap ("OIS") Rate, also referred to as the Fed Funds effective Swap Rate, to be used as a U.S. benchmark for hedge accounting purposes, in addition to London Interbank Offered Rate ("LIBOR") and the interest rate on direct U.S. Treasury obligations. The guidance also removes the restriction on using different benchmarks for similar hedges. ASU 2013-10 is effective prospectively for qualifying new or re-designated hedges entered into on or after July 17, 2013. The adoption of this guidance did not have an impact on our consolidated financial statements.

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 are 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 completion of construction, expenditures for property maintenance are charged to operations as incurred, while significant renovations are capitalized. Depreciation of the buildings is recorded on the straight-line method using an estimated useful life of forty 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 the 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 2012, we recorded no impairment charge related to real estate assets. During 2013 and 2011, we recorded impairment charges of $450,000 and $13,500,000 related to the carrying value of our real estate assets, of these amounts, $450,000 and $12,900,000, respectively, are reflected in discontinued operations.

Substantially all of our community shopping center leases and various of the net leased properties contain provisions requiring tenants to pay as additional rent a proportionate share of operating expenses ("operating cost reimbursements") such as real estate taxes, repairs and maintenance, insurance, etc. 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 commencing with 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 defined in the Internal Revenue Code.

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 December 31, 2013 and 2012, we had accrued a deferred income tax liability of $705,000. In addition, we have recorded an income tax liability of $0 and $17,700 as of December 31, 2013 and 2012, respectively.

Results of Operations

Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012

Minimum rental income increased $8,326,000, or 26%, to $40,895,000 in 2013, compared to $32,569,000 in 2012. Rental income increased $7,002,000 due to the acquisition of 18 properties in 2013 along with the full year impact of 25 properties acquired in 2012. Minimum rent increased $1,185,000 as a result of development activities. We placed six development projects in service during 2013 and two during 2012. In addition, rental income increased $139,000 as a result of other rental income adjustments.

Percentage rents increased from $24,000 in 2012 to $36,000 in 2013.

Operating cost reimbursements increased $596,000, or 30%, to $2,567,000 in 2013, compared to $1,971,000 in 2012. Operating cost reimbursements increased due to higher levels of recoverable property operating expenses and an improved recovery ratio on recoverable property operating expenses.

Other income decreased $41,000, or 68%, to $19,000 in 2013, compared to $60,000 in 2012 due primarily to non-recurring fee income in 2012.

Real estate taxes increased $249,000, or 14%, to $2,035,000 in 2013, compared to $1,786,000 in 2012. The increase is due to the ownership of additional properties in 2013 compared to 2012.

Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) increased $225,000, or 23%, to $1,193,000 in 2013 compared to $968,000 in 2012. The increase was the result of a increase in shopping center maintenance expenses of $145,000, snow removal costs of $45,000, utilities of $23,000, and insurance costs of $12,000.

Land lease payments decreased $146,000, or 25%, to $428,000 in 2013 compared to $574,000 for 2012. The decrease is the result of our purchase of the underlying land at our property in Ann Arbor, Michigan in June 2012.

General and administrative expenses increased $270,000, to $5,952,000 in 2013 compared to $5,682,000 in 2012. The increase in general and administrative expenses was primarily the result of increased employee costs of $196,000, increased professional fees of $99,000, offset by net decreases in other expenses of $25,000. General and administrative expenses as a percentage of total rental income (minimum and percentage rents) decreased to 14.2% for 2013 from 16.0% in 2012.

Depreciation and amortization increased $2,248,000, or 36%, to $8,489,000 in 2013 compared to $6,241,000 in 2012. The increase was the result of the acquisition of 18 properties in 2013 and the acquisition of 25 properties in 2012.

Interest expense increased $1,341,000, or 26%, to $6,475,000 in 2013, from $5,134,000 in 2012. The increase in interest expense is a result of higher levels of borrowings for the acquisition and development of additional properties during 2013 and 2012.

