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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended December 31, 1996
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number 1-12928
Agree Realty Corporation
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(Exact name of registrant as specified in its charter)
Maryland 38-3148187
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31850 Northwestern Highway, Farmington Hills, Michigan 48334
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, included area code: (810) 737-4190
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $.0001 par value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
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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 __X__ 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. __X__
Shares of common stock outstanding as of March 14, 1997: 2,678,430. The
aggregate market value of the Registrant's shares of common stock held by
non-affiliates on such date was approximately $55,577,422.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incoroprated into Form 10-K
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Portions of the Registrant's Proxy Statement Part III
for its Annual Meeting of Shareholders Items 10-13
to be held on May 12, 1997
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TABLE OF CONTENTS
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Part I
Page
Numbers
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Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes and Disagreements With Accountants
on Accounting and Financial Disclosure 22
Part III
Item 10. Directors and Executive Officers of the
Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial
Owners and Management 22
Item 13. Certain Relationships and Related Transactions 22
Part IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 23
Signatures 25
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PART 1
Item 1. BUSINESS
General
The Company is a self-administered, self-managed real estate investment
trust (a "REIT") which develops, acquires, owns and operates properties which
are primarily leased to major national and regional retail companies under
net leases. As of December 31, 1996, the Company owned, either directly or
through interests in joint ventures, a portfolio of 32 properties located in
12 states and containing an aggregate of approximately 3.1 million square
feet of gross leasable area ("GLA"). The Properties consist of 13
neighborhood and community shopping centers and 19 free standing properties.
As of December 31, 1996, 98% of GLA in the Portfolio was leased, and
approximately 92% of the Company's base rental income was attributable to
national and regional retailers. Such retailers include Kmart Corporation
("Kmart"), Borders, Inc., Roundy's Inc. ("Roundy's") and Fashion Bug
(Charming Shoppes, Inc.) which, as of December 31, 1996, collectively
represented approximately 70% of current base rental income. The Company was
the developer of all 13 of the shopping centers and 14 of the 19
free-standing properties. As of December 31, 1996, the average age of the
Properties was 5.5 years.
The Company was formed in December 1993, to continue and expand the
retail property business founded in 1971 by its current Chairman of the Board
of Directors and President, Richard Agree. Since 1971, the Company and its
predecessors have specialized in building properties to suit for national and
regional retailers who have signed long-term net leases prior to commencement
of construction. The Company believes that this strategy provides it with a
predictable source of income from primarily national and regional retail
tenants in its existing properties and also provides opportunities for
development of additional properties at attractive returns on investment,
without the lease-up risks inherent in speculative development.
Upon completion of its initial public offering (the "IPO") in April
1994, the Company succeeded to the ownership of 17 properties which contained
an aggregate of 2,376,000 square feet of space. Since the IPO, the Company
has:
o Completed the development or acquisition of 14 properties leased to
Borders, Inc. and other subsidiaries (collectively, "Borders") of Borders
Group, Inc. ("BGI") which contain over 650,000 square feet. These
properties include Borders' corporate headquarters and central
administrative building in Ann Arbor, Michigan. BGI has guaranteed the
leases on all 14 of these properties. Seven of these properties are owned
directly by the Company and seven of these properties (the "Joint Venture
Properties") are owned by entities formed with affiliates of Borders
wherein the Company's economic interest ranges from 8% to 20% (the "Joint
Ventures").
o Developed a Circuit City store in Boynton Beach, Florida, consisting of
approximately 32,500 square feet, pursuant to a twenty-year net lease.
o Continued to operate both its initial portfolio and its new properties
at leased rates of over 95% and without any tenant
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defaults. Kmart, the Company's largest tenant, reported to the Company
that the aggregate same-store sales at the stores leased from the Company
increased over 6% from 1995 to 1996. Since the IPO, the only anchor tenant
to vacate any of the Company's Properties was J. Byrons, which vacated
its 51,868 square foot location in Lakeland, Florida. The Company has
leased such location to Best Buy Company, at an increased rental rate for
a term which expires in January 2013.
o Announced results for the fourth quarter and year ended December 31,
1996, which included Funds from Operations (as hereafter defined) of
$1,951,000 and $7,076,000 for the quarter and the year, respectively, or
an increase of 18% and 10% respectively, from the same periods in 1995;
and net income for the quarter and the year of $1,382,000 and $3,734,000
respectively, or an increase of 65% and 15%, respectively, over the same
periods in 1995.
The Company is operated under the direction of Richard Agree, Chairman
of the Board and President, and Kenneth R. Howe, Vice President, Finance.
Messrs. Agree and Howe have an combined 35 years experience in the
construction, management, leasing and disposition of shopping center
properties.
Objectives and Strategies
Objectives
The Company's primary objectives are (i) to realize steady and
predictable cash flows through the ownership of high quality properties
leased primarily to national and regional retailers, and (ii) to increase
Funds from Operations per share through the development or acquisition of
additional properties. The Company presently intends to achieve these
objectives by implementing the growth, operating and financial strategies
outlined below.
Growth and Operating Strategies
In seeking to attain these objectives, the Company has applied and
intends to continue to apply the same strategies that have guided its
principals during the past twenty-six years. These strategies include the
following:
o Developing or acquiring each property with the objective of holding it
for long-term investment value.
o Developing or acquiring properties in what the Company considers to be
attractive long term locations. Such locations typically have (i)
convenient access to transportation arteries with traffic count that is
higher than average for the local market; (ii) concentrations of other
retail proprieties and (iii) demographic characteristics which are
attractive to the retail tenant which will lease the property upon
completion.
o Generally, purchasing land and beginning development of a property only
upon the execution of a lease with a national or regional retailer on
terms which provide a return on estimated cost which is attractive
relative to the Company's cost of capital.
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o Directing all aspects of development, including construction, design,
leasing and management. Property management and the majority of its
leasing activities are handled directly by Company personnel. The Company
believes that this approach to development and management enhances the
ability of the Company to develop and maintain assets of high
construction quality which are designed, leased and maintained to
maximize long-term value and enables it to operate efficiently.
The Company believes that the relationships established by its
principals with national and regional retailers as well as the financing
relationships its principals have developed with lenders provide it with an
advantage in achieving its objectives.
Financing Strategy
As of December 31, 1996, the Company's ratio of indebtedness to market
capitalization was 54%. The Company intends to maintain a ratio of total debt
(including construction and acquisition financing) to market capitalization
of 65% or less. The Company plans to begin construction of additional
pre-leased developments and may acquire additional properties which will
initially be financed by its Credit Facility and Line of Credit. Management
intends to periodically refinance short term construction and acquisition
financing with long-term debt and /or equity. Upon completion of refinancing,
the Company intends to lower the ratio of total debt to market capitalization
to 50% or less. Nevertheless, the Company may operate with debt levels or
ratios which are in excess of 50% for extended periods of time prior to such
refinancing.
The Company may from time to time re-evaluate its borrowing policies in
light of then current economic conditions, relative costs of debt and equity
capital, market value of properties, growth and acquisition opportunities and
other factors. However, there is no contractual limit on the Company's ratio
of debt to total market capitalization and, accordingly, the Company may
modify its borrowing policy and may increase or decrease its ratio of debt to
market capitalization.
Tax Status
The Company has operated and intends to operate in a manner to qualify
as a REIT under Sections 856 through 860 of the Internal Revenue Code of
1986, as amended. In order to maintain qualification as a REIT, the Company
must distribute at least 95% of its real estate investment trust income and
meet certain other asset and income tests. Additionally, ownership of the
Company, directly or constructively, by any single person is limited to 9.8%
of the total number of outstanding shares, subject to certain exceptions. As
a REIT, the Company is not subject to federal income tax with respect to that
portion of its income which meets certain criteria and is distributed
annually to the stockholders.
Competition
The Company faces competition in seeking properties for acquisition and
tenants who will lease space in these properties from insurance companies,
credit companies, pension funds, private individuals, investment companies
and other REITs, many of which have greater financial and other resources
than the Company. There can be no
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assurance that the Company will be able to successfully compete with such
entities in its development, acquisition and leasing activities in the
future.
Potential Environmental Risks
Investments in real property create a potential for environmental
liability on the part of the owner or operator of such real property. If
hazardous substances are discovered on or emanating from any of the
Properties, the owner or operator of the property (including the Company) may
be held strictly liable for all costs and liabilities relating to such
hazardous substances. The Company has had a Phase I environmental study
(which involves inspection without soil sampling or ground water analysis)
conducted on each Property by independent environmental consultants.
Furthermore, the Company has adopted a policy of conducting a Phase I
environmental study on each property it acquires.
The Phase I environmental studies conducted by the Company have not
revealed the existence of any hazardous substance or environmental liability
on the Properties. In addition, the management of the Company has no reason
to believe that any hazardous substances exist on such Properties in
violation of any applicable laws; however, no assurance can be given that
such substances are not located on any of the Properties. The Company
presently carries no insurance coverage for the types of environmental risks
described above.
The Company believes that it is in compliance in all material respects
with all Federal, state and local ordinances and regulations regarding
hazardous or toxic substances. The Company has not been notified by any
governmental authority of any noncompliance, liability or other claim in
connection with any of the Properties.
Employees
As of March 15, 1997, the Company employed eight persons. Employee
responsibilities include accounting, construction, leasing, property
coordination and administrative functions for the Properties. The Company's
employees are not covered by a collective bargaining agreement and the
Company considers its employee relations to be satisfactory. The Company's
headquarters are located at 31850 Northwestern Highway, Farmington Hills, MI
48334 and its telephone number is (810) 737-4190.
Recent Developments
On January 24, 1997 the Company repaid $4,221,283 of construction loans.
Such funds were paid from the Company's Credit Facility (defined below).
On February 26, 1997 the Company repaid $8,518,615 of construction
loans. Such funds were paid from the Company's Credit Facility (defined
below).
-6-
Item 2. PROPERTIES
The Properties consist of 13 neighborhood and community shopping centers
and 19 free standing properties. As of December 31, 1996, 98% of GLA in the
Portfolio was leased, and approximately 92% of the Company's base rental
income was attributable to, national and regional retailers. Such retailers
include Kmart, Borders, Roundy's and Fashion Bug which, at December 31, 1996,
collectively represented approximately 70% of current base rental income.
A substantial portion of the Company's income consists of rent received
under net leases. Most of the leases provide for the payment of fixed base
rentals monthly in advance and for the payment by tenants of a pro rata share
of the real estate taxes, insurance, utilities and common area maintenance of
the shopping center as well as payment to the Company of a percentage of such
tenant's sales. However the payments of percentage rents to the Company
historically have not been material and the Company does not anticipate that
they will become material in the future. Although a majority of the leases
require the Company to make roof and structural repairs as needed, a number
of leases place that responsibility on the tenant. The Company's management
places a strong emphasis on sound construction and maintenance on its
properties.
