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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