We recognized a gain of $946,000 on the disposition of a net leased property in Ypsilanti, Michigan in January 2013 for $5,600,000. The Company also classified a non-core Kmart anchored shopping center located in Ironwood, Michigan as held for sale as of December 31, 2013. The Company completed the sale of the Ironwood property for $5,000,000 on January 15, 2014. During 2012 we recognized gains of $2,097,000 on the dispositions of properties. In 2012, we sold six non-core properties, a vacant office property for approximately $650,000; two vacant single tenant properties for $4,460,000; a Kmart anchored shopping center in Charlevoix, Michigan for $3,500,000, and two Kmart anchored shopping centers, located in Plymouth and Shawano, Wisconsin for $7,475,000. In addition, in 2012, we conveyed four mortgaged properties to the lender pursuant to a consensual deed-in-lieu-of-foreclosure process that satisfied the loans, which had an aggregate principal amount outstanding of approximately $9.2 million as of December 31, 2011. The Company also classified a single tenant property located in Ypsilanti, Michigan as held for sale as of December 31, 2012. The Company completed the sale of the Ypsilanti property for approximately $5,600,000 on January 11, 2013.

Income from discontinued operations was $298,000 in 2013 compared to $2,267,000 in 2012. The income from discontinued operations in 2013 was a result of the sale of a property in Ypsilanti, Michigan in January, 2013. We also classified a non-core Kmart anchored shopping center in Ironwood, Michigan as held for sale at December 31, 2013. Discontinued operations included the impact of $450,000 of impairment charges in 2013. The income from discontinued operations in 2012 was a result of the sale of six properties in 2012, one in March, one in May, one in June, two in August, one in September, and the conveyance of four former Borders properties to the lender in March, one of which was occupied, combined with the impact of the 2013 property sale and property classified as held for sale as of December 31, 2013. We also classified a single tenant property located in Ypsilanti, Michigan as held for sale as of December 31, 2012.

Our net income increased $1,586,000, or 9%, to $20,190,000 in 2013, from $18,604,000 in 2012 as a result of the foregoing factors.

Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011

Minimum rental income increased $5,150,000, or 19%, to $32,569,000 in 2012, compared to $27,419,000 in 2011. Rental income increased $4,808,000 due to the acquisition of 25 properties in 2012 along with the full year impact of 10 properties acquired in 2011. The increase was also the result of the development of a McDonalds in Southfield, Michigan in May 2012, and the development of a Chase bank located in Venice, Florida in November 2012. Our revenue increases from these developments amounted to $99,000. In addition, rental income increased $243,000 as a result of other rental income adjustments.

Percentage rents decreased from $31,000 in 2011 to $24,000 in 2012.

Operating cost reimbursements increased $203,000, or 11%, to $1,971,000 in 2012, compared to $1,768,000 in 2011. Operating cost reimbursements increased due to an improved recovery ratio on recoverable property operating expenses.

We earned development fee income of $895,000 in 2011 related to a project that we completed in Berkeley, California. There were no development fee projects in 2012 and no additional development fee projects are currently anticipated.

Other income decreased $90,000, or 60%, to $60,000 in 2012, compared to $150,000 in 2011 due primarily to non-recurring fee income in 2011.

Real estate taxes were $1,786,000 and $1,699,000 in 2012 and 2011.

Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) decreased $80,000, or 8%, to $968,000 in 2012 compared to $1,048,000 in 2011. The decrease was the result of a decrease in shopping center maintenance expenses of $89,000 including utilities for vacant space, and a decrease in snow removal costs of $33,000, offset by an increase in insurance costs of $42,000.

Land lease payments decreased $147,000, or 20%, to $574,000 in 2012 compared to $721,000 for 2011. The decrease is the result of our purchase of the underlying land at our property in Ann Arbor, Michigan in June 2012.

General and administrative expenses increased $20,000, to $5,682,000 in 2012 compared to $5,662,000 in 2011. General and administrative expenses as a percentage of total rental income (minimum and percentage rents) decreased to 16.0% for 2012 from 16.4% in 2011 without the impact of the deferred revenue recognition.

Depreciation and amortization increased $1,041,000, or 20%, to $6,241,000 in 2012 compared to $5,200,000 in 2011. The increase was the result of the acquisition of 25 properties in 2012 and the acquisition of 10 properties in 2011.

