UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2011
Commission File Number 1-12928
AGREE REALTY CORPORATION
(Exact name of Registrant as specified in its charter)
31850 Northwestern Highway, Farmington Hills, Michigan 48334
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code: (248) 737-4190
Securities Registered Pursuant to Section 12(b) of the Act:
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No S
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No S
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £ Accelerated filer S Non-accelerated filer £ Smaller reporting company £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S
The aggregate market value of the Registrant’s shares of common stock held by non-affiliates was approximately $220,113,821 as of June 30, 2011, based on the closing price of $22.33 on the New York Stock Exchange on that date.
At March 3, 2012, there were 11,440,514 shares of common stock, $.0001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the annual stockholder meeting to be held in 2012 are incorporated by reference into Part III of this Annual Report on Form 10-K as noted herein.
Index to Form 10-K
CAUTIONARY NOTE REGARDING 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 “Securities 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 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”). 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.
Item 1: Business
General
Agree Realty Corporation, a Maryland corporation, is a fully-integrated, self-administered and self-managed REIT. The terms “Registrant”, “Company”, “we”, “our” or “us” 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 96.59% interest as of December 31, 2011. 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 focused primarily on the ownership, development, acquisition and management of single tenant retail properties net leased to national tenants. We were incorporated in December 1993 to continue and expand the business founded in 1971 by our current Chief Executive Officer and Chairman, Richard Agree. We specialize in acquiring and developing single tenant net leased retail properties for industry leading retail tenants. As of December 31, 2011, approximately 96% of our annualized base rent was derived from national tenants and regional tenants. As of December 31, 2011, approximately 52% of our annualized base rent was derived from our top three tenants: Walgreens Co. (“Walgreens”) – 34%; Kmart Corporation (“Kmart”) - 11% and CVS Caremark Corporation (“CVS”) – 7%.
At December 31, 2011, our portfolio consisted of 87 properties, located in 21 states containing an aggregate of approximately 3.6 million square feet of gross leasable area (“GLA”). As of December 31, 2011, our portfolio included 75 freestanding single tenant net leased properties and 12 community shopping centers that were 92.7% leased with a weighted average lease term of approximately 11.7 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. See Item 2. “Properties” for a summary of our developments and acquisitions in 2011, as well as other information regarding our tenants, leases and properties as of December 31, 2011.
We expect to continue to grow our asset base primarily 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 believe, based on our historical returns we have been able to achieve, it generally provided us a higher return on investment than the acquisition of similarly located properties. However, beginning in 2010, we commenced strategic acquisition program to acquire retail properties net leased to industry leading retail tenants. Since our initial public offering in 1994, we have developed 59 of our 87 properties, including 47 of our 75 freestanding properties and all 12 of our community shopping centers. As of December 31, 2011, the properties that we developed accounted for approximately 75% of our annualized base rent. We expect to continue to expand our tenant relationships and diversify our tenant base to include other quality industry leading retail tenants through the development and acquisition of net leased properties.
Growth Strategy
Our growth strategy includes the development and acquisition of industry leading single tenant net leased retail properties.
Development. We believe that our development strategy produces superior risk adjusted returns. Our development process commences with the identification of land parcels that we believe are situated in an attractive retail location. The location must be in a concentrated retail corridor, have high traffic counts, good visibility and demographics compatible with the desires of a targeted retail tenant. After assessing site feasibility we propose long-term net leases that commence prior to the development of the site.
Upon the execution of the lease, we acquire the land and pursue all necessary approvals to commence development. We direct all aspects of the development process, including land acquisition due diligence, design, construction, lease negotiation and asset management.
Acquisitions. We strategically acquire single-tenant net leased retail properties when we have determined that a potential acquisition target meets our return on investment criteria and such acquisition will diversify our rental income either by tenant, geographically or retail sector concentration. Since the commencement of our acquisition program in April 2010, we have acquired 19 single tenant net leased retail properties in 13 states in nine retail sectors.
