Agree Realty is a Real Estate Investment Trust (REIT) that own own, develops, acquires and manages retail properties net leased to national tenants. ADC's portfolio consists of roughly 81 properties, located in 17 states containing an aggregate of approximately 3.8 million square feet of gross leasable area. All of 66 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. Because rents come from a wide variety of sectors, macroeconomic factors will highly determine the tenant quality and their ability to pay to ADC.
ADC continues to grow its asset base primarily through the development and acquisition of retail properties that are leased on a long-term basis to national tenants. Historically the company has focused more on development because they generally provided the company with a higher return on investment than the acquisition of similarly located properties.
Agree's tenants are highly concentrated, with 62% of annualized base rent was derived from the top three tenants: Walgreen Company (WAG) at 31%; Borders Group (BGP) at 20%; and and Kmart Corporation at 11%. Declining performance in all these three corporations, for example bankruptcy at Borders has hurt Agree's ability to collect rent from these tenants. Kmart, for example, have suffered from the Wal-mart effect, and Walgreen's in intense competition with CVS, thereby all resulting into declining top-line rent collections. Agree Realty must therefore seek new tenants of better quality to replace roughly two thirds of its own revenue stream.
Because REITS are obligated to pay out 90% of income to shareholders, which therefore allow it to become a pass-through entity, REITS such as ADC have difficulty simply retaining cash on hand. Without a large surplus of cash at hand to fund growth, ADC must resort to external financing from either credit or equity markets. Equity markets tend to be dilutive to shareholders, and as such stable credit markets are necessary to insure a continuance of refinancing opportunities as REITS are traditionally unable to keep large amounts of cash at hand to pay off balloon payments.
IRC competes with other REITs operating primarily in the retail space, such as: