Agree Realty's Shares Hit The Skids As Borders Woes Deepen
05 January 2011 - 7:42AM
Dow Jones News
The mounting troubles for Borders Group Inc.(BGP) is becoming a
major headache for Agree Realty Corp. (ADC), a retail landlord that
counts Borders as its second-largest tenant.
Investors have turned bearish on Agree Realty, a real-estate
investment trust based in Farmington Hills, Mich., that has leases
with 15 Borders stores. The company also is the landlord of Borders
headquarters in Ann Arbor.
Agree's stock has tumbled 8% since Borders announced Thursday it
was halting payments to some of its vendors in order to refinance
its debt. If that fails, Borders warned ,it could "experience a
liquidity shortfall."
Shares of Agree were trading at around $24 in midafternoon
trading on the New York Stock Exchange.
Agree has been one of the worst performers among real estate
investment trusts since the Borders announcement. Only a month
before the announcement, Agree hit its 52 week high of $29.25.
Borders is Agree's second-largest tenant behind Walgreen Co.
(WAG) and the company receives a little more than 20% of its
revenues from its leases with the distressed book seller. Most of
the 80 properties that Agree operates in Michigan have only one
tenant.
Andrew DiZio, an analyst at Janney Capital Markets, said Wall
Street has been factoring in the bankruptcy risk for Borders for
quite some time. He said the recent sell-off is likely the result
of hedge funds shorting the shares of Agree stock, which only has a
market capitalization of $235 million. Borders, currently trading
at 86 cents, has been struggling with weaker sales as more readers
turn to the Internet to buy their books and music.
DiZio downgraded Agree's stock Tuesday to neutral from buy.
Agree was not immediately able to provide comment.
The analyst noted that the majority of Agree's leases with
Borders are triple net leases, where the landlord collects the rent
while the tenant pays all property-related expenses.
Although the outlook is looking up for retail landlords as
consumer confidence returns and the economy recovers, Agree's faces
problems if some of its stores lose Borders as a tenant. The
company operates mostly in second-tier but stable markets where
finding tenants to fill big vacant spaces is still difficult.
"While a lot of companies have enjoyed the strong rebound in
REIT pricing, there are still a lot of issues out there," said Gary
Linhart, a portfolio manager at ViaWest Group, a Phoenix-based firm
focusing on REIT investments.
"Even if Borders survives, its real estate footprint will have
to change, which means that it will have to start talking to
landlords about rent and space reductions," he said. "Agree faces
some serious headwinds."
DiZio said given the current environment "it would be more
favorable" for Agree to accept lower rent than attempt to find new
tenants. "It's not a landlord's market yet," he said.
-By A.D. Pruitt, Dow Jones Newswires; 212-416-2197;
angela.pruitt@dowjones.com
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