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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 FISCAL YEAR ENDED DECEMBER 31, 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
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AGREE REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 38-3148187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31850 NORTHWESTERN HIGHWAY (248) 737-4190
FARMINGTON HILLS, MICHIGAN 48334 (Registrant's telephone number,
(Address of principal executive offices) including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS
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Common Stock, $.0001 par value
NAME OF EACH EXCHANGE ON
WHICH REGISTERED
-----------------------
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, 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. ____
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No ____
The aggregate market value of the Registrant's shares of common stock held by
non-affiliates was approximately $85,363,795 as of June 28, 2002, based on the
closing price of $19.20 on the NYSE on that date.
As of March 14, 2003, the number of shares of common stock of the Registrant
outstanding was 4,479,345.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED INTO FORM 10-K
-------- ---------------------------
Portions of the Registrant's Proxy Statement for its Part III
Annual Meeting of Shareholders to be held on May 5, 2003 Items 10-13
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TABLE OF CONTENTS
PART I
PAGE
NUMBERS
-------
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of
Security Holders 18
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 20
Item 7A Quantitative and Qualitative Disclosures
About Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes and Disagreements With Accountants
on Accounting and Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers of the
Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial
Owners and Management 28
Item 13. Certain Relationships and Related Transactions 28
Item 14. Controls and Procedures 29
PART IV
Item 15. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 29
SIGNATURES 33
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002 34
2
PART 1
FORWARD LOOKING STATEMENTS
This Form 10-K, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based on assumptions and expectations which may not be realized and are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. Future events and
actual results, financial and otherwise, may differ materially from the results
discussed in the forward-looking statements. 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, as well as other
risks listed herein under "Item 1. Business" and from time to time in the
Company's reports filed with the Securities and Exchange Commission or otherwise
publicly disseminated by the Company.
References herein to the "Company" include Agree Realty Corporation,
together with its wholly-owned subsidiaries and its majority owned partnership,
Agree Limited Partnership (the "Operating Partnership"), unless the context
otherwise requires.
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 national and regional retail companies
under net leases in which the Company may be responsible for certain costs. As
of December 31, 2002, the Company owned, either directly or through interests in
joint ventures, a portfolio of 48 properties (the "Properties") located in 13
states and containing an aggregate of approximately 3.7 million square feet of
gross leasable area. The Properties consist of 14 neighborhood and community
shopping centers (the "Community Shopping Centers", 33 free-standing properties
and 1 land lease property. The Company independently owns 29 of the
free-standing properties and owns the other four through joint ventures (the
"Joint Venture Properties"). As of December 31, 2002, approximately 99% of gross
leasable area in the portfolio was leased, and approximately 95% of the
Company's base rental income was attributable to national and regional
retailers. Among such retailers are Borders, Inc. ("Borders") Kmart Corporation
("Kmart") and Walgreen Co. ("Walgreen") which, as of December 31, 2002,
collectively represented approximately 65% of the Company's base rental income.
See "Major Tenants." The Company developed all 14 of the shopping centers and 29
of the 33 free-standing properties.
During 2002 the Company completed the development of one (1)
free-standing Property which added 14,490 square feet of gross leasable area
3
to the Company's operating portfolio and cost approximately $3.5 million. The
Property is leased to Walgreen Co.
During 2002 the Company also leased a parcel of land to Sam's Club, a
division of Wal-Mart, Inc ("Sam's Club"). Sam's Club at its expense razed the
site of existing buildings and is constructing a 135,000 square foot building.
In November 2002, the Company acquired the interest of its joint
venture partner in three (3) Joint Venture Properties and now owns 100% of the
properties. The properties are located in Oklahoma City, Oklahoma, Omaha,
Nebraska and Indianapolis, Indiana. The cost to acquire the Oklahoma City and
Omaha interests was $7,628,622 and was funded using the Company's credit
facility. The Indianapolis interest was funded with a fixed rate mortgage in the
amount of $1,301,866.
In February 2003 the Company acquired the interest of its joint venture
partner in an additional Joint Venture Property and now owns 100% of the
property. The property is located in Ann Arbor, Michigan. contains 458,729
square feet of gross leasable area and is leased to Borders Group, Inc. for
their headquarters. The cost to acquire the interest in this property was
approximately $7,700,000 and was financed with a fixed rate mortgage at a rate
of 6.50%.
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
generally consistent 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.
The Company's headquarters are located at 31850 Northwestern Highway,
Farmington Hills, MI 48334 and its telephone number is (248) 737-4190. The
address of the Company's web site is www.agreerealty.com. The Company's SEC
filings can be accessed through this site.
Description of Business
Objectives
The Company's primary objectives are (1) to realize consistent cash flows
through the ownership of high quality properties leased primarily to national
and regional retailers and (2) to maximize stockholder returns through the
development or acquisition of additional properties. The Company intends to
achieve these objectives by implementing the growth, operating and financial
strategies outlined below.
- - Developing or acquiring each property with the objective of holding it for
long-term investment value.
- - Developing or acquiring properties in what the Company considers to be
attractive long-term locations. These locations typically have (1)
convenient access to transportation arteries with traffic count that is
higher than average for the local market; (2) concentrations
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of other retail properties; and (3) demographic characteristics which are
attractive to the retail tenant which will lease the property.
- - Generally, purchasing land and beginning development of a property only
upon the execution of a lease with a national or regional retailer on terms
that provide a return on estimated cost which is attractive relative to the
Company's cost of capital.
- - Directing all aspects of development, including construction, design,
leasing and management. Property management and the majority of the 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 "first
look" opportunities not generally available to its competitors, thereby
providing the Company with an advantage in achieving its objectives.