Location of Properties in the Portfolio
Total Gross Percent of
Number of Leasable Area GLA Leased on
State Properties (Sq. feet) December 31, 1996
----- ---------- ------------- -----------------
California 1 38,015 100%
Florida 5 (1) 486,657 96
Indiana 1 (1) 15,844 100
Illinois 1 20,000 85
Kansas 1 25,000 100
Kentucky 1 135,009 100
Michigan 11 (1) 1,549,758 99
Nebraska 2 (1) 55,000 100
Ohio 2 108,543 100
Oklahoma 3 (1) 74,282 100
Pennsylvania 1 37,004 100
Wisconsin 3 523,036 97
-- --------- ---
Total/Average 32 3,068,148 98%
-- --------- ---
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(1) Includes Joint Venture Properties
-7-
Annualized Base Rent of the Company's Properties
The following is a breakdown of Base Rents in place at December 31, 1996
for each property type of retail tenant:
Annualized Percent of
Type of Tenant Base Rent (1) Total Base Rent
---------------------------------------------------------------
National (2) $13,802,774 81%
Regional (3) 1,882,863 11
Local 1,341,566 8
----------- ---
Total $17,027,203 100%
----------- ---
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(1) Includes the Company's share of annualized base rent for each of the
Joint Venture Properties.
(2) Includes the following national tenants: Kmart, Borders, Fashion Bug, Winn
Dixie, Rite Aid, JC Penney, Avco Financial, GNC Group, Radio Shack, On Cue,
Super Value, Maurices, Petrie Stores, Walgreens, Payless Shoes, Food Lion,
Blockbuster Video, Sears, A&P, TGI Fridays and Circuit City.
(3) Includes the following regional tenants: Roundy's, Dunhams Sports, Brauns
Fashion and Hollywood Video.
As of December 31, 1996, 98% of the Portfolio was leased and
approximately 92% of the Company's base rental income was attributable to
national and regional retailers under long-term leases. On December 31, 1996
the average annualized base rent per square foot of the Portfolio was $6.39.
Four of the Company's largest tenants of are Kmart, Borders, Inc.,
Roundys, Inc. and Fashion Bug (Charming Shoppes). The annualized base rental
income for these tenants, (including the Company's proportionate share of the
annual base rent for the Joint Venture properties) as of December 31, 1996,
is as follows:
Percent
Amount of Total
------ --------
Kmart $ 5,305,601 31%
Borders, Inc. 4,393,545 26%
Roundys, Inc. 1,730,063 10%
Fashion Bug 573,200 3%
----------- ---
$12,002,409 70%
----------- ---
-8-
Community Shopping Centers
Thirteen of the Company's properties are Community Shopping Centers ranging
in size from 20,000 to 228,476 square feet of GLA. The centers are located in
5 states as follows: Florida (2), Illinois (1), Kentucky (1), Michigan (6)
and Wisconsin (3). The location, general character and primary occupancy
information with respect to the community shopping centers at December 31,
1996 are set forth below:
Summary of Community Shopping Centers at December 31, 1996
(2) (3)
Total (1) Average Percent Percent
Year Land Leasable Annualized Base Leased at Occupied Anchor Tenants
Completed/ Area Area Base Rent per at Dec 31, at Dec 31, (Lease expiration/
Property Location Expanded (acres) (Sq. Ft.) Rent Sq. Ft. 1996 1996 Option expiration)
- -------------------------------------------------------------------------------------------------------------------------------
Capital Plaza 1978/ 11.58 135,009 $ 405,268 $ 3.00 100% 100% Kmart (2003/2053)
Frankfort, KY 1991 Winn Dixie (2010/2035)
Fashion Bug (2004/2024)
Charleviox Commons 1991 14.79 137,375 633,395 4.61 96% 70% Kmart (2015/2065)
Charlevoix, MI Roundy's, Inc. (2011/2031)
Chippewa Commons 1991 16.37 168,311 845,833 5.03 96% 96% Kmart (2014/2064)
Chippewa Falls, WI Roundy's, Inc. (2011/2031)
Fashion Bug (2001/2021)
Iron Mountain Plaza 1991 21.20 176,352 835,713 4.74 97% 77% Kmart (2015/2065)
Iron Mountain, MI Roundy's, Inc. (2011/2031)
Fashion Bug (2002/2022)
Ironwood Commons 1991 23.92 185,535 940,679 5.07 100% 100% Kmart (2015/2065)
Ironwood, MI Super Value (2011/2036)
J.C. Penney Co (2006/2026)
Fashion Bug (2002/2022)
Marshall Plaza 1990 10.74 119,279 627,536 5.26 100% 100% Kmart (2015/2065)
Marshall, MI Fashion Bug (2002/2022)
North Lakeland Plaza 1987 16.67 171,334 1,336,611 7.80 100% 100% Kmart (2011/2061)
Lakeland, FL Best Buy (2013/2028)
-9-
Summary of Community Shopping Centers at December 31, 1996 (continued)
(2) (3)
Total (1) Average Percent Percent
Year Land Leasable Annualized Base Leased at Occupied Anchor Tenants
Completed/ Area Area Base Rent per at Dec 31, at Dec 31, (Lease expiration/
Property Location Expanded (acres) (Sq. Ft.) Rent Sq. Ft. 1996 1996 Option expiration)
- -------------------------------------------------------------------------------------------------------------------------------
Petoskey Town Center 1990 22.08 174,870 934,248 5.34 94% 94% Kmart (2015/2065)
Petoskey, MI Roundy's, Inc. (2010/2030)
Fashion Bug (2002/2022)
Plymouth Commons 1990 16.30 162,031 807,131 4.98 95% 95% Kmart (2015/2065)
Plymouth, WI Roundy's, Inc. (2010/2030)
Fashion Bug (2001/2021)
Rapids Associates 1990 16.84 173,557 978,119 5.64 100% 100% Kmart (2015/2065)
Big Rapids, MI Roundy's, Inc. (2010/2030)
Fashion Bug (2001/2021)
Shawano Plaza 1990 17.91 192,694 985,324 5.11 100% 100% Kmart (2014/2064)
Shawano, WI Roundy's, Inc. (2010/2030)
J.C. Penney Co (2005/2025)
Fashion Bug (2001/2021)
West Frankfort Plaza 1982 1.45 20,000 89,250 4.46 85% 85% Fashion Bug (1997/2007)
West Frankfort, IL
Winter Garden Plaza 1988 22.34 228,476 1,210,801 5.30 91% 69% Kmart (2013/2063)
Winter Garden, FL Food Lion (2009/2029)
Sears Roebuck (2000/2010)
------ --------- ----------- ----- -- --
Total/Average 212.19 2,044,823 $10,629,908 $5.20 97% 91%
====== ========= =========== ===== == ==
(1) Total annualized base rents of the Company as of December 31, 1996
(2) Calculated as total annualized base rents, divided by GLA actually
leased as of December 31, 1996
(3) Roundy's does not currently occupy the space it leases at the Iron
Mountain Plaza (35,285 square feet, rented at a rate of $5.87 per square
foot) and the Charlevoix Commons Property (35,896 square feet, rented at a
rate of $5.97 per square foot). Both of these leases expire in 2011 (assuming
they are not extended by Roundy's Inc.). Sears, Roebuck & Co. leases but does
not currently occupy, the 50,000 square feet it leases at the Winter Garden
Plaza Property. This lease expires in 2000 (assuming that it is not extended
by Sears) and is rented at a rate of $5.00 per square foot.
(4) All community shopping centers except Capital Plaza (which is subject
to a long-term ground lease expiring in 2053 from a third party are
wholly-owned by the Company.
-10-
Free-Standing Properties
Nineteen of the Properties are free-standing properties net leased to
either A&P (1), Borders (14), Circuit City Stores (1), or Kmart (3), which in
the aggregate comprise approximately 1,000,000 square feet. The free-standing
properties range in size from 15,844 to 226,000 square feet of GLA and are
located in the following states: California (1), Florida (3), Indiana (1),
Kansas (1), Michigan (5), Nebraska, (2), Ohio (2), Oklahoma (3) and
Pennsylvania (1). Included in the Company's 19 retail properties are seven
Joint Venture Properties in which the Company owns interests ranging from 8%
to 20% and 12 wholly owned properties. The Company's twelve (12) wholly owned
free-standing properties provide $5,720,378 of annualized base rent at an
average base rent per square foot of $10.00. The location, general character
and primary occupancy information with respect to the wholly-owned
free-standing properties are set forth in the following table:
Wholly Owned Free Standing Properties
Year Lease expiration
Tenant/Location Completed Total GLA (Option expiration)
- --------------- --------- --------- -------------------
A&P, Roseville, MI 1977 104,000 May 21, 2002 (2022)
Borders, (1)
Aventura, FL 1996 30,000 April 11, 2116 (2036)
Borders, Columbus, OH 1996 21,000 Jan 23, 2016 (2036)
Borders,
Monroeville, PA 1996 37,004 Nov 8, 2016 (2036)
Borders, Norman, OK 1996 24,641 Sep 20, 2016 (2036)
Borders, Omaha, NE 1995 30,000 Nov 3, 2015 (2035)
Borders,
Santa Barbara, CA 1995 38,015 Nov 17, 2015 (2035)
Borders, Wichita, KS 1995 25,000 Nov 10, 2015 (2035)
Circuit City Stores
Boynton Beach, FL 1996 32,459 Dec 15, 2016 (2036)
Kmart, Grayling, MI 1984 52,320 Sep 30, 2009 (2059)
Kmart, Oscoda, MI 1984 90,470 Sep 30, 2009 (2059)
Kmart, (1)
Perysburg, OH 1983 87,543 Oct 31, 2008 (2058)
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Total 572,452
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(1)These properties are subject to long-term ground leases where a third
party owns the underlying land and has leased the land to the Company
to construct or operate two free-standing properties. The Company pays
rent for the use of the land and generally is responsible for all costs
and expenses associated with the building and improvements. At the end
of the lease terms, as extended (2035 and 2027), the land together with
all improvements revert to the land owner. The Company has an option to
purchase the Perrysburg property during its lease term.
-11-
Joint Venture Properties
During 1996, the Company developed or acquired seven free-standing
Properties which are leased to Borders, including Borders' corporate
headquarters, its central administrative building and Properties operated as
Borders Books and Music. Each of these Properties is owned by a separate
limited liability company or a limited partnership which is owned jointly by
the Company and an affiliate of Borders. The Company's economic interest in
the Joint Ventures ranges from 8% to 20%. The financing for the development
of the Joint Venture Properties was provided through a financing facility
established by Borders and its affiliates (the "Borders Financing Facility").