In 2011, we incurred an impairment charge of $600,000, for our continuing operations, as a result of writing down the carrying value of our real estate assets for properties formerly leased to Borders.

Interest expense increased $1,177,000, or 30%, to $5,134,000 in 2012, from $3,957,000 in 2011. The increase in interest expense is a result of higher levels of borrowings for the acquisition of additional properties during 2012 and 2011.

In 2011, we recognized a gain on extinguishment of debt in the amount of $2,360,000.

We recognized a gain of $2,097,000 on the disposition of properties in 2012. We sold six non-core properties; a vacant office property for approximately $650,000; two vacant single tenant properties for $4,460,000; a Kmart anchored shopping center in Charlevoix, Michigan for $3,500,000, and two Kmart anchored shopping centers, located in Plymouth and Shawano, Wisconsin for $7,475,000. In addition, we conveyed four mortgaged properties to the lender pursuant to a consensual deed-in-lieu-of-foreclosure process that satisfied the loans, which had an aggregate principal amount outstanding of approximately $9.2 million as of December 31, 2011. The Company also classified a single tenant property located in Ypsilanti, Michigan as held for sale as of December 31, 2012. The Company completed the sale of the Ypsilanti property for approximately $5,600,000 on January 11, 2013. We recognized a gain of $110,000 on the disposition of properties in 2011. We sold three properties, conveyed the former Borders corporate headquarters to the lender, and terminated the ground lease on a property during 2011 and conveyed a portion of the property to the ground lessor. The properties were located in Tulsa, Oklahoma (2), Norman, Oklahoma and Ann Arbor, Michigan (2).

Income from discontinued operations was $2,267,000 in 2012 compared to loss from discontinued operations of $3,957,000 in 2011. The income from discontinued operations in 2012 was a result of the sale of six properties, one in March, one in May, one in June, two in August, one in September, and the conveyance of four former Borders properties to the lender in March, one of which was occupied. We also classified a single tenant property located in Ypsilanti, Michigan as held for sale as of December 31, 2012. The loss from discontinued operations in 2011 was a result of impairment charges of $12,900,000, offset by $5,697,000 due to the recognition of deferred revenue. We sold two properties in January 2011, sold one property in December 2011, conveyed the former Borders corporate headquarters to the lender in December 2011, and terminated the ground lease on a property in December 2011 and conveyed a portion of the property to the ground lessor.

Our net income increased $8,714,000, or 88%, to $18,604,000 in 2012, from $9,890,000 in 2011 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 the properties, through cash flow provided by operations and the Credit Facility. 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 development 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 for planned new development projects in the near term, 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 a follow-on offering of 1,495,000 shares of common stock in January/February of 2012. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $35.1 million after deducting the underwriting discount. The proceeds from the offering were used to pay down amounts outstanding under the Credit Facility and for general corporate purposes.

We completed a follow-on offering of 1,725,000 shares of common stock in January of 2013. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $44.9 million after deducting the underwriting discount. The proceeds from the offering were used to pay down amounts outstanding under the Credit Facility and for general corporate purposes.

We completed a follow-on offering of 1,650,000 shares of common stock in November of 2013. The offering raised net proceeds of approximately $48.8 million after deducting the underwriting discount. The proceeds from the offering were used to pay down amounts outstanding under the Credit Facility and for general corporate purposes.

Our cash flows from operations increased $8,384,000 to $29,590,000 in 2013, compared to $21,206,000 in 2012 due to increased cash flow from the additional investment in real estate assets. Cash used in investing activities increased $16,004,000 to $85,260,000 in 2013, compared to $69,256,000 in 2012 due to additional investments through the acquisition and development of real estate assets and lower net proceeds from the sale of assets. Cash provided by financing activities increased $21,620,000 to $68,938,000 in 2013, compared to $47,318,000 in 2012 due primarily to two common stock offerings in 2013. Our cash and cash equivalents increased by $13,267,000 to $14,537,000 as of December 31, 2013 as a result of the foregoing factors.