Major Tenants
As of December 31, 2002, approximately 65% of the Company's gross
leasable area, including the Joint Venture Properties, was leased to Borders,
Kmart and Walgreen and approximately 65% of total annualized base rents was
attributable to these tenants. At December 31, 2002, Borders occupied
approximately 27% of the Company's gross leasable area, including the Joint
Venture Properties, and accounted for approximately 28% of the annualized base
rent. At December 31, 2002, Kmart occupied approximately 36% of the Company's
gross leasable area, including the Joint Venture Properties, and accounted for
approximately 20% of the annualized base rent. At December 31, 2002, Walgreen
occupied approximately 5% of the company's gross leasable area, including the
Joint Venture Properties, and accounted for approximately 17% of the annualized
base rent. No other tenant accounted for more than 10% of gross leasable area or
annualized base rent in 2002. The loss of any of these anchor tenants or the
inability of any of them to pay rent would have an adverse effect on the
Company's business.
On January 22, 2002, Kmart Corporation and 37 of its U.S. subsidiaries
filed voluntary petitions for reorganization under chapter 11 of the U.S.
Bankruptcy Code. In its filings in the U.S. Bankruptcy Court for the Northern
District of Illinois, Kmart indicated that it will reorganize on a fast-track
basis and has targeted emergence from chapter 11 in 2003. Kmart has outlined
certain strategic, operational and financial initiatives that it intends to
continue or implement during the reorganization process. One of its initiatives
was to evaluate the performance of every store and terms of every lease in its
portfolio, with the objective of closing unprofitable or underperforming stores.
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. The Kmart stores are located in five states as follows: Michigan
(9), Wisconsin (3), Florida (2), Ohio (1) and
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Kentucky (1). All sixteen (16) of the Kmart stores were open and operating as
Kmart discount stores as of December 31, 2002.
On March 8, 2002, Kmart announced that it intended 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. On January 24, 2003, Kmart announced that it intends to
close an additional 317 stores and emerge from bankruptcy by April 30, 2003. One
(1) of the Company's Kmart stores (a Community Shopping Center store) was
included in this list of stores to be closed. The store is located in Lakeland,
Florida. It is anticipated that Kmart will vacate the premises during the first
quarter 2003. Annual rental from this Kmart of approximately $480,000 and
Kmart's contribution for real estate taxes, insurance and common area
maintenance of approximately $110,000 will cease on the actual date Kmart
vacates the premises. Management believes it may take between six to twelve
months to release the Kmart store. Certain tenants in the Lakeland, Florida
shopping center have co-tenancy clauses which if the Kmart store closes provide
either for their rental payments to be based on gross sales or an option to
terminate their lease should a replacement tenant not be obtained. Tenants in
other Community Shopping Centers in which Kmart is the anchor tenant, have
similar co-tenancy provisions in their leases. In addition the Company has
agreed to rent reductions totaling $300,000 per year on two other Kmart leases.
The rent reductions are for a five (5) year period. The stores receiving the
rent concessions are located in Perrysburg, Ohio and Winter Garden, Florida.
There can be no assurance that Kmart will not announce additional store closings
in the future which may include some of the Company's stores prior to their
emergence from bankruptcy.
Financing Strategy
As of December 31, 2002, the Company's ratio of indebtedness to market
capitalization was approximately 57%. 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, all of
which will initially be financed by its Credit Facility and Line of Credit (each
as hereinafter defined). Management intends to periodically refinance short-term
construction and acquisition financing with long-term debt and / or equity in
order to reduce its ratio of total debt to market capitalization. Nevertheless,
the Company may operate with debt levels or ratios that are in excess of 50% for
extended periods of time prior to the completion of this long-term financing
process.
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. 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 without stockholder approval.
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 (the "Code"). In order to maintain
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qualification as a REIT, the Company must, among other things, distribute at
least 90% of its real estate investment trust income and meet certain other
asset and income tests. Additionally, the Company's charter limits ownership of
the Company, directly or constructively, by any single person 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 that 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 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 a property, 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 and if
necessary conducting additional investigation as warranted.
The Company conducted a Phase I environmental study on the Property it
developed in 2002. The results of these Phase I studies required the Company to
perform a Limited Phase II environmental site assessment (which involves soil
sampling or ground water analysis). The results of the Phase II environmental
study conducted on the Property indicated that no further action was required by
the Company. In addition, the Company has no knowledge of any hazardous
substances existing on any of its 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 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, 2003, 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
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agreement, and the Company considers its employee relations to be satisfactory.
Financial Information About Industry Segments
The Company is in the business of development, acquisition and
management of shopping centers and free-standing properties. The Company
considers its activities to consist of a single industry segment. See the
Consolidated Financial Statements and Notes thereto included in Item 8 of this
Annual Report on Form 10-K for certain information required in Item 1.
ITEM 2. PROPERTIES
The Properties consist of 14 Community Shopping Centers, 33
free-standing properties and 1 land lease property. As of December 31, 2002,
approximately 99% of the Gross Leasable Area ("GLA") in the portfolio was
leased, and approximately 95% of the Company's base rental income was
attributable to, national and regional retailers. Among such retailers are
Borders, Kmart and Walgreen which, at December 31, 2002, collectively
represented approximately 65% 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. The Company received percentage rents of $247,994 and $413,058
for 2002 and 2001, respectively such amounts represented 1.0% and 1.7%
respectively of the Company's total revenue. Included in those amounts were
percentage rents from Kmart of $162,419 and $235,894 for 2002 and 2001,
respectively. Leases with Borders do not contain percentage rent provisions.