The lease between Borders and each of the Joint Ventures has a term
expiring November 21, 2000, unless the Borders Financing Facility is extended
or earlier terminated. At any time during the term of the lease, Borders has
the right to refinance the Property or to purchase the Property for various
percentages of total project costs, provided that, prior to such refinancing
or purchase, the Company may elect to provide alternative financing for the
Property or purchase the Property and purchase the interest of the Borders'
affiliate in the Joint Venture. In the event the Company elects to provide
financing or to purchase the Property, and is subsequently unable to obtain
the requisite financing or in the event that the Company defaults in its
development obligations to the Joint Venture, Borders may purchase the
Property. If the Company provides refinancing or purchases the Property, the
Company will be required to acquire the interest of the Borders' affiliate in
the Joint Venture, and Borders and the Joint Venture will enter into a new
lease providing for a term of 20 years, with four five-year extension
options.
Under certain circumstances, the Company may elect to allow Borders to
place long-term financing on such Properties, in which case, the Company will
maintain its current interest in the Joint Venture and become the sole equity
member of the entity which owns such Property. In such a circumstance, the
Company will own the Property subject to a first mortgage loan which could
exceed 90% of the property's estimated value, and lease payments received by
the Company would be adjusted to reflect Borders' financing.
Prior to one of the financing transactions discussed above, the
Company's investment in the seven Joint Venture properties is expected to
provide in excess of $600,000 annualized base rent. Of this amount, the
Company estimates that approximately $116,000 is variable based on short-term
financing. Under certain circumstances relating to refinancing of such
assets, the rents paid pursuant to such leases are subject to adjustment. The
following table provides additional information on the Joint Venture
Properties.
-12-
Joint Venture Properties
The Company's
Tenant / Location Interest Total GLA Lease Expirations
- ----------------- ------------- --------- -----------------
Borders, Inc.
Ann Arbor, MI 11% 110,000 November 21, 2000
Borders, Inc.
Ann Arbor, MI 8% 226,000 November 21, 2000
Borders, Inc.
Boynton Beach, FL 12% 20,000 November 21, 2000
Borders, Inc.
Indianapolis, IN 8% 15,844 November 21, 2000
Borders, Inc.
Oklahoma City, OK 20% 24,641 November 21, 2000
Borders, Inc./Omaha, NE 18% 25,000 November 21, 2000
Borders, Inc./Tulsa, OK 15% 25,000 November 21, 2000
-------
Total 446,485
-------
Major Tenants
The following table sets forth certain information with respect to the
Company's major tenants:
Annual Base Percent of Total
Number Rent as of Annual Base Rent as
of Leases December 31, 1996 of December 31, 1996
--------- ----------------- --------------------
Kmart 15 $ 5,305,601 31%
Borders 14 4,393,545 (1) 26%
Roundy's 7 1,730,063 10%
Fashion Bug
(Charming Shoppes) 10 573,200 3%
-- ----------- --
Total/Average 46 $12,002,409 70%
-- ----------- --
- --------------
(1) Includes the Company's share of annual base rent for each of the
Joint Venture Properties
Fifteen of the Properties are anchored by Kmart, a publicly traded
international retailer with over 2,100 stores. Kmart's principal business is
general merchandise retailing through a chain of department stores and it is
one of the world's largest retailers based on sales volume. The Company
derived approximately 31% of its annual base rental income for the year ended
December 31, 1997 from, and approximately 39% of the Company's future minimum
rentals are attributable to, Kmart.
BGI, a publicly-traded company, is the country's second largest
retailers of books, music and other informational, educational and
entertainment products. Two of BGI's subsidiaries, Borders, Inc. and Walden
Books, Co., Inc. together operate in over 1,000 locations, serving all 50
states. The Company derived approximately 26% of its total average annual
base rental income for the year ended December 31, 1996 from, and
approximately 31% of the Company's future minimum rentals are attributable
to, Borders.
Roundy's and its subsidiaries are engaged principally in the wholesale
distribution of food and non-food products to supermarkets and warehouse food
stores. The Company derived approximately 10% of its
-13-
annual base rental income from, and approximately 11% of the Company's future
minimum rentals are attributable to, Roundy's.
Charming Shoppes, Inc. operates, through its subsidiaries, a chain of
women's specialty clothing stores in over 40 states. Its retail properties
operate under the names Fashion Bug and Fashion Bug Plus. The Company derived
approximately 3% of its annual base rental income for the year ended December
31, 1996 from, and approximately 1% of the Company's future minimum rental
are attributable to, Charming Shoppes, Inc.
Lease Expirations
The following table shows lease expirations for the next 10 years for
the Company's community shopping centers and wholly owned free-standing
properties, assuming that none of the tenants exercise renewal options.
December 31, 1996
Gross Lesable Area Annualized Base Rent
------------------ --------------------
Number
Expiration of Leases Square Percent Per cent
Year Expiring Footage of Total Amount of Total
- ---------- --------- ------- -------- ------ --------
1997 9 35,240 1.35% $ 289,574 1.77%
1998 22 79,410 3.03 567,242 3.47
1999 4 19,800 0.76 121,620 0.74
2000 13 114,050 4.36 731,530 4.47
2001 26 105,434 4.03 873,346 5.34
2002 10 166,570 6.37 830,969 5.08
2003 7 113,992 4.36 502,732 3.07
2004 -- -- -- -- --
2005 2 34,204 1.31 131,714 0.81
2006 2 31,204 1.18 157,065 0.97
-- ------- ----- ---------- -----
Total/Average 95 699,904 26.75 $4,205,792 25.72%
-- ------- ----- ---------- -----
Leases on the seven Joint Venture Properties are typically for an
initial term through November 2000. In the event a refinancing is
consummated, Borders is required to enter into a twenty year net lease with a
fixed lease rate.
Item 3. LEGAL PROCEEDINGS
The Company is not presently involved in any litigation nor, to
management's knowledge, is any litigation threatened against the Company,
except for routine litigation arising in the ordinary course of business
which is expected to be covered by the Company's liability insurance.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1996.
-14-
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange
under the symbol ADC. The following table sets forth the high and low sales
prices of the Common Stock, as reported on the New York Stock Exchange
Composite Tape, and the dividends declared per share of Common Stock by the
Company for each calendar quarter in the last two fiscal years. Dividends
were paid in the periods immediately subsequent to the periods in which such
dividends were declared.
Market Information Dividends Per
High Low Common Share
---- --- -------------
Quarter Ended
March 31, 1995 $16.250 $15.375 $0.45
June 30, 1995 $17.000 $14.500 $0.45
September 30, 1995 $17.375 $15.500 $0.45
December 31, 1995 $17.000 $13.500 $0.45
March 31, 1996 $18.250 $14.500 $0.45
June 30, 1996 $18.875 $16.500 $0.45
September 30, 1996 $19.750 $17.500 $0.45
December 31, 1996 $21.500 $18.750 $0.45
At December 31, 1996, there were 2,649,475 shares of Common Stock issued
and outstanding which were held by approximately 216 stockholders of record.
The stockholders of record do not reflect persons or entities who held their
shares in nominee or "street" name.
The Company intends to continue to declare quarterly dividends to its
stockholders. However, distributions by the Company are determined by the
Board of Directors and will depend on a number of factors, including the
amount of Funds from Operations, the financial and other condition of its
properties, its capital requirements, the annual distribution requirements
under the provisions of the code applicable to REIT"s and such other factors
as the Board of Directors deems relevant.
During the year ended December 31, 1996, there were no sales of
unregistered securities by the Company, except the grant under the Company's
1994 Stock Incentive Plan of 11,290 shares of restricted stock to certain
employees of the Company. Such shares vest in equal annual installments over
a five-year period from the date of the grant, but entitle the holder thereof
to receive dividends from the date of the grant.
-15-
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the
Company and the Agree Predecessors on a historical basis and should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and all of the financial statements and
notes thereto included elsewhere in the Report. The balance sheet data for
December 31, 1992 through December 31, 1996 and operating data for each of
the periods presented were derived from audited financial statements of the
Company and the Agree Predecessors.
(In thousands, except per share information)
Agree Realty Corporation The Agree Predecessors
------------------------------------- -------------------------------------
Year Year April 22, January 1, Year Year
Ended Ended Through Through Ended Ended
Dec 31, Dec 31, Dec 31, April 21, Dec 31, Dec 31,
Operating Data 1996 1995 1994 1994 1993 1992
- -------------------------------------------------------------------------------- ------------------------------------
Total Revenue $ 16,291 $ 13,699 $ 9,280 $4,080 $ 13,156 $ 12,606
-------- -------- -------- ------ -------- --------
Expenses
Property expense (1) 2,485 2,049 1,245 681 1,872 1,856
General and administrative 1,105 966 668 159 660 639
Interest 6,101 4,335 2,972 2,584 8,803 9,167
Depreciation and amortization 2,620 2,317 1,627 680 2,292 2,260
-------- -------- -------- ------ -------- --------
Total Expenses 12,311 9,667 6,512 4,104 13,627 13,922
-------- -------- -------- ------ -------- --------
Other Income (Expense) (2) 653 -- (375) 85 448 680
-------- -------- -------- ------ -------- --------
Income (loss) before extraordinary
item and minority interest 4,633 4,032 2,393 61 (23) (636)
Extraordinary Item - Early
Extinguishment of Debt -- -- (2,139) -- -- --
-------- -------- -------- ------ -------- --------
Income (loss) before Minority Interest 4,633 4,032 254 61 (23) (636)
Minority Interest 899 785 49 -- -- --
-------- -------- -------- ------ -------- --------
Net Income (Loss) $ 3,734 $ 3,247 $ 205 $ 61 $ (23) $ (636)
======== ======== ======== ====== ======== ========
Funds from Operations $ 7,076 $ 6,389 $ 4,544 -- -- --
======== ======== ======== ====== ======== ========
Number of Properties 32 20 17 17 17 17
======== ======== ======== ====== ======== ========
Number of Square Feet 3,068 2,470 2,377 2,377 2,377 2,377
======== ======== ======== ====== ======== ========
Per share data
- --------------
Net income (3) $ 1.41 $ 1.23 $ 0.08 -- -- --
======== ======== ======== ====== ======== ========
Cash dividends $ 1.80 $ 1.80 $ 1.25 -- -- --
======== ======== ======== ====== ======== ========
Weighted average of common
shares outstanding 2,649 2,638 2,638 -- -- --
======== ======== ======== ====== ======== ========
Balance Sheet Data
Real Estate
(before accumulated depreciation) $132,474 $118,360 $ 96,852 $ 96,548 $ 95,870
Total Assets $121,382 $108,928 $ 89,653 $ 89,835 $ 91,859
Total debt, including accrued interest $ 88,252 $ 73,741 $ 54,431 $ 94,334 $ 95,939
- ---------
(1) Property expense includes real estate taxes, property maintenance,
insurance, utilities and land lease expense.