During 2013, we spent approximately $1,488,000 at our existing community shopping centers for tenant improvement or allowance costs, $18,000 for leasing commissions and $87,000 for other capital items. During 2012, we spent approximately $1,229,000 at our existing community shopping centers for tenant improvement or allowance costs, $56,000 for leasing commissions and $171,000 for other capital items.

We intend to maintain a ratio of total indebtedness (including construction or acquisition financing) to total market capitalization of 65% or less. Nevertheless, we may operate with debt levels which are in excess of 65% of total market capitalization for extended periods of time. At December 31, 2013, our ratio of indebtedness to total market capitalization was approximately 26.4%. This ratio decreased from 33.8% as of December 31, 2012 as a result of the increase in shares outstanding from our 2013 follow on offerings in January 2013 and November 2013 and an increase in the market price of our common stock, offset by an increase in debt due to our 2013 property acquisitions and development expenditures.

Dividends
During the quarter ended December 31, 2013, we declared a quarterly dividend of $.41 per share. The cash dividend was paid on January 3, 2014 to holders of record on December 20, 2013.

During the quarter ending March 31, 2014, we declared a quarterly dividend of $.43 per share. The cash dividend will be paid on April 8, 2014 to holders of record on March 31, 2014.

Debt
Agree Limited Partnership (the "Operating Partnership") has in place an $85,000,000 unsecured revolving credit facility ("Credit Facility"), which is guaranteed by the Company. Subject to customary conditions, at the Company's option, total commitments under the Credit Facility may be increased up to an aggregate of $135,000,000. The Company intends 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 the Company's 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, or the base rate, depending on the Company's leverage ratio. As of December 31, 2013, $9,500,000 was outstanding under the Credit Facility bearing a weighted average interest rate of 3.75%, and $75,500,000 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 the 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 the Company's leverage ratio. In conjunction with the closing of the loan, the Company entered into a seven year interest rate swap agreement resulting in a fixed interest rate of 3.85%, based on the current spread. The Company used the proceeds from the Unsecured Term Loan to pay down amounts outstanding under the Credit Facility.

The Credit Facility and the 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 December 31, 2013.

As of December 31, 2013, we had total mortgage indebtedness of $113,897,759 with a weighted average maturity of 5.5 years. Including our mortgages that have been swapped to a fixed interest rate, our weighted average interest rate on mortgage debt was 4.4%.

In December 2012, we closed on a $25 million secured financing with PNC Bank. The non-recourse loan is secured by 11 net leased properties. The interest rate has been swapped to a fixed rate of 2.49% and will mature in April 2018.

In addition, in December 2012, we closed on a $23.6 million secured Commercial Mortgage Backed Security "CMBS" financing with Morgan Stanley Mortgage Capital Holdings, LLC. The 10-year, non-recourse loan is secured by 12 net leased properties. The loan bears interest at a fixed rate of 3.60% and matures in January 2023.

In addition, we closed on an amended and restated $22.9 million term loan in June 2012 to replace our existing 3.74% term loan. The term loan will mature May 2019, inclusive of a two-year extension option, at our election, which is subject to customary conditions. We entered into a forward interest rate agreement to fix the interest rate at 3.62% for the period July 2013 until maturity.

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 December 31, 2013, mortgage debt of $22,017,758 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 December 31, 2013, our total market capitalization was approximately $600.4 million. Market capitalization consisted of $158.4 million of debt (including mortgage notes payable, unsecured term loan and the Credit Facility), and $442.0 million of shares of common stock (based on the closing price on the NYSE of $29.02 per share on December 31, 2013) and OP units at market value. Our ratio of debt to total market capitalization was 26.4% at December 31, 2013.

At December 31, 2013, the noncontrolling interest in the Operating Partnership represented a 2.28% 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 15,230,933 shares of common stock outstanding at December 31, 2013, with a market value of approximately $442.0 million.

We completed a follow-on offering of 1,495,000 shares of common stock in January/February of 2012. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $35.1 million after deducting the underwriting discount. The proceeds from the offering were used to pay down amounts outstanding under the Credit Facility and for general corporate purposes.

We completed a follow-on offering of 1,725,000 shares of common stock in January of 2013. The offering, which included the full exercise of the overallotment . . .

  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.