Leases with Walgreen do contain percentage rent provisions; however no
percentage rent was received from Walgreen. A majority of the leases require the
Company to make roof and structural repairs, as needed. 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, 2002
--------- ---------------- ------------ ------------------
California 1 38,015 100%
Florida 5 (1) 492,305 99
Indiana 1 15,844 100
Illinois 1 20,000 100
Kansas 2 45,000 100
Kentucky 1 135,009 100
Maryland 2 53,000 100
Michigan 23 (1) 2,076,866 99
Nebraska 2 55,000 100
Ohio 2 108,543 100
8
LOCATION OF PROPERTIES IN THE PORTFOLIO
(CONTINUED)
Total Gross Percent of
Number of Leasable Area GLA Leased on
State Properties (Sq. feet) December 31, 2002
--------- ---------------- ------------ ------------------
Oklahoma 4 (1) 99,282 100
Pennsylvania 1 37,004 100
Wisconsin 3 523,036 98
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Total/Average 48 3,698,904 99%
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(1) Includes Joint Venture Properties in which the Company owns interests
ranging from 8% to 15%
ANNUALIZED BASE RENT OF THE COMPANY'S PROPERTIES
The following is a breakdown of base rents in place at December 31, 2002
for each type of retail tenant:
Percent of
Annualized Annualized
Type of Tenant Base Rent (1) Base Rent
--------------- --------------- -------------
National (2) $21,564,309 87%
Regional (3) 2,023,417 8
Local 1,102,249 5
----------- ---
Total $24,689,975 100%
----------- ---
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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, Walgreen, Wal-Mart,
Fashion Bug, Winn Dixie, Rite Aid, JC Penney, Avco Financial, GNC Group, Radio
Shack, Sam Goody, Super Value, Maurices, Payless Shoes, Kash N Karry,
Blockbuster Video, Family Dollar, H&R Block, Sally Beauty, Jo Ann Fabrics,
Staples, Best Buy, Dollar Tree, TGI Friday's, Circuit City and Pier 1 Imports.
(3) Includes the following regional tenants: Roundy's Foods, Dunham's Sports,
Christopher Banks, Beal's Outlet Stores and Hollywood Video.
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COMMUNITY SHOPPING CENTERS
Fourteen (14) of the Company's properties are Community Shopping Centers ranging
in size from 20,000 to 241,458 square feet of gross leasable area. The centers
are located in 5 states as follows: Florida (2), Illinois (1), Kentucky (1),
Michigan (7) and Wisconsin (3). The location, general character and primary
occupancy information with respect to the Community Shopping Centers at December
31, 2002 are set forth below: The option to extend the lease beyond its initial
term is only at the option of the tenant.
SUMMARY OF COMMUNITY SHOPPING CENTERS AT DECEMBER 31, 2002
(2) (3)
(4) Gross (1) Average Percent Percent
Year Land Leasable Annualized Base Leased at Occupied Anchor Tenants
Completed/ Area Area Base Rent per Dec 31, at Dec 31, (Lease expiration/
Property Location Expanded (acres) (Sq. Ft.) Rent Sq. Ft. 2002 2002 Option period expiration)
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Capital Plaza 1978/ 11.58 135,009 $ 359,568 $ 2.66 100% 75% Kmart (2003/2053)
Frankfort, KY 1991 Winn Dixie (2010/2035)
Fashion Bug (2005/2025)
Charlevoix Commons 1991 14.79 137,375 658,495 4.97 96% 70% Kmart (2015/2065)
Charlevoix, MI Roundy's (2011/2031)
Chippewa Commons 1991 16.37 168,311 857,183 5.44 94% 94% Kmart (2014/2064)
Chippewa Falls, WI Roundy's (2011/2031)
Fashion Bug (2006/2021)
Iron Mountain Plaza 1991 21.20 176,352 854,493 4.98 97% 97% Kmart (2015/2065)
Iron Mountain, MI Roundy's (2011/2031)
Fashion Bug (2007/2022)
Ironwood Commons 1991 23.92 185,535 923,994 4.98 100% 88% Kmart (2015/2065)
Ironwood, MI Super Value (2011/2036)
J.C. Penney Co. (2006/2026)
Fashion Bug (2004/2022)
Marshall Plaza 1990 10.74 119,279 653,331 5.48 100% 100% Kmart (2015/2065)
Marshall, MI
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SUMMARY OF COMMUNITY SHOPPING CENTERS AT DECEMBER 31, 2002 (CONTINUED)
(2) (3)
(4) Gross (1) Average Percent Percent
Year Land Leasable Annualized Base Leased at Occupied Anchor Tenants
Completed/ Area Area Base Rent per Dec 31, at Dec 31, (Lease expiration/
Property Location Expanded (acres) (Sq. Ft.) Rent Sq. Ft. 2002 2002 Option period expiration)
- ------------------------------------------------------------------------------------------------------------------------------------
Mt Pleasant Shopping 1973/ 24.51 241,458 $ 1,077,874 $ 4.46 100% 100% Kmart (2008/2048)
Center 1997 J.C. Penney Co. (2005/2020)
Mt. Pleasant, MI Staples, Inc. (2005/2025)
Fashion Bug (2006/2026)
North Lakeland Plaza 1987 16.67 171,334 1,024,930 5.98 100% 100% Kmart (2003)
Lakeland, FL Best Buy (2013/2028)
Petoskey Town Center 1990 22.08 174,870 1,045,942 6.11 98% 98% Kmart (2015/2065)
Petoskey, MI Roundy's (2010/2030)
Fashion Bug (2007/2022)
Plymouth Commons 1990 16.30 162,031 972,549 6.00 100% 100% Kmart (2015/2065)
Plymouth, WI Roundy's (2010/2030)
Fashion Bug (2004/2021)
Rapids Associates 1990 16.84 173,557 998,327 5.75 100% 100% Kmart (2015/2065)
Big Rapids, MI Roundy's (2010/2030)
Fashion Bug (2004/2021)
Shawano Plaza 1990 17.91 192,694 1,013,292 5.26 100% 100% Kmart (2014/2064)
Shawano, WI Roundy's (2010/2030)
J.C. Penney Co. (2005/2025)
