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Agree Realty Disagrees on Buyout

Nicholas Yulico

With a dividend yield of 6%, higher than many of its peers, Agree Realty (ADC Quote) is already an interesting REIT play. But at least one firm apparently believes there is some value that isn't being realized at the company.

Agree Realty is a small-cap real estate investment trust with a national portfolio of mostly single-tenant retail sites leased to chains such as Borders, Walgreen's and Kmart.

On Wednesday, privately held Boca Raton, Fla.-based real estate developer Compson Holding issued a press release saying it recently submitted two unsolicited offers to buy the Farmington Hills, Mich.-based REIT, or at least its existing 59-property portfolio. Compson's principals already hold about 3.1% of Agree's outstanding shares, according to the release.

Both bids were rejected by Agree's board of directors, who Compson said provided no explanation other than "it is not in the best interest of our stockholders."

Both proposals consisted of cash only, with no financing contingencies, Compson said. The first offer was $34.50 per share and the latest offer was $36.

Agree's shares rose 4% to $32.65 on Wednesday afternoon. A company representative didn't immediately return a call seeking comment on the offers.

Adjusting for the repayment of debt and other transaction costs, Compson says Agree's portfolio is worth $309 million to $314 million, or above $40 per share. This figure doesn't include any value for Agree's development pipeline.

"We asked the board if we can fly to Michigan and meet with them," says Michael Comparato, president of Compson. "We were told it was a waste of time." Comparato said his firm purchased its shares in Agree over the past four months.

He says his firm has been eyeing the privatization trend among REITs over the past year, and in December his company came up with a list of three REITs that it would be interested in bidding on to take private. The thinking was that the companies' stock prices represented a value based on where private-market deals were occurring.

His top candidate at the time was Bedford Property (BED Quote). Bedford ended up going private in February at a 10% premium to its stock price. Next up on his list was Agree. His firm is also eying a third REIT, which he declined to name.

Comparato says his firm valued Agree's individual properties at cap rates, or initial rates of return, of 6.35% to 7.5%, which is where he says similar properties have been trading on the private market. He admits that even these values might be conservative.

Yesterday, Agree reported first-quarter funds from operations of 58 cents a share, down from 60 cents a year and a penny below analysts' mean estimate. BB&T Capital Markets analysts attributed the underperformance to higher-than-anticipated property and corporate-level expenses.

BB&T rates Agree hold based on its fair relative valuation. "We see no catalyst for appreciation," the analysts wrote in a report, which was released before news of the Compson bid came out Wednesday morning. The analysts declined to comment on whether the new offer would provide such a catalyst.

The situation at Agree could get interesting if Compson can get some of the company's major institutional investors backing them. Agree's board would have some serious explaining to do as to why an asset sale or a privatization isn't in the best interests of shareholders.