Financing Strategy
As of December 31, 2011, our total mortgage debt was approximately $62.9 million with a weighted average maturity of 6.3 years. Of this total mortgage indebtedness, approximately $39.7 million is fixed rate, self–amortizing debt with a weighted average interest rate of 7.6% and a weighted average maturity of 9.1 years. The remaining mortgage debt of approximately $23.2 million bears interest at 150 basis points over LIBOR or 1.78% as of December 31, 2011 and has a maturity date of July 14, 2013, which can be extended at our option for two additional years. In January 2009, we entered into an interest rate swap agreement that fixes the interest rate during the initial term of the variable interest mortgage at 3.744%.
In addition to our mortgage debt, on October 26, 2011, we replaced our $55 million and $5 million credit facilities with an $85 million unsecured revolving credit facility that matures on October 26, 2014 (the “Credit Facility”). Subject to customary conditions, at our option, the Credit Facility may be extended for two one-year terms and the total commitments under the Credit Facility may be increased up to an aggregate of $135 million. Borrowings under the Credit Facility are priced at LIBOR plus 175 to 260 basis points, depending on our leverage ratio. As of December 31, 2011, we had $56.4 million outstanding under the Credit Facility with a weighted average interest rate of 2.18%.
We intend to maintain a ratio of total indebtedness (including construction and acquisition financing) to total market capitalization of 65% or less. At December 31, 2011, our ratio of indebtedness to total market capitalization assuming the conversion of limited partnership interests in the Operating Partnership (“OP units”), was approximately 32.4%.
We are evaluating our borrowing policies on an on-going basis in light of current economic conditions, relative costs of debt and equity capital, market value of properties, growth and acquisition opportunities and other factors. There is no contractual limit or any limit in our organizational documents on our ratio of total indebtedness to total market capitalization, and accordingly, we may modify our borrowing policy and may increase or decrease our ratio of debt to total market capitalization without stockholder approval.
Asset Management
We maintain a proactive leasing and capital improvement program that, combined with the quality and locations of our properties, has made our properties attractive to tenants. We intend to continue to hold our properties for long-term investment and, accordingly, place a strong emphasis on the quality of construction and an on-going program of regular maintenance. Our properties are designed and built to require minimal capital improvements other than renovations or expansions paid for by tenants. At our 12 community shopping centers properties, we sub contract on site functions such as maintenance, landscaping, snow removal and sweeping. The cost of these functions is generally reimbursed by our tenants. Personnel from our corporate headquarters conduct regular inspections of each property and maintain regular contact with major tenants.
We have a management information system designed to provide management with the operating data necessary to make informed business decisions on a timely basis. This system provides us rapid access to lease data, tenants’ sales history, cash flow budgets and forecasts. Such a system enables us to maximize cash flow from operations and closely monitor corporate expenses.
Major Tenants
As of December 31, 2011, approximately 46% of our GLA was leased to Walgreens, Kmart, and CVS and approximately 52% of our total annualized base rent was attributable to these tenants. At December 31, 2011, Walgreens occupied approximately 13.5% of our GLA and accounted for approximately 34% of our annualized base rent. At December 31, 2011, Kmart occupied approximately 30% of our GLA and accounted for approximately 11% of our annualized base rent. At December 31, 2011, CVS occupied approximately 2% of our GLA and accounted for approximately 7% of our annualized base rent. No other tenant accounted for more than 6% of GLA or annualized base rent in 2011. The loss of any of these anchor tenants or a significant number of their stores, or the inability of any of them to pay rent, would have a material adverse effect on our business.
Borders
As of December 31, 2010, we had 14 properties leased to Borders, Inc. (“Borders”) under triple net leases, including 13 retail properties and the corporate headquarters in Ann Arbor, Michigan. As of December 31, 2010, we had annualized base rent of approximately $7.4 million from Borders, Inc., amounting to approximately 20% of our total annualized base rent. In addition, as of December 31, 2010, we owned two additional Borders locations that were occupied by subtenants under sublease agreements with Borders.