Fashion Bug (2004/2021)
West Frankfort Plaza 1982 1.45 20,000 131,000 6.55 100% 100% Fashion Bug (2007)
West Frankfort, IL
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SUMMARY OF COMMUNITY SHOPPING CENTERS AT DECEMBER 31, 2002 (CONTINUED)
(2) (3)
(4) Gross (1) Average Percent Percent
Year Land Leasable Annualized Base Leased at Occupied Anchor Tenants
Completed/ Area Area Base Rent per Dec 31, at Dec 31, (Lease expiration/
Property Location Expanded (acres) (Sq. Ft.) Rent Sq. Ft. 2002 2002 Option period expiration)
- ------------------------------------------------------------------------------------------------------------------------------------
Winter Garden Plaza 1988/ 22.34 233,512 $ 927,927 $ 3.97 98% 98% Kmart (2013/2063)
Winter Garden, FL 2000 Kash N Karry (2020/2040)
-------------------------------------------------------------------
TOTAL/AVERAGE 236.70 2,291,317 $11,498,905 $ 5.08 99% 95%
===================================================================
(1) Total annualized base rents of the Company as of December 31, 2002
(2) Calculated as total annualized base rents, divided by gross leasable area
actually leased as of December 31, 2002
(3) Roundy's has sub-leased the space it leases at Iron Mountain Plaza (35,285
square feet, rented at a rate of $5.87 per square foot) and leases but does not
currently occupy, the 35,896 square feet it leases at Charlevoix Commons at a
rate of $5.97 per square foot. Both of these leases expire in 2011 (assuming
they are not extended by Roundy's). Winn Dixie leases but does not currently
occupy, the 33,617 square feet it leases at Capital Plaza. This lease expires in
2010 and is rented at a rate of $4.06 per square foot. JC Penney Co. leases but
does not currently occupy, the 22,204 square feet it leases at Ironwood Commons.
This lease expires in 2006 and rented at a rate of $3.75 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.
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FREE-STANDING PROPERTIES
Thirty-three (33) of the Properties are free-standing properties which
at December 31, 2002 were net leased to Borders (18), Circuit City Stores (1),
Kmart (3) and Walgreen (11). These Properties contain, in the aggregate,
approximately 1,174,858 square feet of gross leasable area or approximately 34%
of the Company's total gross leasable area. The free-standing Properties range
in size from 13,686 to 458,729 square feet of gross leasable area and are
located in the following states: California (1), Florida (3), Indiana (1),
Kansas (2), Maryland (2), Michigan (15), Nebraska (2), Ohio (2), Oklahoma (4)
and Pennsylvania (1). Included in the Company's retail Properties are four Joint
Venture Properties in which the Company owns interests ranging from 8% to 15%
and 29 wholly-owned Properties. The Company's 29 wholly owned free-standing
Properties provide $12,065,459, or approximately 49% of the total annualized
base rent at an average base rent per square foot of $15.29. The Company (or the
joint ventures in which the Company has an interest) owns each of the
thirty-three (33) free-standing properties in fee, except as indicated below.
The location and general 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 (2)
Tenant/Location Completed Total GLA (Option expiration)
- -------------------------------------------------------------------------------
Borders, (1)
Aventura, FL 1996 30,000 Jan 31, 2016 (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)
Borders, (1)
Lawrence, KS 1997 20,000 Oct 16, 2022 (2042)
Borders, Tulsa, OK 1998 25,000 Oct 16, 2022 (2042)
Borders, Oklahoma
City, OK 2002 24,641 Nov 17, 2017 (2037)
Borders, Omaha, NE 2002 25,000 Nov 17, 2017 (2037)
Borders,
Indianapolis, IN 2002 15,844 Nov 17, 2017 (2037)
Borders, Columbia, MD 1999 28,000 Oct 16, 2022 (2042)
Borders, Germantown, MD 2000 25,000 Oct 16, 2022 (2042)
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, Perrysburg, OH 1983 87,543 Oct 31, 2008 (2058)
Walgreen, Waterford, MI 1997 13,905 Feb 28, 2018 (2058)
Walgreen, Chesterfield, MI 1998 13,686 July 31, 2018 (2058)
Walgreen, Pontiac, MI 1998 13,905 Oct 31, 2018 (2058)
13
WHOLLY-OWNED FREE STANDING PROPERTIES
(CONTINUED)
Year Lease expiration (2)
Tenant/Location Completed Total GLA (Option expiration)
- -------------------------------------------------------------------------------
Walgreen, Grand Blanc, MI 1998 13,905 Feb 28, 2019 (2059)
Walgreen, Rochester, MI 1998 13,905 June 30, 2019 (2059)
Walgreen, Ypsilanti, MI 1999 15,120 Dec 31, 2019 (2059)
Walgreen (1), Petoskey, MI 2000 13,905 Apr 30, 2020 (2060)
Walgreen, Flint, MI 2000 14,490 Dec 31, 2020 (2060)
Walgreen, Flint, MI 2001 15,120 Feb 28, 2021 (2061)
Walgreen, N Baltimore, MI 2001 14,490 Aug 31, 2021 (2061)
Walgreen, Flint, MI 2002 14,490 Apr 30, 2027 (2077)
---------
TOTAL 788,858
---------
(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 three 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 (Aventura, FL 2036, Lawrence,
KS 2027 and Petoskey, MI 2049), the land together with all
improvements revert to the land owner. The Company has an option to
purchase the Lawrence property during the period October 1, 2006 to
September 30, 2016 and to purchase the Petoskey property after August
7, 2019.