(2) Other income (expense) is composed of development fee income, gain
on land sales, equity in net income of unconsolidated entities and
reorganization costs
(3) Net income per share has been computed by dividing the net income
by the weighted average number of Common Stock.
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANYALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was established to continue to operate and expand the retail
property business of its predecessors. The Company commenced its operations
on April 22, 1994 with the sale of 2,500,000 shares of common stock. The net
cash proceeds to the Company from the completion of this IPO were
approximately $45.4 million which were used primarily to reduce outstanding
indebtedness, pay stock issuance costs and establish a working capital
reserve.
The assets of the Company are held by, and all operations conducted through
Agree Limited Partnership, (the "Operating Partnership") of which the Company
is the sole general partner which held an 80.59% interest as of December 31,
1996. The Company is operating so as to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
The following should be read in conjunction with the Consolidated Financial
Statements of Agree Realty Corporation and the Combined Financial Statements
of the Agree Predecessors, including the respective notes thereto, which are
included elsewhere in this Form 10-K.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Rental income increased $2,514,000, or 21%, to $14,450,000 in 1996, compared
to $11,936,000 in 1995. The increase was the result of the development and
acquisition of five properties in 1996 and the development of three
properties in the fourth quarter of 1995.
Operating cost reimbursements, which represent additional rent required by
substantially all of the Company's leases to cover the tenants' proportionate
share of property operating expenses, increased $90,000, or 5%, to $1,761,000
in 1996, compared to $1,671,000 in 1995. Operating cost reimbursements
increased due to the increase in real estate taxes and property operating
expenses from 1995 to 1996 as explained below.
Management fees and other income remained relatively constant at $81,000 in
1996 versus $92,000 in 1995.
Real estate taxes increased $49,000, or 4%, to $1,169,000 in 1996 versus
$1,120,000 in 1995. The increase is the result of general assessment
increases relating to the shopping center properties and the addition of new
properties.
Property operating expenses (shopping center maintenance, insurance and
utilities) increased $109,000, or 12%, to $980,000 in 1996 versus $871,000 in
1995. The increase was the result of increased snow removal costs of $26,000;
an increase in shopping center maintenance costs of $95,000; an increase in
utility costs of $8,000 and a decrease in insurance costs of $20,000 in 1996
versus 1995.
Land lease payments increased $280,000 to $336,000 in 1996 versus $56,000 in
1995 as a result of the acquisition of a ground lease of a free standing
property in Aventura, Florida.
-17-
General and administrative expenses increased by $139,000, or 14%, to
$1,105,000 in 1996 versus $966,000 in 1995. The increase was primarily the
result of an increase in compensation related expenses of $24,000; increases
in state franchise and income taxes of $40,000; additional administrative
expenses in connection with its secured line of credit of $25,000 and
increased expenses in connection with the management of the Company's
properties of $50,000. General and administrative expenses as a percentage of
rental income decreased from 8.1% for 1995 to 7.6% for 1996.
Depreciation and amortization increased $303,000, or 13%, to $2,620,000 in
1996 versus $2,317,000 in 1995. The increase was the result of the completion
of eight new properties in late 1995 and 1996.
Interest expense increased $1,766,000, or 41%, to $6,101,000 in 1996, from
$4,335,000 in 1995. The increase in interest expense was the result of the
Company financing the development and acquisition of eight new properties in
late 1995 and 1996.
The Company received $510,000 of development fee income in 1996 in connection
with the development of four Joint Venture Properties. There was no
development fee income in 1995. The above amount was not included in the
Company's calculation of Funds from Operations, due to the non-recurring
nature of this type of income.
The Company recognized income of $85,000 on the sale of a parcel of land in
1996. There was no land sale gains in 1995.
Equity in net income of unconsolidated entities represents the Company's
share of the net income of $59,000, from the seven Joint Ventures formed for
the purpose of acquiring and developing the single tenant properties for
Borders. These entities were not in existence during the year ended December
31, 1995.
The Company's income before minority interest increased $601,000 as a result
of the foregoing factors.
Comparison of Year ended December 31, 1995 to Year ended December 31, 1994
Rental income increased $221,000, or 2%, to $11,936,000 in 1995, compared to
$11,715,000 in 1994. The increase was the result of $237,000 from the
addition of three new properties in 1995, $49,000 from periodic rental
increases that came into effect during 1995 and a decrease of $65,000 due
primarily to the releasing of tenant space in one of the Company's Florida
shopping centers.
Operating cost reimbursements increased $83,000, or 5%, to $1,671,000 in
1995, compared to $1,588,000 in 1994. The increase in operating cost
reimbursements resulted from the increase in real estate taxes and property
operating expenses from 1994 to 1995 as explained below.
Management fees and other income increased $35,000 to $91,000 in 1995 versus
$56,000 in 1994.
Real estate taxes increased $15,000, or 1%, to $1,121,000 in 1995 versus
$1,106,000 in 1995. The increase is the result of general assessment
increases.
-18-
Property operating expense increased $107,000, or 14%, to $871,000 in 1995
versus $764,000 in 1994. The increase was the result of an increase in snow
removal costs of $96,000 as a result of heavy snowfalls in Michigan and
Wisconsin during the fourth quarter of 1995; an increase in property repairs
of $13,000; an increase in utility costs of $3,000 and a decrease in
insurance expense of $5,000.
Land lease payments remained the same at $56,000 for 1995 and 1994.
General and administrative expenses increased $139,000, or 16%, to $1,022,000
in 1995 versus $883,000 in 1994. This increase is primarily the result of
costs associated with being a public company for a full year. General and
administrative expenses as a percentage of rental income increased from 7.1%
in 1994 to 8.1% in 1995.
Depreciation and amortization increased $10,000, to $2,317,000 in 1995 from
$2,307,000 in 1994. The increase reflects depreciation and amortization on
properties developed in 1995.
Interest expense decreased $1,221,000, or 22%, to $4,335,000 in 1995, from
$5,556,000 in 1994. The decrease in interest expense results primarily from
the prepayment and refinancing of the Company's debt in connection with the
IPO.
Other income (excluding reorganization costs) decreased $205,000 as a result
of a decrease in development fee income of $85,000 and a decrease in gain on
land sale of $120,000.
Reorganization costs of $494,000 were incurred during 1994 in connection with
certain property and related mortgage transfers. These costs were associated
with the transfer of the properties from the Agree Predecessors to the
Company in connection with the IPO. There were no reorganization costs in
1995.
There was an extraordinary item in 1994 of $2,139,000 attributable to
prepayment penalties and the write-off of deferred finance charges on the
indebtedness which was repaid with the proceeds of the IPO. There were no
extraordinary items in 1995.
The Company's income before minority interest increased $3,717,000 as a
result of the foregoing factors.
Funds From Operations
Management considers Funds from Operations ("FFO") to be a supplemental
measure of the Company's operating performance. FFO is defined by the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT") to
mean net income computed in accordance with Generally Accepted Accounting
Principals ("GAAP"), excluding gains (or loses) from debt restructuring and
sales of property, plus depreciation and amortization, and after adjustments
for unconsolidated partnerships and joint ventures. FFO does not represent
cash generated from operating activities in accordance with GAAP and is not
necessarily indicative of cash available to fund cash needs. FFO should not
be considered as an alternative to net income as the primary indicator of the
Company's operating performance or as an alternative to cash flow as a
measure of liquidity.
-19-
The following table illustrates the calculation of FFO for the years ended
December 31, 1996 and 1995:
Year ended December 31, 1996 1995
- ----------------------- ---------- ----------
Net income before minority interest $4,633,295 $4,032,381
Depreciation of real estate assets 2,556,603 2,248,720
Amortization of leasing costs 52,033 58,867
Amortization of stock awards 82,873 48,750
Depreciation of real estate assets
held in unconsolidated entities 345,972 --
Gain on sale of assets (84,688) --
Development fee income (509,673) --
---------- ----------
Funds from Operations $7,076,415 $6,388,718
---------- ----------
Funds from Operations per share $ 2.15 $ 1.95
---------- ----------
Weighted average shares and
OP Units outstanding 3,287,434 3,276,144
---------- ----------
FFO increased $688,000, or 11%, for the year ended December 31, 1996, to
$7,076,000. The increase in FFO is primarily the result of the development
and acquisition of five properties in 1996 and the development of three
properties in the fourth quarter of 1995.
Liquidity and Capital Resources
The Company's principal demands for liquidity are distributions to its
stockholders, debt repayment, development of new properties and future
property acquisitions.
During the quarter ended December 31, 1996, the Company declared a quarterly
dividend of $.45 per share. The dividend was paid on January 6, 1997 to
holders of record on December 23, 1996.
As of December 31, 1996, the Company had total mortgage indebtedness of
$53,663,999 with a weighted average interest rate of 7.61%. Future scheduled
annual maturates of mortgages payable for the years ending December 31 are as
follows: 1997 - $357,946; 1998 - $421,123; 1999 - $10,679,397; 2000 -
$969,964; 2001 - $1,046,875. This mortgage debt is all fixed rate debt with
the exception of $2,375,000 which bears interest at one half percent over the
prime rate.
In addition, the Operating Partnership has in place a $50 million line of
credit facility (the "Credit Facility") which is guaranteed by the Company.
The loan matures in November, 1998 and can be extended by the Company for an
additional three years. Advances under the Credit Facility bear interest
within a range of one-month to six-month LIBOR plus 200 basis points to 263
basis points or the Bank's prime rate plus 37 basis points to 75 basis
points, at the option of the Company, based on certain factors such as debt
to property value and debt service coverage. The Credit Facility is used to
fund property acquisitions and development activities and is secured by all
of the Company's existing properties which are not otherwise encumbered and
properties to be acquired or developed. As of December 31, 1996, $20,746,937
was outstanding under the Credit Facility.
-20-
The Company also has in place a $5 million line of credit (the "Line of
Credit," which matures in September 1997, and which the Company expects
to renew for an additional 12 month period). The line bears interest at
the bank's prime rate or 225 basis points in excess of the one month
LIBOR rate at the option of the Company. The purpose of the line is to
provide working capital to the Company and fund land options and start-up
costs associated with new projects. As of December 31, 1996, $2,869,445 was
outstanding under this Line of Credit.
The Company has received funding from an unaffiliated third party for the
construction of certain of its Properties. Advances under this arrangement
bear no interest and are required to be repaid within sixty (60) days after
the date construction has been completed. The advances are secured by the
specific land and buildings being developed. As of December 31, 1996
$10,616,936 was outstanding under this arrangement.
