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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
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: (248) 737-4190
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 No
[X] [ ]
4,446,031 Shares of Common Stock, $.0001 par value, were outstanding as of
August 9, 2002
AGREE REALTY CORPORATION
FORM 10-Q
INDEX
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PART I: FINANCIAL INFORMATION PAGE
Item 1. Interim Consolidated Financial Statements 3
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 4-5
Consolidated Statements of Operations for the six months ended June 30, 2002 6
and 2001
Consolidated Statements of Operations for the three months ended June 30, 7
2002 and 2001
Consolidated Statement of Stockholders' Equity for the six months ended June 8
30, 2002
Consolidated Statements of Cash Flows for the six months ended June 30, 2002 9
and 2001
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition and 11-18
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
AGREE REALTY CORPORATION
PART I: FINANCIAL INFORMATION
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ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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JUNE 30, December 31,
2002 2001
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ASSETS
REAL ESTATE INVESTMENTS
Land $ 46,838,530 $ 46,838,530
Buildings 150,144,528 148,283,359
Property under development 492,284 1,363,939
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197,475,342 196,485,828
Less accumulated depreciation (35,536,107) (33,634,461)
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NET REAL ESTATE INVESTMENTS 161,939,235 162,851,367
CASH AND CASH EQUIVALENTS 761,470 1,101,861
ACCOUNTS RECEIVABLE - TENANTS, net of allowance of
$146,000 and $50,000 for possible losses 180,114 666,749
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES 271,179 255,203
UNAMORTIZED DEFERRED EXPENSES
Financing 1,253,515 1,355,864
Leasing costs 341,903 352,441
OTHER ASSETS 898,166 927,861
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$165,645,582 $167,511,346
=================================================================================================
See accompanying notes to consolidated financial statements.
4
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
===============================================================================
JUNE 30, December 31,
2002 2001
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LIABILITIES AND STOCKHOLDERS' EQUITY
MORTGAGE PAYABLE $ 71,371,468 $ 69,209,337
CONSTRUCTION LOANS 13,351,632 16,560,202
NOTES PAYABLE 19,758,232 19,958,232
DIVIDENDS AND DISTRIBUTIONS PAYABLE 2,355,006 2,341,591
ACCRUED INTEREST PAYABLE 231,090 218,598
ACCOUNTS PAYABLE
Operating 807,781 1,244,950
Capital expenditures 148,326 598,362
TENANT DEPOSITS 81,003 50,020
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TOTAL LIABILITIES 108,104,538 110,181,292
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MINORITY INTEREST 5,694,180 5,698,101
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STOCKHOLDERS' EQUITY
Common stock, $.0001 par value; 20,000,000 shares authorized,
4,446,031 and 4,416,869 shares issued and outstanding 445 442
Additional paid-in capital 64,457,522 63,937,682
Deficit (11,752,114) (11,724,832)
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52,705,853 52,213,292
Less: unearned compensation - restricted stock (858,989) (581,339)
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TOTAL STOCKHOLDERS' EQUITY 51,846,864 51,631,953
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$ 165,645,582 $167,511,346
=================================================================================================
See accompanying notes to consolidated financial statements.
5
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
==============================================================================
SIX MONTHS ENDED Six Months Ended
JUNE 30, 2002 June 30, 2001
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REVENUES
Minimum rents $ 11,041,706 $ 10,838,855
Percentage rents 43,597 131,360
Operating cost reimbursements 1,278,492 1,308,977
Management fees and other 4,565 21,835
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TOTAL REVENUES 12,368,360 12,301,027
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OPERATING EXPENSES
Real estate taxes 895,235 863,827
Property operating expenses 826,167 750,594
Land lease payments 369,480 369,480
General and administrative 963,441 859,225
Depreciation and amortization 1,959,262 1,906,982
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TOTAL OPERATING EXPENSES 5,013,585 4,750,108
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INCOME FROM OPERATIONS 7,354,775 7,550,919
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OTHER INCOME (EXPENSE)
Interest expense, net (3,023,125) (3,597,288)
Equity in net income of unconsolidated entities 347,159 347,160
Gain on sale of assets - 138,543
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TOTAL OTHER EXPENSE (2,675,966) (3,111,585)
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INCOME BEFORE MINORITY INTEREST 4,678,809 4,439,334
MINORITY INTEREST (615,743) (587,340)
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NET INCOME $ 4,063,066 $ 3,851,994
==================================================================================================
EARNINGS PER SHARE $ .91 $ .87
==================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,446,031 4,416,869
==================================================================================================
See accompanying notes to consolidated financial statements.