(2) At the expiration of tenant's initial lease term, each tenant has an
option, subject to certain requirements, to extend its lease for an
additional period of time.
JOINT VENTURE PROPERTIES
During 1996, seven free-standing Properties which are leased to
Borders, including Borders' current corporate headquarters, its former
headquarters building and Properties operated as Borders Books and Music were
developed or acquired directly by seven limited liability companies which the
Company identifies as Joint Ventures in its periodic reports, but which are
accounted for as partnerships by the Company. In November 2002 the Company
acquired the interest of its Joint Venture partner in three of the Joint Venture
Properties. The acquired properties are located in Oklahoma City, OK, Omaha, NE
and Indianapolis, IN and are now Wholly-Owned Free Standing Properties. The
remaining four Properties are owned by a separate limited liability company that
is owned jointly by the Company and an affiliate of Borders (the "Joint
Ventures"). The Company's economic interest in the Joint Ventures ranges from 8%
to 15%. 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 leases on the four properties between Borders and each of the Joint
Ventures has a term expiring June 20, 2004, 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 Properties or to purchase the
Properties for various percentages of
14
total project costs, provided that, prior to such refinancing or purchase, the
Company may elect to provide alternative financing for the Properties or
purchase the Properties 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 Properties, 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 Properties. If the
Company provides refinancing or purchases the Properties, the Company will be
required to acquire the interest of the Borders' affiliate in the Joint
Ventures, and Borders and the Joint Ventures 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.
The Company's investment in the four Joint Venture Properties currently
yields approximately $530,000 annualized base rent. 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.
JOINT VENTURE PROPERTIES
The Company's
Tenant / Location Interest Total GLA Lease Expirations
- ----------------------------------------------------------------------------
Borders, Inc.
Ann Arbor, MI 11% 110,000 June 20, 2004
Borders, Inc.
Ann Arbor, MI 8% 458,729 June 20, 2004
Borders, Inc.
Boynton Beach, FL 12% 25,000 June 20, 2004
Borders, Inc.
Tulsa, OK 15% 25,000 June 20, 2004
---------
Total 618,729
---------
LAND LEASE PROPERTY
The Company leases a parcel of land (12.68 acres) located in Roseville,
Michigan to Sam's Real Estate Business Trust, a division of Wal-Mart, Inc. The
lease expires in 2022 and can be extended at the option of the tenant for twelve
additional five year periods. The Tenant at its sole cost and expense has razed
the site of existing buildings and is constructing a 135,000 square foot
building.
15
MAJOR TENANTS
The following table sets forth certain information with respect to the
Company's major tenants:
Annualized Base Percent of Total
Number Rent as of Annualized Base Rent as
of Leases December 31, 2002 of December 31, 2002
----------------------------------------------------------------
Borders 18 $ 6,911,754 (1) 28%
Kmart 16 4,952,851 20
Walgreen 12 4,220,756 17
----------------------------------------------------------------
Total 45 $16,085,361 65%
----------------------------------------------------------------
(1) Includes the Company's percentage of base rent for each of the Joint
Venture Properties
Borders Group, Inc., ("BGI), is a FORTUNE 500 company that trades on
the New York Stock Exchange under the symbol BGP. The Company is a leading
global retailer of books, music, movies and other information and entertainment
items. Headquartered in Ann Arbor, Michigan BGI, operates over 400 Borders Books
and Music stores in the United States, as well as 29 international Borders
stores, approximately 800 Waldenbooks locations and 37 United Kingdom based
Books etc. stores. BGI employs more than 32,000 people worldwide and posted
revenues of approximately $3.4 billion in 2001. The Company derived
approximately 28% of its base rental income for the year ended December 31, 2002
from, and approximately 34% of the Company's future minimum rentals are
attributable to, Borders.
Sixteen of the Properties are anchored by Kmart a retailer that will
operate over 1,500 stores after the store closings announced in January 2003
take place. Kmart's principal business is general merchandise retailing through
a chain of department stores. The Company derived approximately 20% of its base
rental income for the year ended December 31, 2002 from, and approximately 18%
of the Company's future minimum rentals are attributable to, Kmart. On January
22, 2002 Kmart Corporation and 37 of its U.S. subsidiaries filed voluntary
petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code. In
two announcements Kmart has said that it will close 610 stores. As of March 15,
2003 only one of the Company's Kmart stores will be closed as a result of the
store closing announcements.
Walgreen is a leader of the U.S. chain drugstore industry and trades on
the New York Stock Exchange under the symbol WAG. It operates over 3,950 stores
in 43 states and Puerto Rico and posted revenues of approximately $28.7 billion
for the year ended August 31, 2002, reported net earnings of approximately $1.0
billion for the same period and total assets of approximately $9.8 billion as of
August 31, 2002. The Company derived approximately 17% of its base rental income
for the year ended December 31, 2002 from, and approximately 25% of the
Company's future minimum rentals are attributable to, Walgreen.
Additional information regarding Borders, Kmart or Walgreen may be
found in their respective public filings. These filings can be accessed at
www.sec.gov.