In November 1996, the Company completed development of two properties which
added 61,061 square feet to the Company's portfolio. The properties are
located in Monroeville, Pennsylvania and Boynton Beach, Florida. The
development of these retail projects is expected to have a positive effect on
cash generated by operating activities and Funds from Operations.
The Company intends to meet its short-term liquidity requirements, including
capital expenditures related to the leasing and improvement of the
Properties, through its cash flow provided by operations and the Line of
Credit. Management believes that adequate cash flow will be available to fund
the Company's operations and pay dividends in accordance with REIT
requirements. The Company may obtain additional funds for future development
or acquisitions through other borrowings or the issuance of additional shares
of Capital Stock. The Company intends to incur additional debt in a manner
consistent with its policy of maintaining a ratio of total debt (including
construction and acquisition financing) to total market capitalization of 65%
or less.
The Company plans to begin construction of additional pre-leased developments
and may acquire additional properties, which will initially be financed by
its Credit Facility and Line of Credit. Management intends to periodically
refinance short-term construction and acquisition financing, with long-term
debt and or equity. Upon completion of refinancing the Company intends to
lower the ratio of total debt to market capitalization to 50% or less.
Nevertheless, the Company may operate with debt levels or ratios which are in
excess of 50% for extended periods of time prior to such refinancing.
Inflation
The Company's leases generally contain provisions designed to mitigate the
adverse impact of inflation on net income. These provisions include clauses
enabling the Company to pass through to tenants certain operating costs,
including real estate taxes, common area maintenance, utilities and
insurance, thereby reducing the Company's exposure to increases in costs and
operating expenses resulting from inflation. Certain of the Company's leases
contain clauses enabling the Company to receive percentage rents based on
tenants' gross sales, which generally increase as prices rise, and, in
certain cases, escalation clauses, which generally increase rental rates
during the terms of the leases. In addition, expiring tenant leases permit
the Company to seek increased rents upon re-lease at market rates if rents
are below the then existing market rates.
-21-
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed in the
Index to Financial Statements and Financial Statement Schedules appearing on
Page F-1 of this Form 10-K.
Item 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
FINANCIAL DISCLOSURE
During the Company's last two fiscal years, there have been no
changes in the independent accountants nor disagreements with such
accountants as to accounting and financial disclosures of the type required
to be disclosed in this Item 9.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to its Annual
Meeting of Stockholders to be held on May 12, 1997.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to its Annual
Meeting of Stockholders to be held on May 12, 1997.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to its Annual
Meeting of Stockholders to be held on May 12, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to its Annual
Meeting of Stockholders to be held on May 12, 1997.
-22-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report
(1)(2) The financial statements indicated by Part II,
Item 8, Financial Statements and Supplementary
Schedule.
(3) Exhibits
3.1 Articles of Incorporation and Articles of Amendment of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-11 (Registration
Statement No. 33-73858, as amended ("Agree S-11"))
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.3 to Agree S-11)
10.1 * Loan Modification Agreement, dated April 22, 1994, by and
among Shawano Plaza, Plymouth Commons, Chippewa Commons and
Nationwide Life Insurance Company
10.2 * Loan Modification Agreement, dated April 22, 1994, by and
among Rapids Associates, Marshall Plaza Phase Two, Petoskey
Town Center, Charlevoix Commons and Nationwide Life
Insurance Company
10.3 Modification Agreement, dated as of March 28, 1994, by and
between North Lakeland Plaza and the Travelers Indemnity
Company (incorporated by reference to Exhibit 4.2 to Agree
S-11)
10.4 Loan Agreement, dated August 19, 1992, by and among Richard
Agree, Edward Rosenberg and Michigan National Bank
(incorporated by reference to Exhibit 4.3 to Agree S-11)
10.5 Loan Agreement dated March 7, 1990, and Modification of
Mortgage and Security Agreement, dated July 10, 1990, by and
between Winter Garden Plaza and American United Life Insurance
Company (incorporated by reference to Exhibit 4.4 to Agree
S-11)
10.6 * First Amended and Restated Agreement of Limited Partnership
of Agree Limited Partnership, dated as of April 22, 1994, by
and among the Company, Richard Agree, Edward Rosenberg and
Joel Weiner
10.7 Amended and Restated Registration Rights Agreement, dated July
8, 1994 by and among the Company, Richard Agree, Edward
Rosenberg and Joel Weiner (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 (the "1994 Form 10-K"))
10.8 * 1994 Stock Incentive Plan of the Company
10.9 * Management Agreement, dated April 22, 1994, by and among Mt
Pleasant Shopping Center, Angola Plaza, Shiloh Plaza and the
Company
10.10 * Contribution Agreement, dated as of April 21, 1994, by and
among the Company, Richard Agree, Edward Rosenberg and the
co-partnerships named therein
10.11 * Employment Agreement, dated April 22, 1994, by and between
the Company and Richard Agree
-23-
10.12 * Employment Agreement, dated April 22, 1994, by and between
the Company and Edward Rosenberg
10.13 * Agree Realty Corporation Profit Sharing Plan
10.14 Business Loan Agreement by and between Agree Limited
Partnership and Michigan National Bank (incorporated by
reference to Exhibit 10.8 to the 1994 10-K)
10.15 Business Loan Agreement, dated as of September 21, 1995, by
and between Agree Limited Partnership and Michigan National
Bank (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 10-K"))
10.16 Line of Credit Agreement by and among Agree Limited
Partnership, the Company, the lenders parties thereto, and
Michigan National Bank as Agent (incorporated by reference to
Exhibit 10.10 to the 1995 10-K)
27.1 * Financial Data Schedule
- ---------
* Filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during
the quarter ending December 31, 1996.
-24-
SIGNATURES
PURSUANT to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, duly authorized.
AGREE REALTY CORPORATION
By: /s/ Richard Agree
-----------------------------
Name: Richard Agree
President and Chairman of the
Board of Directors
Date: March 28, 1997
PURSUANT to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 28th day of March, 1997.
By: /s/Richard Agree By: /s/ Farris G. Kalil
----------------------------- ---------------------------
Richard Agree Farris G. Kalil
President and Chairman of the Director
Board of Directors
(Principal Executive Officer)
By: /s/ Michael Rotchford
---------------------------
Michael Rotchford
Director
By: /s/Kenneth R. Howe
-----------------------------
Kenneth R. Howe
Vice President, Finance By: /s/ Ellis G. Wachs
and Secretary ---------------------------
(Principal Financial and Ellis G. Wachs
Accounting Officer) Director
By: /s/ Gene Silverman
---------------------------
Gene Silverman
By: /s/Edward Rosenberg Director
-----------------------------
Edward Rosenberg
Director and Senior Vice
President
-25-
Agree Realty Corporation and the
Agree Predecessors
Index
- -----------------------------------------------------------------------------
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets of the Company F-3
Consolidated Statements of Operations of the Company
and Combined Statements of Operations of the
Agree Predecessors F-5
Consolidated Statements of Stockholders' Equity of
the Company and Combined Statements of Partners'
Deficit of the Agree Predecessors F-6
Consolidated Statements of Cash Flows of the Company
and Combined Statements of Cash Flows of the
Agree Predecessors F-7
Notes to Financial Statements F-9
Schedule III - Real Estate and Accumulated Depreciation F-20
F - 1
Report of Independent Certified Public Accountants
To the Board of Directors and Owners of
Agree Realty Corporation
Farmington Hills, Michigan
We have audited the accompanying consolidated balance sheets of Agree Realty
Corporation (the "Company") as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1996 and 1995 and for the period from April
22, 1994 to December 31, 1994. We have also audited the accompanying combined
statements of operations, partners' deficit and cash flows for the period
from January 1, 1994 to April 21, 1994 of Agree Realty Group (the "Agree
Predecessors"). We have also audited the schedule listed in the accompanying
index. These financial statements and the schedule are the responsibility of
the Company's and Agree Predecessors' management. Our responsibility is to
express an opinion on these financial statements and the schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and the schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and the
schedule. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Agree Realty
Corporation at December 31, 1996 and 1995 and the results of its operations
and its cash flows for the years ended December 31, 1996 and 1995 and for the
period from April 22, 1994 to December 31, 1994, and the results of the Agree
Predecessors operations and its cash flows for the period from January 1,
1994 to April 21, 1994 in conformity with generally accepted accounting
principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
February 14, 1997
F - 2
Agree Realty Corporation
Consolidated Balance Sheets
- -----------------------------------------------------------------------------
December 31, December 31,
1996 1995
- -----------------------------------------------------------------------------------------
Assets
Real Estate Investments (Note 3)
Land $ 25,183,667 $ 23,224,377
Buildings 107,204,583 94,955,086
Property under development 85,993 180,805
------------- -------------
132,474,243 118,360,268
Less accumulated depreciation (17,339,353) (14,792,193)
------------- -------------
Net Real Estate Investments 115,134,890 103,568,075
Cash and Cash Equivalents 294,389 1,283,672
Accounts Receivable - Tenants 638,735 626,280
Restricted Asset - Cash Held in Escrow 266,771 259,204
Investments In and Advances To Unconsolidated Entities 1,820,605 --
Unamortized Deferred Expenses
Financing costs 2,398,377 2,513,665
Leasing costs 141,757 140,026
Other Assets 686,346 537,487
------------- -------------
$ 121,381,870 $ 108,928,409
============= =============
See accompanying notes to financial statements.
F - 3
Agree Realty Corporation
Consolidated Balance Sheets
- -----------------------------------------------------------------------------
December 31, December 31,
1996 1995
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Mortgages Payable (Note 3) $ 53,663,999 $ 53,970,525
Construction Loans (Note 3) 10,616,936 17,603,785
Note Payable (Note 3) 23,616,382 1,977,808
Dividends and Distributions Payable (Note 4) 1,479,345 1,474,265
Accrued Interest Payable 354,988 189,256
Accounts Payable
Operating 691,981 596,913
Capital expenditures 596,794 1,637,861
Tenant Deposits 50,394 53,477
------------- -------------
Total Liabilities 91,070,819 77,503,890
------------- -------------
Minority Interest (Note 5) 5,869,014 6,118,017
------------- -------------
Stockholders' Equity (Note 4)
Common stock, $.0001 par value, 20,000,000
shares authorized, 2,649,475 and 2,638,185
shares issued and outstanding 265 264
Additional paid-in capital 30,060,908 29,890,292
Deficit (5,619,136) (4,584,054)
------------- -------------
Total Stockholders' Equity 24,442,037 25,306,502
------------- -------------
$ 121,381,870 $ 108,928,409
------------- -------------
See accompanying notes to financial statements.