On February 16, 2011, Borders filed a petition for reorganization relief under Chapter 11 of the Bankruptcy Code. In July 2011, Borders, unable to sell itself as a going concern, sought and received the bankruptcy court's approval for the liquidation of all of the assets of Borders, including its leases, under Chapter 11 of the Bankruptcy Code. The Borders liquidation commenced in July 2011 under a phased program and concluded in September 2011. During the year ended December 31, 2011, Borders closed stores and rejected the leases at all of our properties leased to Borders.
Sales of Borders Properties. In January 2011, we completed the sale of two of our former Borders properties located in Tulsa, Oklahoma. The properties were sold to an unrelated party for approximately $6.5 million. The proceeds from the sale were used to pay down amounts outstanding under our credit facilities. In addition, in December 2011, we completed the sale of one former Borders location in Norman, Oklahoma for approximately $1.6 million.
Re-Leased Borders Properties. As discussed above, two of our Borders locations were occupied by subtenants under sublease agreements with Borders. In connection with the Chapter 11 bankruptcy proceedings, effective July 1, 2011, our affiliates took control of the two properties through an assignment of those subleases. We waived certain bankruptcy rejection damage claims against Borders for its unencumbered stores to facilitate this transaction, and Borders is no longer obligated under the two leases. The two properties are located in Boynton Beach, Florida (subleased to Off Broadway Shoes) and Indianapolis, Indiana (subleased to Simply Amish Furniture). We also have the ability to develop a 16,000 square foot building adjacent to the Boynton Beach property. In July 2011, we leased the former Borders location in Wichita, Kansas to Vitamin Cottage Natural Food Markets, Inc. The new tenant opened a Natural Grocers by Vitamin Cottage store in the location during November 2011. In addition, in September 2011, the former Borders location in Columbia, Maryland was assigned to Books-A-Million.
Deed-in-Lieu of Foreclosure Transactions. During the fourth quarter of 2011, we conveyed the former Borders corporate headquarters property in Ann Arbor, Michigan, which was subject to a non-recourse mortgage loan in default, to the lender pursuant to a consensual deed-in-lieu-of-foreclosure process that satisfied the loan. In addition, during the fourth quarter of 2011, we entered into a settlement agreement that provided for the termination of the ground lease on a former Borders property in Ann Arbor, Michigan, and conveyed the retail portion of the property to the ground lessor and retained the office portion of the property. On March 6, 2012, we conveyed the four former Borders properties located in Germantown, Maryland; Oklahoma City, Oklahoma; Omaha, Nebraska and Columbia, Maryland, which were subject to non-recourse mortgage indebtedness in default, to the lender pursuant to a consensual deed-in-lieu-of-foreclosure process that satisfied the loans. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt.”
During the quarter ended September 30, 2011, we recognized various non-cash items amounting to net charges of $5.4 million related to the Borders properties. These included non-cash impairment charges of $13.5 million, offset by non-cash deferred revenue recognition of $5.7 million which is included in discontinued operations and a non-cash gain on extinguishment of debt of $2.4 million.
As of December 31, 2011, we have no rental income attributable to Borders. We currently have five vacant former Borders locations in Ann Arbor, Michigan (office); Columbus, Ohio; Lawrence, Kansas; Monroeville, Pennsylvania; and Omaha, Nebraska. We are currently marketing for sale and/or lease these remaining unencumbered former Borders retail properties. As of the date of this report, two former Borders properties are under contracts to sell for an aggregate sales price of $4.2 million. Closing of these transactions is subject to satisfactory completion of the purchasers’ due diligence investigations and other customary closing conditions, and there is no assurance that the conditions will be satisfied or that the sales will occur as contemplated.
The Borders liquidation has negatively affected our operating results and will continue to negatively affect our future operating results as we will be covering the operating expenses related to the vacant properties, and therefore there will be uncertainty in determining the ultimate impact on our operations.