16
LEASE EXPIRATIONS
The following table shows lease expirations for the next 10 years for
the Company's Community Shopping Centers, wholly-owned free-standing Properties
and Land Lease Property, assuming that none of the tenants exercise renewal
options.
December 31, 2002
-----------------
Gross Leasable Area Annualized Base Rent
------------------- --------------------
Number
Expiration of Leases Square Percent Percent
Year Expiring Footage of Total Amount of Total
- -----------------------------------------------------------------------------
2003 19 219,224 7.12% $ 829,992 3.44%
2004 15 87,623 2.84 642,242 2.66
2005 27 197,817 6.42 1,183,237 7.77
2006 31 174,098 5.65 1,315,254 5.44
2007 10 50,330 1.63 364,030 1.51
2008 13 248,792 8.08 938,455 3.88
2009 2 142,790 4.64 542,414 2.25
2010 5 206,735 6.71 1,176,729 4.87
2011 7 182,903 5.94 1,201,938 4.98
2012 1 50,000 1.62 56,250 0.23
--------------------------------------------------------------
Total 130 1,560,312 56.15% $8,250,541 34.15%
--------------------------------------------------------------
Two Kmart leases expire in 2003, one of which the Company expects the
tenant to extend for an additional five year period, and the other Kmart lease
(Lakeland Florida) will be terminated by Kmart and no other Kmart leases expire
pursuant to lease terms prior to 2008.
The Company has made preliminary contact with the tenants whose leases
expire in 2003. Eleven (11) tenants, at their option have the right to extend
their lease term; six (6) tenants' leases expire in 2003 and with the exception
of one Kmart lease the Company expects to negotiate lease extensions; and two
(2) tenants have month to month lease arrangements. Of the 16 leases that
expired in 2002, eleven (11) tenants extended their lease term; four (4) tenants
elected not to extend their lease (two of which were subsequently re-leased to
new tenants and two are currently for lease); and one (1) tenant elected a month
to month option.
Leases on the four Joint Venture Properties are for an initial term
through June 20, 2004. In the event a refinancing of any of these Properties 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.
17
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 2002.
PART II
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 Company's 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, 2002 $ 18.97 $ 14.40 $ 0.46
June 30, 2002 $ 20.00 $ 17.41 $ 0.46
September 30, 2002 $ 19.98 $ 15.75 $ 0.46
December 31, 2002 $ 18.14 $ 16.20 $ 0.46
March 31, 2001 $ 17.50 $ 14.12 $ 0.46
June 30, 2001 $ 20.05 $ 16.20 $ 0.46
September 30, 2001 $ 20.60 $ 17.15 $ 0.46
December 31, 2001 $ 19.75 $ 17.85 $ 0.46
At December 31, 2002, there were 4,448,531 shares of the Company's
Common Stock issued and outstanding which were held by approximately 225
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 REITs and such other factors as the Board of Directors
deems relevant.
During the year ended December 31, 2002, there were no sales of
unregistered securities by the Company, except the grant, under the Company's
1994 Stock Incentive Plan (the "Plan"), of 37,662 shares of restricted stock to
certain employees of the Company. The transfer restrictions on such shares lapse
in equal annual installments over a five-year period from the date of the grant,
but the holder thereof is entitled to receive dividends on all such shares from
the date of the grant. On January 1, 2002 the Company redeemed 6,000 shares of
restricted stock previously issued under the Plan.
18
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the
Company 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 this Form 10-K. The balance sheet data for the periods ended
December 31, 1998 through December 31, 2002 and operating data for each of the
periods presented were derived from the audited financial statements of the
Company.
(In thousands, except per share information)
Year Year Year Year Year
Ended Ended Ended Ended Ended
Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
Operating Data 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Total Revenue $ 25,824 $ 24,629 $ 23,730 $ 21,931 $ 19,674
---------------------------------------------------------------------
Expenses
Property expense (1) 4,252 3,925 3,775 3,512 3,050
General and administrative 2,012 1,756 1,557 1,425 1,170
Interest 6,196 6,720 7,045 5,771 5,231
Depreciation and amortization 3,938 3,845 3,689 3,436 3,073
---------------------------------------------------------------------
Total Expenses 16,398 16,246 16,066 14,144 12,524
---------------------------------------------------------------------
Other Income (2) 674 913 522 69 168
---------------------------------------------------------------------
Income before extraordinary
item and minority interest 10,100 9,296 8,186 7,856 7,318
Extraordinary Item - Early
Extinguishment of Debt - - - - (319)
---------------------------------------------------------------------
Income before Minority Interest 10,100 9,296 8,186 7,856 6,999
Minority Interest 1,328 1,230 1,088 1,050 912
---------------------------------------------------------------------
Net Income $ 8,772 $ 8,066 $ 7,098 $ 6,806 $ 6,087
=====================================================================
Number of Properties 48 47 45 42 39
=====================================================================
Number of Square Feet 3,699 3,556 3,526 3,468 3,411
=====================================================================
Per Share Data
- ----------------------------------------------
Net income (3) $ 1.97 $ 1.83 $ 1.61 $ 1.56 $ 1.40
=====================================================================
Cash dividends $ 1.84 $ 1.84 $ 1.84 $ 1.84 $ 1.84
=====================================================================
Weighted average of common
shares outstanding 4,447 4,417 4,396 4,365 4,346
=====================================================================
Balance Sheet Data
Real Estate
(before accumulated depreciation) $ 210,986 $196,486 $191,048 $179,858 $ 166,921
Total Assets $ 178,162 $167,511 $166,052 $158,196 $ 149,648
Total debt, including accrued interest $ 115,534 $105,946 $104,407 $ 95,762 $ 85,650
- ----------------------------------------------
(1) Property expense includes real estate taxes, property maintenance,
insurance, utilities and land lease expense.