F - 4
Agree Realty Corporation and the
Agree Predecessors
Consolidated Statements of Operations of the Company and
Combined Statements of Operations of the Agree Predecessors
- -----------------------------------------------------------------------------
Agree Realty Agree Realty Agree Realty Agree
Corporation Corporation Corporation Predecessors
January 1, to January 1, to April 22, to January 1, to
December 31, 1996 December 31, 1995 December 31, 1994 April 21, 1994
- ----------------------------------------------------------------------------------------------------------------------------
Revenues
Rental income $ 14,450,035 $ 11,935,523 $ 8,139,566 $ 3,575,128
Operating cost reimbursement 1,760,681 1,671,359 1,093,463 494,909
Management fees and other (Note 7) 80,752 91,714 46,487 9,858
------------ ------------ ----------- -----------
Total Revenues 16,291,468 13,698,596 9,279,516 4,079,895
------------ ------------ ----------- -----------
Operating Expenses
Real estate taxes 1,169,308 1,120,515 737,628 368,124
Property operating expenses 979,606 871,167 464,007 299,623
Land lease payments 336,083 56,000 43,400 12,600
General and administrative 1,104,861 966,464 667,800 159,393
Depreciation and amortization 2,620,274 2,316,862 1,626,604 680,458
------------ ------------ ----------- -----------
Total Operating Expenses 6,210,132 5,331,008 3,539,439 1,520,198
------------ ------------ ----------- -----------
Income From Operations 10,081,336 8,367,588 5,740,077 2,559,697
------------ ------------ ----------- -----------
Other Income (Expense)
Interest expense, net (6,101,106) (4,335,207) (2,972,237) (2,584,002)
Development fee income 509,673 -- -- 85,273
Gain on land sales 84,688 -- 119,635 --
Equity in net income of unconsolidated entities 58,704 -- -- --
Reorganization costs (Note 6) -- -- (494,317) --
------------ ------------ ----------- -----------
Total Other Expense (5,448,041) (4,335,207) (3,346,919) (2,498,729)
------------ ------------ ----------- -----------
Income Before Extraordinary Item and Minority Interest 4,633,295 4,032,381 2,393,158 60,968
Extraordinary Item - Loss on Extinguishment
of Debt (Note 8) -- -- (2,139,114) --
------------ ------------ ----------- -----------
Income Before Minority Interest 4,633,295 4,032,381 254,044 60,968
Minority Interest 899,323 785,105 49,462 --
------------ ------------ ----------- -----------
Net Income $ 3,733,972 $ 3,247,276 $ 204,582 $ 60,968
============ ============ =========== ===========
Earnings Per Share
Income before extraordinary item $ 1.41 $ 1.23 $ .73
Extraordinary item -- -- (.65)
------------ ------------ ----------- -----------
Earnings Per Share $ 1.41 $ 1.23 $ .08
============ ============ =========== ===========
Weighted Average Number of Common Shares
Outstanding 2,649,475 2,638,185 2,638,185
============ ============ =========== ===========
See accompanying notes to financial statements.
F - 5
Agree Realty Corporation and the
Agree Predecessors
Consolidated Statements of Stockholders' Equity of the Company and
Combined Statements of Partners' Deficit of the Agree Predecessors
- -----------------------------------------------------------------------------
Agree
Common Stock Additional Predecessors
----------------- Paid-In Partners'
Shares Amount Capital Deficit Deficit
- ------------------------------------------------------------------------------------------------------------
Balance, January 1, 1994 -- $ -- $ -- $ -- $(5,436,893)
Contributions -- -- -- -- 3,000
Distributions -- -- -- -- (3,350,741)
Net income -- -- -- -- 60,968
--------- ---- ------------ ----------- -----------
Balance, April 21, 1994 -- -- -- -- (8,723,666)
Reclassification of Agree
Predecessors partners'
deficit in connection with
formation of the Company -- -- (8,723,666) 8,723,666
Proceeds from issuance of common stock,
net of underwriting fees 2,625,685 263 47,800,594 -- --
Payment of stock issuance costs -- -- (2,203,712) -- --
Issuance of shares under the Stock
Incentive Plan 12,500 1 243,749 -- --
Minority interest equity
immediately following the
April 22, 1994 initial
public offering -- -- (7,226,673) -- --
Dividends declared for the
period April 22, 1994
to December 31, 1994,
$1.246 per share -- -- -- (3,287,179) --
Net income for the period
April 22, 1994
to December 31, 1994 -- -- -- 204,582 --
--------- ---- ------------ ----------- -----------
Balance, December 31, 1994 2,638,185 264 29,890,292 (3,082,597) --
Dividends declared for the year ended
December 31, 1995, $1.80 per share -- -- -- (4,748,733) --
Net income for the year
ended December 31, 1995 -- -- -- 3,247,276 --
--------- ---- ------------ ----------- -----------
Balance, December 31, 1995 2,638,185 264 29,890,292 (4,584,054) --
Issuance of shares under the
Stock Incentive Plan 11,290 1 170,616 -- --
Dividends declared for the year
ended December 31, 1996,
$1.80 per share -- -- -- (4,769,054) --
Net income for the year
ended December 31, 1996 -- -- -- 3,733,972 --
--------- ---- ------------ ----------- -----------
Balance, December 31, 1996 2,649,475 $265 $ 30,060,908 $(5,619,136) $ --
========= ==== ============ =========== ===========
See accompanying notes to financial statements.
F - 6
Agree Realty Corporation and the
Agree Predecessors
Consolidated Statements of Cash Flows of the Company and Combined
Statements of Cash Flows of the Agree Predecessors
- -----------------------------------------------------------------------------
Agree Realty Agree Realty Agree Realty Agree
Corporation Corporation Corporation Predecessors
January 1, to January 1, to April 22, to January 1, to
December 31, December 31, December 31, April 21,
1996 1995 1994 1994
- ---------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 3,733,972 $ 3,247,276 $ 204,582 $ 60,968
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 2,523,621 2,252,642 1,551,570 636,561
Amortization 505,089 311,415 249,971 74,598
Equity in net income of unconsolidated
entities (58,704) -- -- --
Write-off of deferred financing costs -- -- 189,231 --
Minority interests 899,323 785,105 49,462 --
Gain on land sales (84,688) -- (119,635) --
Decrease (increase) in accounts receivable (12,455) (64,629) (561,651) 449,504
Increase in deferred costs (53,764) (27,524) (14,640) --
Decrease (increase) in other assets 677 (133,728) (112,531) 522,163
Increase (decrease) in accounts payable 95,068 197,406 327,885 (760,349)
Increase (decrease) in accrued interest 165,732 9,592 (967,640) (536,099)
Increase (decrease) in tenant deposits (3,083) (5,484) 58,961 (60,461)
------------ ------------ ----------- ---------
Net Cash Provided By Operating Activities 7,710,788 6,572,071 855,565 386,885
------------ ------------ ----------- ---------
Cash Flows From Investing Activities
Acquisition of real estate investments
(including capitalized interest of
$78,703 in 1996 and $59,752 in 1995) (13,577,181) (19,870,270) (117,102) (228,810)
Investments in and advances to
unconsolidated entities (1,761,901) -- -- --
Proceeds from sale of land 144,688 -- 161,635 --
Proceeds from sale of marketable
securities -- 300,188 -- --
Purchase of marketable securities -- -- (300,188) --
------------ ------------ ----------- ---------
Net Cash Used In Investing Activities (15,194,394) (19,570,082) (255,655) (228,810)
------------ ------------ ----------- ---------
See accompanying notes to financial statements.
F - 7
Agree Realty Corporation and the
Agree Predecessors
Consolidated Statements of Cash Flows of the Company and Combined
Statements of Cash Flows of the Agree Predecessors
- -----------------------------------------------------------------------------
Agree Realty Agree Realty Agree Realty Agree
Corporation Corporation Corporation Predecessors
January 1, to January 1, to April 22, to January 1, to
December 31, December 31, December 31, April 21,
1996 1995 1994 1994
- ------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Line-of-credit proceeds 21,638,574 1,977,808 -- 1,589,774
Payment of construction loans (11,861,006) -- (11,407,600) --
Dividends and limited partners'
distributions paid (5,912,300) (5,897,059) (2,607,811) --
Proceeds from construction loans 4,874,157 17,603,785 -- --
Payments of payables for capital
expenditures (1,637,861) -- -- (45,688)
Payments of mortgages payable (306,526) (280,522) (14,394,680) (1,388,265)
Payments for financing costs (293,148) (765,535) (961,339) (425,424)
Decrease (increase) in escrow and
bond fund deposits (7,567) (16,200) 7,314 380,378
Net proceeds from the issuance of
common stock -- -- 45,597,145 --
Payment of line-of-credit -- -- (7,003,977) --
Payments on related party notes -- -- (4,414,556) --
Payment of bonds -- -- (3,755,000) --
Partners' distributions -- -- -- (3,350,741)
Mortgage proceeds -- -- -- 2,375,000
Partners' contributions -- -- -- 3,000
------------ ------------ ------------ -----------
Net Cash Provided By (Used In)
Financing Activities 6,494,323 12,622,277 1,059,496 (861,966)
------------ ------------ ------------ -----------
Net Increase (Decrease) In Cash
and Cash Equivalents (989,283) (375,734) 1,659,406 (703,891)
Cash and Cash Equivalents,
beginning of period 1,283,672 1,659,406 -- 703,891
------------ ------------ ------------ -----------
Cash and Cash Equivalents,
end of period $ 294,389 $ 1,283,672 $ 1,659,406 $ --
============ ============ ============ ===========
Supplemental Disclosure of
Cash Flow Information
Cash paid for interest $ 5,630,000 $ 4,177,000 $ 2,677,000 $ 4,318,000
============ ============ ============ ===========
Supplemental Disclosure of
Non-Cash Transactions
Dividends and limited
partners' distributions
declared and unpaid $ 1,479,345 $ 1,474,265 $ 1,474,265 $ --
Real estate investments
financed with accounts
payable $ 596,794 $ 1,637,861 $ -- $ --
Shares issued under Stock
Incentive Plan $ 170,617 $ -- $ 243,750 $ --
============ ============ ============ ===========
See accompanying notes to financial statements.
F - 8
Agree Realty Corporation and the
Agree Predecessors
Notes to Financial Statements
- -----------------------------------------------------------------------------
1. Summary of
Significant
Accounting
Policies
Organization and Business
Agree Realty Corporation (the "Company") was formed as a Maryland real estate
investment trust in December 1993, and commenced operations effective with
the completion of its initial public offering on April 22, 1994. The Company
is the successor to the operations of Agree Realty Group (the "Agree
Predecessors"), which was comprised of seventeen real estate property
partnerships and a management and development company. All of the Company's
assets are held by, and all of its operations are conducted through, Agree
Limited Partnership (the "Operating Partnership"). The Company will, at all
times, be the sole general partner of the Operating Partnership. Minority
interest in the Operating Partnership represents partnership units of the
Operating Partnership (OP Units).