6
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
==============================================================================
THREE MONTHS ENDED Three Months Ended
JUNE 30, 2002 June 30, 2001
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REVENUES
Minimum rents $ 5,565,176 $ 5,458,858
Percentage rents 8,401 6,831
Operating cost reimbursements 624,681 642,749
Management fees and other 658 10,422
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TOTAL REVENUES 6,198,916 6,118,860
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OPERATING EXPENSES
Real estate taxes 454,223 432,231
Property operating expenses 277,513 313,791
Land lease payments 184,740 184,740
General and administrative 488,436 477,170
Depreciation and amortization 980,102 954,807
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TOTAL OPERATING EXPENSES 2,385,014 2,362,739
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INCOME FROM OPERATIONS 3,813,902 3,756,121
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OTHER INCOME (EXPENSE)
Interest expense, net (1,545,430) (1,747,326)
Equity in net income of unconsolidated entities 173,579 173,580
Gain on sale of assets - 138,543
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TOTAL OTHER EXPENSE (1,371,851) (1,435,203)
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INCOME BEFORE MINORITY INTEREST 2,442,051 2,320,918
MINORITY INTEREST (321,378) (307,066)
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NET INCOME $ 2,120,673 $ 2,013,852
====================================================================================================
EARNINGS PER SHARE $ .48 $ .46
====================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,446,031 4,416,869
====================================================================================================
See accompanying notes to consolidated financial statements.
7
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
==============================================================================
Unearned
Common Stock Additional Compensation -
-------------------------- Paid-In Restricted
Shares Amount Capital Deficit Stock
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BALANCE, January 1, 2002 4,416,869 $ 442 $63,937,682 $ (11,724,832) $ (581,339)
Issuance of shares under
Stock Incentive Plan 35,162 3 630,780 - (433,650)
Shares redeemed under the
stock Incentive Plan (6,000) - (110,940) - -
Vesting of restricted stock - - - - 156,000
Dividends declared for the period
January 1, 2002 to June 30, 2002 - - - (4,090,348) -
Net income for the period
January 1, 2002 to June 30, 2002 - - - 4,063,066 -
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BALANCE, June 30, 2002 4,446,031 $ 445 $64,457,522 $ (11,752,114) $ (858,989)
===========================================================================================================
See accompanying notes to consolidated financial statements.
8
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
==============================================================================
SIX MONTHS ENDED Six Months Ended
JUNE 30, 2002 June 30, 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,063,066 $3,851,994
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 1,921,318 1,869,190
Amortization 178,244 226,290
Stock based-compensation 156,000 134,000
Gain on sale of assets - (138,543)
Equity in net income of unconsolidated entities (347,159) (347,160)
Minority interests 615,743 587,340
Decrease in accounts receivable 486,635 393,999
Decrease (increase) in other assets (9,729) 168,545
Decrease in accounts payable (437,169) (351,513)
Increase (decrease) in accrued interest 12,492 (55,980)
Increase (decrease) in tenant deposits 30,983 (1,220)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 6,670,424 6,336,942
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate investments (including
capitalized interest of $59,000 in 2002 and $100,000 in 2001) (841,188) (2,101,217)
Distributions from unconsolidated entities 347,159 347,160
Proceeds from sale of assets - 200,000
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NET CASH USED IN INVESTING ACTIVITIES (494,029) (1,554,057)
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CASH FLOWS FROM FINANCING ACTIVITIES
Dividends and limited partners' distributions paid (4,696,597) (4,672,970)
Payments of mortgages payable (1,019,539) (693,107)
Repayment of capital expenditure payables (401,229) (1,040,673)
Line-of-credit net borrowings (payments) (200,000) 800,000
Redemption of restricted stock (110,940) (70,000)
Payment for financing costs (37,951) (500)
Payments on construction loan (26,900) (26,900)
Payment of leasing costs (23,630) (45,186)
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NET CASH USED IN FINANCING ACTIVITIES (6,516,786) (5,749,336)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (340,391) (966,451)
CASH AND CASH EQUIVALENTS, beginning of period 1,101,861 1,119,072
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CASH AND CASH EQUIVALENTS, end of period $ 761,470 $ 152,621
=======================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest (net of amounts capitalized) $ 2,875,402 $3,468,845
=======================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Construction loan paid with mortgage $ 3,181,670 $ -
Dividends and limited partners' distributions declared
and unpaid $ 2,355,006 $2,341,591
Real estate investments financed with accounts payable $ 148,326 $1,077,427
Shares issued under Stock Incentive Plan $ 630,783 $ 375,251
=======================================================================================================
See accompanying notes to consolidated financial statements.