(2) Other income is composed of development fee income, gain on land
sales, and equity in net income of unconsolidated entities.
(3) Net income per share has been computed by dividing the net income by
the weighted average number of shares of Common Stock outstanding. The
per share amounts shown are presented in accordance with SFAS No. 128
"Earnings per Share". The Company's basic and diluted earnings per
share are the same
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS 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 in April 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
86.85% interest as of December 31, 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 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 was to evaluate the performance of every store and terms of every
lease in its portfolio, with the objective of closing unprofitable or
underperforming stores.
The Kmart stores in the Company's Portfolio provide 20% of the
Company's Annual Base Rent as of December 31, 2002. Nine of the Kmart stores
paid percentage rent in addition to their minimum rent during 2002. As of
December 31, 2002 all Kmart stores in the Company's Portfolio were open and
operating as Kmart discount stores; however the Company has been notified by
Kmart that it intends to close one Company store during the first quarter of
2003.
On March 8, 2002, Kmart announced that it intended to close 284
under-performing stores as part of its initial Chapter 11 financial objectives
review. None of the Company's Kmart stores was included in this initial list of
stores to be closed. On January 24, 2003, Kmart announced that it intends to
close an additional 317 stores and emerge from bankruptcy by April 30, 2003. One
(1) of the Company's Kmart stores (a Community Shopping Center store) was
included in this list of stores to be closed. The Store is located in Lakeland,
Florida. It is anticipated that Kmart will vacate the premises during the first
quarter of 2003. Annual rental from this Kmart of approximately $480,000 and
Kmart's contribution for real estate taxes, insurance and common area
maintenance of approximately $110,000 will cease on the actual date Kmart
vacates the premises. Management believes it will take between six to twelve
months to release the Kmart store. Certain tenants in the Lakeland, Florida
shopping center have co-tenancy clauses which if the Kmart store closes, provide
either for their rental payments to be based on gross sales or an option to
terminate their lease should a replacement tenant not be obtained. Tenants in
other Community Shopping Centers in which Kmart is the anchor tenant, have
similar co-tenancy provisions in their leases. In addition the Company has
agreed to rent reduction totaling $300,000 per year on two other Kmart leases.
The rent reductions are for a five (5) year period. The stores receiving the
rent concessions are located in Perrysburg, Ohio and Winter Garden, Florida.
There can be no assurance that Kmart will not announce
20
additional store closings in the future which may include some of the Company's
stores prior to their emergence from bankruptcy. The following should be read in
conjunction with the Consolidated Financial Statements of Agree Realty
Corporation, including the respective notes thereto, which are included
elsewhere in this Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 establishes a
single accounting model for the impairment or disposal of long-lived assets,
including discontinued operations. SFAS superceded Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of (SFAS 121), and APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. The provisions of SFAS 144 are effective in fiscal
years beginning after December 15, 2001, with early adoption permitted, and in
general are to be applied prospectively.
The Company adopted this standard on January 1, 2002. The adoption had
no impact on its results of operations and financial position.
CRITICAL ACCOUNTING POLICIES
In the course of developing and evaluating accounting polices and
procedures, the Company used estimates, assumptions and judgments to determine
the most appropriate methods to be applied. Such processes are used in
determining capitalization of costs related to real estate investments,
potential impairment of real estate investments, operating cost reimbursements,
and taxable income.
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
and recorded as "Property under development" until construction has been
completed. 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.
In determining the fair value of real estate investments, we consider
future cash flow projections on a property by property basis, current interest
rates and current market conditions of the geographical location of each
property.
Substantially all of the Company's leases contain provisions requiring
tenants to pay as additional rent a proportionate share of operating expenses
(Operating Cost Reimbursements) 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.
21
The Company elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), commencing with the Company's 1994 tax
year. As a result, the Company is not subject to federal income taxes to the
extent that is distributes annually at lease 90% of its taxable income to its
shareholders and satisfies certain other requirements defined in the Code.
Accordingly, no provision was made for federal income taxes in the accompanying
consolidated financial statements.
COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001
Minimum rental income increased $1,121,000, or 5%, to $22,843,000 in
2002, compared to $21,722,000 in 2001. The increase was the result of the
development of two Properties in 2001, one Property in 2002 and the acquisition
of the joint venture partner's interest in three Joint Venture Properties in
2002 - $655,000; the receipt of three lease terminations payments in 2002 -
$269,000; and rental rate increases during 2002 - $196,000.
Percentage rental income decreased $165,000, or 40%, to $248,000 in
2002, compared to $413,000 in 2001. The decrease was the result of the
elimination of a tenant's percentage rent provision in exchange for an increase
in their base rental income ($128,000); a decrease in percentage rent received
from Kmart ($73,000); and an increase in percentage rent received from other
tenants $36,000.
Operating cost reimbursements, which represents additional rent
required by substantially all of the Company's leases to cover the tenants'
proportionate share of property operating expenses, increased $271,000, or 11%,
to $2,724,000 in 2002, compared to $2,453,000 in 2001. Operating cost
reimbursement increased due to the increase in the reimbursable property
operating expenses as explained below.
Management fees and other income decreased $32,000, or 77%, to $9,000
in 2002, compared to $41,000 in 2001. The decrease was the result of the
terminations in September 2001 and February 2002 of the management agreements
between the Company and two properties it previously managed but did not own.
Real estate taxes increased $14,000, or 1%, to $1,766,000 in 2002
compared to $1,752,000 in 2001. The increase is the result of general assessment
increases on the Properties.