The Company operates, manages, acquires and develops retail properties. At
December 31, 1996, the Company's properties are comprised of thirteen
shopping centers and twelve single tenant retail facilities located in eleven
states. During the year ended December 31, 1996, approximately 90% of the
Company's base rental revenues were received from national or regional
tenants under long-term leases, including approximately 32% from Kmart
Corporation and 23% from Borders, Inc.
Principles of Consolidation
The consolidated financial statements of Agree Realty Corporation include the
accounts of the Company and its majority owned partnership, the Operating
Partnership. The Agree Predecessors' financial statements were prepared on a
combined basis because of common ownership and management. All significant
intercompany accounts and transactions have been eliminated in the
accompanying consolidated and combined financial statements.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect (1) the reported amounts of assets and liabilities
and
F - 9
the disclosure of contingent assets and liabilities as of the date of the
financial statements, and (2) revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair Values of Financial Instruments
The carrying amounts of the Company's financial instruments, which consist of
cash, cash equivalents, receivables, notes payable, accounts payable and
long-term debt, approximate their fair values.
Real Estate Investments
Real estate assets are stated at cost less accumulated depreciation. All
costs related to planning, development and construction of buildings prior to
the date they become operational, including interest and real estate taxes
during the construction period, are capitalized for financial reporting
purposes.
Subsequent to completion of construction, expenditures for property
maintenance are charged to operations as incurred, while significant
renovations are capitalized. Depreciation of the buildings is recorded on the
straight-line method using an estimated useful life of forty years.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid tax anticipation
notes with original maturities of three months or less.
Accounts Receivable - Tenants
Accounts receivable from tenants reflect primarily reimbursement of specified
common area maintenance costs. No allowance for uncollectible accounts has
been provided based on past collection results.
F - 10
Restricted Assets
These amounts represent funds on deposit restricted by certain lenders
pursuant to agreements entered into by the Company. The funds held in escrow
are used to pay capital-related costs and are released to the Company upon
inspection and leasing of related property to tenants and are used to pay
real estate taxes for one shopping center in Florida.
Investments in Unconsolidated Entities
The Company uses the equity method of accounting for investments in non-
majority owned entities where the Company has the ability to exercise
significant influence over operating and financial policies.
The Company's initial investment is recorded at cost, and the carrying amount
of the investment is (a) increased by the Company's share of the investees'
earnings (as defined in the limited liability company agreements), and (b)
reduced by distributions paid from the investees to the Company.
Unamortized Deferred Expenses
Deferred expenses are stated net of total accumulated amortization. The
nature and treatment of these capitalized costs are as follows: (1) financing
costs, consisting of expenditures incurred to obtain long-term financing, are
being amortized using the interest method over the term of the related loan,
and (2) leasing costs, which are amortized on a straight-line basis over the
term of the related lease.
Accounts Payable - Capital Expenditures
Included in accounts payable are amounts related to the construction of
buildings. Due to the nature of these expenditures, they are reflected in the
statements of cash flows as a financing activity.
F - 11
Minority Interest
This amount represents the limited partners' interest of 19.41% and 19.47% in
the Operating Partnership as of December 31, 1996 and 1995, respectively,
which is convertible into 637,959 shares of the Company's common stock.
Revenue Recognition
Base rental income attributable to leases is recorded when due from tenants.
Certain leases provide for additional rents based on tenants' sales volume.
These percentage rents are reflected based on the tenants' fiscal year;
however, such amounts earned by the Company have historically not been
material. In addition, leases for certain tenants contain rent escalations
and/or free rent during the first several months of the lease term; however,
such amounts are not material.
The Company acts as the construction developer on certain properties. Related
development fee income is recognized upon completion of construction.
Operating Cost Reimbursement
Substantially all of the Company's leases contain provisions requiring
tenants to pay as additional rent a proportionate share of operating expenses
such as real estate taxes, repairs and maintenance, insurance, etc. The
related revenue from tenant billings is recognized in the same period the
expense is recorded.
Income Taxes
The Company has elected to be taxed as a real estate investment trust
("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986,
as amended. A REIT will generally not be subject to federal income taxation
on that portion of its income that qualifies as REIT taxable income to the
extent that it distributes at least 95 percent of its taxable income to its
stockholders and complies with certain other requirements. Accordingly, no
F - 12
provision has been made for federal income taxes for the Company in the
accompanying consolidated financial statements.
The aggregate federal income tax basis of Real Estate Investments is
approximately $10.5 million less than the financial statement basis.
Per Share Data
Earnings per share has been computed by dividing the income by the weighted
average number of common shares and dilutive common equivalent shares
outstanding.
Reclassifications
Certain insignificant amounts in the prior year financial statements have
been reclassified to conform with the 1996 presentation.
2. Formation of
the Company,
Initial Public
Offering and
Basis of
Presentation
The Company was established to continue the business of the Agree
Predecessors. The Company commenced its operations on April 22, 1994 with the
sale of 2,500,000 shares of common stock. The cash proceeds (net of
underwriting fees) to the Company from the completion of this initial public
offering were approximately $45.4 million, which were used primarily
to reduce outstanding indebtedness, pay stock issuance costs and establish a
working capital reserve. Also in connection with the formation of the
Company, 125,685 shares of common stock were purchased by two principals of
the Agree Predecessors in a private transaction at the initial public
offering price of $19.50 per share.
The assets of the Company are held by and all operations conducted through
the Operating Partnership. The Company controls, as the sole general partner,
80.59% and 80.53% of the Operating Partnership as of December 31, 1996 and
1995, respectively.
F - 13
3. Mortgages,
Construction
Loans and Note
Payable
Mortgages payable consisted of the following:
December 31, 1996 1995
- ----------------------------------------------------------------------------------------------------------
Note payable in monthly installments of interest only at 6.875% per annum
until May 1999, at which time the Company can elect to either pay the
amount in full or accept the then prevailing interest rate and continue
making principal and interest payments based on a 22-year amortization
schedule, with the remaining unpaid principal and accrued unpaid
interest then due November 2005, collateralized by related
real estate and tenants' leases $33,600,000 $33,600,000
Note payable in monthly installments of $98,477 including interest at 9.75%
per annum, collateralized by related real estate and tenants' leases,
final balloon installment due July 2010 9,698,073 9,874,834
Note payable in monthly installments of $62,881 including interest at 7.75%
per annum, collateralized by related real estate and tenants' leases,
final balloon installment due March 1999 7,990,926 8,120,691
Note payable in monthly installments of interest only at the prime rate
(which was 8.25% at December 31, 1996) plus .5%, beginning April 1997,
payable in monthly installments of principal and interest based on a
20-year amortization, collateralized by related real estate and tenants'
leases, final balloon installment due March 1999 2,375,000 2,375,000
----------- -----------
Mortgages Payable $53,663,999 $53,970,525
=========== ===========
Future scheduled annual maturities of mortgages payable for years ending
December 31, are as follows: 1997 - $357,946; 1998 - $421,123; 1999 -
$10,679,397; 2000 - $969,964; 2001 - $1,046,875 and $40,188,694 thereafter.
(These maturities assume that the $33,600,000 mortgage will be extended
beyond May 1999.)
F - 14
In November 1995, the Operating Partnership entered into a $50 million
line-of-credit agreement which is guaranteed by the Company. The agreement
has an initial term of three years and can be extended, at the option of the
Company, for an additional three years. Advances under this credit facility
bear interest within a range of LIBOR plus 200 basis points to 263 basis
points, or the bank's prime rate plus 37 basis points to 75 basis points, at
the option of the Company, based on certain factors such as debt to property
value and debt service coverage. The credit facility will be used to fund
property acquisitions and development activities, and is secured by specific
properties. As of December 31, 1996, $20,746,937 was outstanding under this
facility and there were no amounts outstanding under this credit facility as
of December 31, 1995.
In addition, the Company maintains a $5,000,000 line-of-credit agreement with
a bank which expires on September 21, 1997. Payments of interest only, at the
bank's prime rate, or 225 basis points in excess of the one month LIBOR rate,
at the option of the Company, are required monthly. At December 31, 1996 and
1995, $2,869,445 and $1,977,808 were outstanding under this agreement,
respectively.
The Company has received funding from an unaffiliated third party for certain
of its single tenant retail properties. Borrowings under this arrangement
bear no interest and are required to be repaid within sixty (60) days after
the date the construction has been completed. The advances are secured by the
specific land and buildings being developed. As of December 31, 1996 and
1995, $10,616,936 and $17,603,785 was outstanding under this agreement,
respectively.
4. Dividends and
Distributions
Payable
On December 9, 1996, the Company declared a dividend of $.45 per share for
the quarter ended December 31, 1996; approximately 30 percent of the dividend
represented a return of capital. The holders of OP Units were entitled to an
equal distribution per OP Unit held as of December 31, 1996. The dividends
and distributions payable are recorded as liabilities in the Company's
balance sheet at December 31, 1996. The dividend has been reflected as a
reduction of stockholders' equity and the distribution has been
F - 15
reflected as a reduction of the limited partners' minority interest. These
amounts were paid on January 6, 1997.
5. Minority
Interest
The following summarizes the changes in the limited partners' minority
interest since January 1, 1995:
Minority interest at January 1, 1995 $ 6,481,238
Minority interests' share of income for
the year ended December 31, 1995 785,105
Distributions for the year ended December 31, 1995 (1,148,326)
-----------
Minority Interest at December 31, 1995 6,118,017
Minority interests' share of income for the year
ended December 31, 1996 899,323
Distributions for the year ended December 31, 1996 (1,148,326)
-----------
Minority Interest at December 31, 1996 $ 5,869,014
===========
6. Reorganization
Costs
Costs incurred by the Company related to title insurance costs, revenue
stamps and transfer fees associated with the transfer of properties and
certain related mortgages from the Agree Predecessors to the Company were
charged to operations and reflected as "Reorganization Costs" in the 1994
consolidated statement of operations.
7. Related Party
Transactions
The Company currently manages certain additional properties which are owned
by certain officers and directors of the Company, but are not included in
these consolidated or combined financial statements. Income related to these
activities are reflected as "Management fees and other" in the accompanying
consolidated statements of operations.
8. Extraordinary
Item
As a result of the early extinguishment of indebtedness with a portion of the
net proceeds from the issuance of its common stock, the Company recognized an
extraordinary loss in 1994 related to loan prepayment penalties and the
write-off of deferred financing costs on debt that was retired.