9
AGREE REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. BASIS OF The accompanying unaudited 2002 consolidated
PRESENTATION financial statements have been prepared in accordance
with generally accepted accounting principles for
interim financial information and with the
instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by
generally accepted accounting principles for complete
financial statements. In the opinion of management,
all adjustments (consisting of normal recurring
accruals) considered necessary for a fair
presentation have been included. The consolidated
balance sheet at December 31, 2001 has been derived
from the audited consolidated financial statements at
that date. Operating results for the six months ended
June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2002, or for any other interim period.
For further information, refer to the consolidated
financial statements and footnotes thereto included
in the Company's Annual Report for the year ended
December 31, 2001.
2. EARNINGS PER Earnings per share has been computed by dividing the
SHARE income by the weighted average number of common
shares outstanding. The per share amounts reflected
in the consolidated statements of income are
presented in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings per
Share"; the amounts of the Company's "basic" and
"diluted" earnings per share (as defined in SFAS No.
128) are the same.
10
AGREE REALTY CORPORATION
PART I
==============================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OEPRATIONS
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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. The assets of the Company are held by, and all operations are
conducted through, Agree Limited Partnership (the "Operating Partnership"), of
which the Company is the sole general partner and held an 86.84% interest as
of June 30, 2002. The Company is operating so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes.
The Company has entered into sixteen (16) leases with Kmart Corporation.
Thirteen (13) of the Kmart stores are anchors in the Company's Community
Shopping Centers and three (3) Kmart stores are free-standing properties.
Kmart Corporation and 37 of its U.S. subsidiaries have filed voluntary
petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code.
Kmart has outlined certain strategic operational and financial initiatives
that it intends to continue or implement during the reorganization process.
One of its initiatives is to evaluate the performance of every store and the
terms of every lease in its portfolio, with the objective of closing
unprofitable or under performing stores.
The Kmart stores in the Company's Portfolio provided 24% of the Company's
Annual Base Rent as of December 31, 2001. Seven of the Kmart stores pay
percentage rent in addition to their minimum rent. All Kmart stores in the
Company's Portfolio are open and operating as Kmart discount stores.
On March 8, 2002, Kmart announced that it intends to close 284
under-performing stores as part of its initial Chapter 11 financial objectives
review. None of the Company's Kmart stores were included in this initial list
of stores to be closed. However, there can be no assurance that Kmart won't
announce additional store closing in the future which may include some of the
Company's stores.
The following should be read in conjunction with the Consolidated Financial
Statements of Agree Realty Corporation, including the respective notes
thereto, which are included in this Form 10-Q.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 TO SIX MONTHS ENDED JUNE 30, 2001
Minimum rental income increased $203,000, or 2%, to $11,042,000 in 2002,
compared to $10,839,000 in 2001. The increase was the result of the
development of one property in 2001 and one property in 2002.
Percentage rental income decreased $87,000, or 67%, to $44,000 in 2002,
compared to $131,000 in 2001. The decrease was primarily the result of an
agreement with a tenant to increase base rent in exchange for the elimination
of their percentage rent provision.
11
AGREE REALTY CORPORATION
PART I
==============================================================================
Operating cost reimbursements, which represent additional rent required by
substantially all of the Company's leases to cover the tenants' proportionate
share of real estate taxes and property operating expenses, decreased $31,000,
or 2%, to $1,278,000 in 2002, compared to $1,309,000 in 2001. Operating cost
reimbursements decreased due to a $96,000 charge in 2002 for a possible
collection loss related to Kmart offset by the increase in real estate taxes
and property operating expenses.