F - 16
9. Stock Incentive
Plan
The Company has established a stock incentive plan (the "Plan") under which
29,400 options were granted in April 1994. The options, which have an
exercise price equal to the initial public offering price ($19.50/share), can
be exercised in increments of 25% on each anniversary of the date of the
grant. A total of 14,700 and 7,350 of the options were exercisable at
December 31, 1996 and 1995, respectively. No options were exercised during
either 1996 or 1995.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." However, since no compensation
cost would have been recognized pursuant to SFAS No. 123 under the Plan in
either 1996 or 1995, there is no effect on the Company's net income or
earnings per share for these years.
10. Restricted Stock
As part of the Company's stock incentive plan, 12,500 restricted common
shares were granted to certain employees in April 1994; an additional 11,290
shares were granted during the first quarter of 1996. The restricted shares
vest in increments of 20% per year for five years. The Company recorded
related compensation expense of $82,873, $48,750 and $34,530 in 1996, 1995
and 1994, respectively. Plan participants are entitled to receive the
quarterly dividends on their respective restricted shares.
11. Profit-Sharing
Plan
The Company has a discretionary profit-sharing plan whereby it contributes to
the plan such amounts as the Board of Directors of the Company determines.
The participants in the plan cannot make any contributions to the plan.
Contributions to the plan are allocated to the employees based on their
percentage of compensation to the total compensation of all employees for the
plan year. Participants in the plan become fully vested after six years of
service. No contributions were made to the plan in 1996, 1995 or 1994.
12. Rental Income
The Company leases premises in its properties to tenants pursuant to lease
agreements which provide for terms ranging generally from 5 to 25 years. The
majority of leases provide for additional rents based on tenants' sales
volume; however, such amounts earned by Agree have historically not been
material.
F - 17
As of December 31, 1996, the future minimum revenues for the next five years
from rental property under the terms of all noncancellable tenant leases,
assuming no new or renegotiated leases are executed for such premises, are as
follows (in thousands):
1997 $ 16,078
1998 15,654
1999 15,350
2000 14,982
2001 13,950
Thereafter 149,949
--------
Total $225,963
========
Of the future minimum rentals, approximately 39% of the above total is
attributable to Kmart Corporation and approximately 31% is attributable to
Borders, Inc. Kmart's principal business is general merchandise retailing
through a chain of discount department stores, and Borders is a major
operator of book superstores in the United States.
13. Lease
Commitments
The Company has entered into certain land lease agreements for three of its
properties. As of December 31, 1996, approximate future annual lease
commitments under these agreements are as follows:
Year Ended December 31,
- ---------------------------------
1997 $ 446,000
1998 446,000
1999 446,000
2000 482,000
2001 485,000
Thereafter 6,606,000
=========
F - 18
14. Interim Results
(Unaudited)
The following summary represents the unaudited results of operations of the
Company, expressed in thousands except per share amounts, for the periods
from January 1, 1995 through December 31, 1996:
Three Months Ended
- --------------------------------------------------------------------------------------
1996 March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------
Revenues $3,866 $4,026 $4,017 $4,382
====== ====== ====== ======
Income before
minority interest $1,010 $1,064 $ 845 $1,714
Minority interest 196 207 164 332
------ ------ ------ ------
Net Income $ 814 $ 857 $ 681 $1,382
====== ====== ====== ======
Net Income Per
Share $ .31 $ .32 $ .26 $ .52
====== ====== ====== ======
Three Months Ended
- --------------------------------------------------------------------------------------
1995 March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------
Revenues $3,413 $3,337 $3,364 $3,614
====== ====== ====== ======
Income before
minority interest $ 987 $1,003 $1,004 $1,038
Minority interest 192 196 195 202
------ ------ ------ ------
Net Income $ 795 $ 807 $ 809 $ 836
====== ====== ====== ======
Net Income Per
Share $ .30 $ .30 $ .31 $ .32
====== ====== ====== ======
F - 19
AGREE REALTY CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
- -------- ----------- ---------------------------- -------------
Costs
Capitalized
Subsequent to
Initial Cost Acquisition
---------------------------- -------------
Building and Building
Description Encumbrance Land Improvements Improvements
- ---------------------------------------------------------------------------------------------------
Completed Retail Facilities
Borman Center, MI $ -- $ 550,000 $ 562,404 $ 1,066,115
Capital Plaza, KY -- 7,379 2,240,607 514,580
Charlevoix Commons, MI 3,981,600 305,000 5,152,992 --
Chippewa Commons, WI 5,103,840 1,197,150 6,367,560 35,539
Grayling Plaza, MI -- 200,000 1,778,657 --
Iron Mountain Plaza, MI -- 677,820 7,014,996 372,627
Ironwood Commons, MI -- 212,500 8,181,306 230,953
Marshall Plaza Two, MI 3,407,040 -- 4,662,230 10,764
North Lakeland Plaza, FL 7,990,926 1,641,879 6,364,379 337,905
Oscoda Plaza, MI -- 183,295 1,872,854 --
Perrysburg Plaza, OH 2,375,000 21,835 2,291,651 --
Petoskey Town Center, MI 5,577,600 875,000 8,895,289 5,985
Plymouth Commons, WI 4,811,520 535,460 5,667,504 138,260
Rapids Associates, MI 5,120,640 705,000 6,854,790 13,000
Shawano Plaza, WI 5,597,760 190,000 9,133,934 --
West Frankfort Plaza, IL -- 8,002 784,077 --
Winter Garden Plaza, FL 9,698,073 1,631,448 8,459,024 --
Omaha Store, NE 3,596,937 1,705,619 2,053,615 2,152
Wichita Store, KS 2,910,064 1,039,195 1,690,644 24,666
Santa Barbara Store, CA 5,795,333 2,355,423 3,240,557 2,650
Monroeville, PA 6,773,314 6,332,158 2,168,892 --
Norman, OK 2,274,622 879,562 1,595,379 --
Columbus, OH 3,131,427 826,000 2,321,134 --
Aventura, FL 3,130,000 -- 3,141,821 --
Boyton Beach, FL 2,183,176 3,103,942 1,953,091 --
----------- ----------- ------------ -----------
Sub Total 83,458,872 25,183,667 104,449,387 2,755,196
----------- ----------- ------------ -----------
Retail Facilities
Under Development
Lawrence, KS -- -- 85,993 --
----------- ----------- ------------ -----------
Total $83,458,872 $25,183,667 $104,535,380 $ 2,755,196
=========== =========== ============ ===========
F-20
Column A Column E Column F Column G Column H
- -------- --------------------------------------------- ------------- ----------- -------------
Life
on Which
Gross Amount at Which Carried Depreciation
at Close of Period in Latest
--------------------------------------------- Income
Building and Accumulated Date of Statement
Description Land Improvements Total Depreciation Construction is Computed
- ------------------------------------------------------------------------------------------------------------------------------
Completed Retail Facilities
Borman Center, MI $ 550,000 $ 1,628,519 $ 2,178,519 $ 878,263 1977 40 Years
Capital Plaza, KY 7,379 2,755,187 2,762,566 1,065,945 1978 40 Years
Charlevoix Commons, MI 305,000 5,152,992 5,457,992 801,471 1991 40 Years
Chippewa Commons, WI 1,197,150 6,403,099 7,600,249 1,056,930 1990 40 Years
Grayling Plaza, MI 200,000 1,778,657 1,978,657 584,444 1984 40 Years
Iron Mountain Plaza, MI 677,820 7,387,623 8,065,443 981,711 1991 40 Years
Ironwood Commons, MI 212,500 8,412,259 8,624,759 1,156,330 1991 40 Years
Marshall Plaza Two, MI -- 4,672,994 4,672,994 677,963 1990 40 Years
North Lakeland Plaza, FL 1,641,879 6,702,284 8,344,163 1,674,282 1987 40 Years
Oscoda Plaza, MI 183,295 1,872,854 2,056,149 608,363 1984 40 Years
Perrysburg Plaza, OH 21,835 2,291,651 2,313,486 759,110 1983 40 Years
Petoskey Town Center, MI 875,000 8,901,274 9,776,274 1,327,675 1990 40 Years
Plymouth Commons, WI 535,460 5,805,764 6,341,224 897,413 1990 40 Years
Rapids Associates, MI 705,000 6,867,790 7,572,790 1,067,320 1990 40 Years
Shawano Plaza, WI 190,000 9,133,934 9,323,934 1,512,238 1990 40 Years
West Frankfort Plaza, IL 8,002 784,077 792,079 290,838 1982 40 Years
Winter Garden Plaza, FL 1,631,448 8,459,024 10,090,472 1,672,227 1988 40 Years
Omaha Store, NE 1,705,619 2,055,767 3,761,386 57,812 1995 40 Years
Wichita Store, KS 1,039,195 1,715,310 2,754,505 48,166 1995 40 years
Santa Barbara Store, CA 2,355,423 3,243,207 5,598,630 91,207 1995 40 years
Monroeville, PA 6,332,158 2,168,892 8,501,050 6,778 1996 40 years
Norman, OK 879,562 1,595,379 2,474,941 9,971 1996 40 years
Columbus, OH 826,000 2,321,134 3,147,134 53,191 1996 40 years
Aventura, FL -- 3,141,821 3,141,821 55,636 1996 40 years
Boyton Beach, FL 3,103,942 1,953,091 5,057,033 4,069 1996 40 years
----------- ------------ ------------ ------------
Sub Total 25,183,667 107,204,583 132,388,250 17,339,353
----------- ------------ ------------ ------------
Retail Facilities
Under Development
Lawrence, KS -- 85,993 85,993 -- N/A N/A
----------- ------------ ------------ ------------
Total $25,183,667 $107,290,576 $132,474,243 $ 17,339,353
=========== ============ ============ ============
F - 21
AGREE REALTY CORPORATION
NOTES TO SCHEDULE III
DECEMBER 31, 1996
- -----------------------------------------------------------------------------
1) Reconciliation of Real Estate Properties
The following table reconciles the Real Estate Properties from January
1, 1994 to December 31, 1996:
1996 1995 1994
- ------------------------------------------------------------------------
Balance at January 1 $ 118,360,268 $ 96,852,137 $ 96,548,225
Construction costs 14,173,975 21,508,131 345,912
Sales (60,000) -- (42,000)
------------- ------------ ------------
Balance at December 31 $ 132,474,243 $118,360,268 $ 96,852,137
============= ============ ============
2) Reconciliation of Accumulated Depreciation
The following table reconciles the accumulated depreciation from January
1, 1994 to December 31, 1996:
1996 1995 1994
- ------------------------------------------------------------------------------
Balance at January 1 $14,792,193 $12,548,826 $10,325,699
Current year depreciation expense 2,547,160 2,243,367 2,223,127
----------- ----------- -----------
Balance at December 31 $17,339,353 $14,792,193 $12,548,826
=========== =========== ===========
3) Tax Basis of Buildings and Improvements
The aggregate cost of Building and Improvements for federal income tax
purposes is equal to the cost basis used for financial statement
purposes.
F - 22