Management fees and other income decreased $17,000, or 79%, to $5,000 in 2002,
compared to $22,000 in 2001. The decrease was the result of the termination of
the management agreement between the Company and two properties it previously
managed.
Real estate taxes increased $31,000, or 4%, to $895,000 in 2002 compared to
$864,000 in 2001. The increase is the result of general assessment changes.
Property operating expenses (shopping center maintenance, insurance and
utilities) increased $75,000, or 10%, to $826,000 in 2002 compared to $751,000
in 2001. The increase was the result of increased snow removal costs of
$117,000; a decrease in shopping center maintenance costs of ($58,000); an
increase in insurance costs of $23,000 and a decrease in utilities of ($7,000)
in 2002 versus 2001.
Land lease payments remained constant at $369,000 for 2002 and 2001.
General and administrative expenses increased $104,000, or 12%, to $963,000 in
2002 compared to $859,000 in 2001. The increase was primarily the result of
increased compensation related expenses. General and administrative expenses
as a percentage of rental income increased from 7.8% for 2001 to 8.7% for
2002.
Depreciation and amortization increased $52,000, or 3%, to $1,959,000 in 2002
compared to $1,907,000 in 2001. The increase was the result of the development
of one property in 2001 and one property in 2002.
Interest expense decreased $574,000, or 16%, to $3,023,000 in 2002, from
$3,597,000 in 2001. The decrease in interest expense was the result of
decreased interest rates on variable rate notes payable.
Equity in net income of unconsolidated entities remained constant at $347,000
for 2002 and 2001.
The Company recognized a gain on the sale of an asset of $139,000 in 2001.
There was no such gain in 2002.
The Company's income before minority interest increased $239,000, or 5% to
$4,679,000 in 2002 from $4,439,000 in 2001 as a result of the foregoing
factors.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 TO THREE MONTHS ENDED JUNE 30,
2001
Rental income increased $106,000, or 2%, to $5,565,000 in 2002, compared to
$5,459,000 in 2001. The increase was the result of the development of one
property in 2001 and one property in 2002.
Percentage rental income increased $1,000, or 23%, to $8,000 in 2002, compared
to $7,000 in 2001. The increase was the result of increased tenant sales.
12
AGREE REALTY CORPORATION
PART I
==============================================================================
Operating cost reimbursements decreased $18,000, or 3%, to $625,000 in 2002,
compared to $643,000 in 2001. Operating cost reimbursements decreased due to a
$39,000 charge in 2002 for a possible collection loss related to Kmart offset
by the increase in real estate taxes and the decrease in property operating
expenses.
Management fees and other income decreased $9,000, or 94%, to $1,000 in 2002,
compared to $10,000 in 2001. The decrease was the result of the termination of
the management agreements between the Company and two properties it previously
managed.
Real estate taxes increased $22,000, or 5%, to $454,000 in 2002 compared to
$432,000 in 2001. The increase is the result of general assessment increases.
Property operating expenses (shopping center maintenance, insurance and
utilities) decreased $36,000, or 12%, to $278,000 in 2002 compared $314,000 in
2001. The decrease was the result of increased snow removal costs of $19,000;
a decrease in shopping center maintenance of ($69,000); an increase in utility
costs of $2,000 and an increase in insurance cost of $12,000.
Land lease payments remained constant at $185,000 for 2002 and 2001.
General and administrative expenses increased $11,000, or 2%, to $488,000 in
2002 compared to $477,000 in 2001. The increase was primarily the result of an
increase in property management expenses. General and administrative expenses
as a percentage of rental income remained constant at 8.7% in 2001 and 2002.
Depreciation and amortization increased $25,000, or 3%, to $980,000 in 2002
compared to $955,000 in 2001. The increase was the result of the development
and acquisition of one property in 2001 and one development in 2002.
Interest expense decreased $202,000, or 12%, to $1,545,000 in 2002, from
$1,747,000 in 2001. The decrease in interest expense was the result of
decreased interest rates on variable rate notes payable.
Equity in net income of unconsolidated entities remained constant at $174,000
in 2002 and 2001.
The Company recognized a gain on the sale of an asset of $139,000 in 2001.
There was no such gain in 2002.
The Company's income before minority interest increased $121,000, or 5%, to
$2,442,000 in 2002, from $2,321,000 in 2001 as a result of the foregoing
factors.
13
AGREE REALTY CORPORATION
PART I
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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 Investments Trusts, Inc. ("NAREIT") to mean net
income computed in accordance with generally accepted accounting principles
("GAAP"), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated entities in which the REIT holds an interest.
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.
14
AGREE REALTY CORPORATION
PART I
==============================================================================
The following tables illustrate the calculation of FFO for the six months and
three months ended June 30, 2002 and 2001:
Six Months Ended June 30, 2002 2001
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Net income before minority interest $ 4,678,809 $ 4,439,334
Depreciation of real estate assets 1,911,045 1,862,285
Amortization of leasing costs 34,168 33,270
Amortization of stock awards 156,000 134,000
Gain on sale of assets - (138,543)
- -------------------------------------------------------------------------------------------------
FUNDS FROM OPERATIONS $ 6,780,022 $ 6,330,346
=================================================================================================
WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING 5,119,578 5,090,416
=================================================================================================
Three Months Ended June 30, 2002 2001
- -------------------------------------------------------------------------------------------------
Net income before minority interest $ 2,442,051 $ 2,320,918
Depreciation of real estate assets 955,973 931,229
Amortization of leasing costs 17,084 17,839
Amortization of stock awards 78,000 67,000
Gain of sale of assets - (138,543)
- -------------------------------------------------------------------------------------------------
FUNDS FROM OPERATIONS $ 3,493,108 $ 3,198,443
=================================================================================================
WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING 5,119,578 5,090,416
=================================================================================================
15
AGREE REALTY CORPORATION
PART I
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FORWARD-LOOKING STATEMENTS
Management has included herein certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. When used,
statements which are not historical in nature including the words
"anticipate," "estimate," "should," "expect," "believe," "intend" and similar
expressions are intended to identify forward-looking statements. Such
statements are, by their nature, subject to certain risks and uncertainties.
Risks and other factors that might cause such a difference include, but are
not limited to, the effect of economic and market conditions; risks that the
Company's acquisition and development projects will fail to perform as
expected; financing risks, such as the inability to obtain debt or equity
financing on favorable terms; the level and volatility of interest rates; loss
or bankruptcy of one or more of the Company's major retail tenants; and
failure of the Company's properties to generate additional income to offset
increases in operating expenses.
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 June 30, 2002, the Company declared a quarterly
dividend of $.46 per share. The dividend was paid on July 11, 2002, to holders
of record on June 28, 2002.
As of June 30, 2002, the Company had total mortgage indebtedness of
$71,371,468 with a weighted average interest rate of 6.94%. Future scheduled
annual maturities of mortgages payable for the years ending June 30 are as
follows: 2003 - $2,135,035; 2004 - $2,359,295; 2005 - $2,527,648; 2006 -
$30,322,835; and 2007 - $1,802,005. This mortgage debt is all fixed rate debt.
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 August 2003 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 150 basis points to 213
basis points or the bank's prime rate, 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 most of the Company's Properties which are not
otherwise encumbered and properties to be acquired or developed. As of June
30, 2002, $19,758,232 was outstanding under the Credit Facility bearing a
weighted average interest rate of 3.60%.
16
AGREE REALTY CORPORATION
PART I
==============================================================================
The Company also has in place a $5 million line of credit (the "Line of
Credit"), which matures on April 30, 2003, and which the Company expects to
renew for an additional 12-month period. The Line of Credit bears interest at
the bank's prime rate less 50 basis points or 175 basis points in excess of
the one-month LIBOR rate, at the option of the Company. The purpose of the
Line of Credit is to provide working capital to the Company and fund land
options and start-up costs associated with new projects. As of June 30, 2002,
no amounts were outstanding under the Line of Credit.
The Company's wholly owned subsidiaries have obtained construction financing
of approximately $12,900,000 to fund the development of three retail
properties. The notes require quarterly interest payments, based on a weighted
average interest rate based on LIBOR, computed by the lender. The notes mature
on June 20, 2004 and are secured by the underlying land and buildings. As of
June 30, 2002, $11,715,292 was outstanding under these notes.
The Company has received funding from an unaffiliated third party for the
construction of certain of its Properties. Advances under this agreement bear
no interest and are secured by the specific land and buildings being
developed. As of June 30, 2002, $1,636,340 was outstanding under this
arrangement.
During the second quarter 2002 the Company's lease with A & P on its
Wholly-Owned Free Standing Property located in Roseville, Michigan expired and
was not renewed by the Tenant. The Company has leased the land to Sam's Real
Estate Business Trust (guaranteed by Wal-Mart Stores, Inc.). The Lessee at its
sole cost and expense will construct a Sam's Club store on the Roseville site.
The transaction is expected to have a positive effect on the Company's 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.
17
AGREE REALTY CORPORATION
PART I
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The Company plans to begin construction of additional pre-leased developments
and may acquire additional properties, which will initially be financed by the
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.
18
AGREE REALTY CORPORATION
PART I
==============================================================================
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its borrowing
activities. There is inherent rollover risk for borrowings as they mature and
are renewed at current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future interest
rates and the Company's future financing requirements.
Mortgages payable - As of June 30, 2002 the Company had five mortgages
outstanding. The first mortgage in the amount of $31,319,114 bears interest at
7.00%. The mortgage matures on November 15, 2005. The second mortgage in the
amount of $6,956,571 bears interest at 7.00%. The mortgage matures on April 1,
2013 and is subject to a rate review after the 7th year (April 1, 2006). The
third mortgage in the amount of $11,191,260 bears interest at 6.63%. The
mortgage matures on February 5, 2017. The fourth mortgage in the amount of
$18,728,600 bears interest at 6.90%. The mortgage matures January 1, 2020. The
fifth mortgage in the amount of $3,175,923 bears interest at 7.50%. The
mortgage matures May 15, 2022.
Construction loans - As of June 30, 2002 the Company had Construction loans
outstanding of $13,351,632. Under the terms of the construction loans the
Company bears no interest rate risk.
Notes Payable - As of June 30, 2002 the Company had $19,758,232 outstanding on
its Lines-of-Credit which was subject to interest at a variable interest rate
based on LIBOR.
The Company does not enter into financial instrument transactions for trading
or other speculative purposes or to manage interest rate exposure.
A 10% adverse change in interest rates on the portion of the Company's debt
bearing interest at variable rates would result in an annual increase in
interest expense of approximately $75,000.
19
AGREE REALTY CORPORATION
PART II
==============================================================================
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 13, 2002, the Company held its Annual Meeting of Stockholders.
The following were the results of the meeting:
The stockholders elected Richard Agree and Michael Rotchford as
Directors until the annual meeting of stockholders in 2005 or until a
successor is elected and qualified.
The vote was as follows: Richard Agree Michael Rotchford
-------------- -----------------
Votes cast for 4,080,989 4,144,637
Votes withheld 94,972 31,324
Not voting 270,070 270,070
20
AGREE REALTY CORPORATION
PART II
==============================================================================
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) 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 Fifth amendment to amended and restated $5 million
business Loan Agreement dated April 30, 2002 between
Agree Limited Partnership and Standard Federal Bank
10.2 Project Loan Agreement dated as of April 30, 2002
between Royal Indemnity Company (together with its
successors and assigns) and Lawrence Store No. 203
L.L.C. (together with its permitted successors and
assigns)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, Richard Agree, Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, Kenneth R. Howe, Chief Financial Officer
(b) Reports on Form 8-K
None
21
AGREE REALTY CORPORATION
SIGNATURES
==============================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGREE REALTY CORPORATION
/s/ RICHARD AGREE
- -------------------------------------------------------
Richard Agree
President and Chief Executive Officer
/s/ KENNETH R. HOWE
- --------------------------------------------------------
Kenneth R. Howe
Vice-President - Finance and Secretary
(Principal Financial Officer)
Date: August 9, 2002
- --------------------------------------------------------
22
Exhibit Index
10.1 Fifth amendment to amended and restated $5 million
business Loan Agreement dated April 30, 2002 between
Agree Limited Partnership and Standard Federal Bank
10.2 Project Loan Agreement dated as of April 30, 2002
between Royal Indemnity Company (together with its
successors and assigns) and Lawrence Store No. 203
L.L.C. (together with its permitted successors and
assigns)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, Richard Agree, Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, Kenneth R. Howe, Chief Financial Officer