Property operating expenses (shopping center maintenance, snow removal,
insurance and utilities) increased $314,000, or 22%, to $1,747,000 in 2002
compared to $1,433,000 in 2001. The increase was the result of additional
shopping center maintenance of $93,000; increased snow removal costs of
$134,000; a decrease in utility costs of ($4,000); and an increase in insurance
costs of $91,000 in 2002 versus 2001.
Land lease payments remained constant at $739,000 for 2002 and 2001.
General and administrative expenses increased $255,000, or 15%, to
$2,012,000 in 2002 compared to $1,757,000 in 2001. The increase was primarily
the result of an increase in compensation related expenses related to the
addition of an employee and normal compensation
22
increases. General and administrative expenses as a percentage of rental income
increased from 7.9% for 2001 to 8.7% for 2002.
Depreciation and amortization increased $93,000, or 2%, to $3,938,000
in 2002 compared to $3,845,000 in 2001. The increase was the result of
indebtedness incurred to develop three Properties in 2001 and 2002 and to
acquire the joint venture partner's interest in three Joint Venture Properties
in 2002.
Interest expense decreased $524,000, or 8%, to $6,196,000 in 2002, from
$6,720,000 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 decreased $21,000 to
$674,000 in 2002 compared to $694,000 in 2001 as a result of the acquisition of
the joint venture partner's interest in three Joint Venture Properties in
November 2002. The tenants are responsible for all operating expenses.
The Company recognized a gain on the sale of an asset in the amount of
$219,000 in 2001. There was no such gain in 2002.
The Company's income before minority interest increased $805,000, or
9%, to $10,100,000 in 2002, from $9,295,000 in 2001 as a result of the foregoing
factors.
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
Minimum rental income increased $858,000, or 4%, to $21,722,000 in
2001, compared to $20,864,000 in 2000. The increase was primarily the result of
the development of three Properties in 2000 and two Properties in 2001.
Percentage rental income increased $112,000, or 37%, to $413,000 in
2001, compared to $301,000 in 2000. The increase was the result of increased
tenant sales.
Operating cost reimbursements, decreased $69,000, or 3%, to $2,453,000
in 2001, compared to $2,522,000 in 2000. Operating cost reimbursement decreased
due to the decrease in the reimbursable property operating expenses and a
potential bad debt charge of $50,000 relating to amounts due from Kmart.
Management fees and other income decreased $2,000, or 5%, to $41,000 in
2001, compared to $43,000 in 2000. The decrease was the result of the
termination in September 2001 of a management agreement between the Company and
one property is previously managed but did not own.
Real estate taxes increased $25,000, or 1%, to $1,752,000 in 2001
compared to $1,727,000 in 2000. The increase is the result of general assessment
increases on the Properties.
Property operating expenses increased $69,000, or 5%, to $1,433,000 in
2001 compared to $1,364,000 in 2000. The increase was the result of additional
property expenses and major roof repairs of $166,000; decreased snow removal
costs of ($164,000); an increase in shopping
23
center maintenance costs of $54,000; an increase in utility costs of $4,000; and
an increase in insurance costs of $9,000 in 2001 versus 2000.
Land lease payments increased $54,000, or 8%, to $739,000 in 2001
compared to $685,000 in 2000 as a result of the Company leasing land for its
Petoskey, Michigan development completed in 2000.
General and administrative expenses increased $200,000, or 13%, to
$1,757,000 in 2001 compared to $1,557,000 in 2000. The increase was primarily
the result of an increase in compensation related expenses and general increases
in professional fees. General and administrative expenses as a percentage of
rental income increased from 7.4% for 2000 to 7.9% for 2001.
Depreciation and amortization increased $155,000, or 4%, to $3,845,000
in 2001 compared to $3,690,000 in 2000. The increase was the result of the
development of five Properties in 2000 and 2001.
Interest expense decreased $325,000, or 5%, to $6,720,000 in 2001, from
$7,045,000 in 2000. The decrease in interest expense was the result of decreased
interest rates on variable rate notes payable.
Equity in net income of unconsolidated entities increased $172,000 to
$694,000 in 2001 compared to $522,000 in 2000 as a result of depreciation
expense no longer being allocated to the Company pursuant to the joint venture
agreements in which the Company holds interests in properties ranging from 8% to
20%. The tenants are responsible for all operating expenses.
The Company recognized a gain on the sale of an asset in the amount of
$219,000 in 2001. There was no such gain in 2000.
The Company's income before minority interest increased $1,110,000, or
14%, to $9,295,000 in 2001, from $8,186,000 in 2000 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 principles ("GAAP"),
excluding gains (or losses) from sales of property, plus real estate related
depreciation and amortization. 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. In
addition, our method of calculating FFO may not be comparable to the methods
used by other REITS and, accordingly, may be different from similarly titled
measures reported by other companies.
The following table illustrates the calculation of FFO for the years
ended December 31, 2002, 2001 and 2000:
24
Year ended December 31,
-----------------------
2002 2001 2000
----------------------------------------------
Income before minority interest $10,100,563 $ 9,295,472 $ 8,185,808
Depreciation of real estate assets 3,840,636 3,747,065 3,589,757
Amortization of leasing costs 68,325 68,241 73,723
Depreciation of real estate assets
held in unconsolidated entities - - 171,980
Gain on sale of assets - (218,543) -
----------------------------------------------
Funds from Operations $14,009,524 $ 12,892,235 $12,021,268
----------------------------------------------
Weighted average shares and
OP Units outstanding 5,120,338 5,090,416 5,069,353
----------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal demands for liquidity are distributions to its
stockholders, debt service, development of new properties and future property
acquisitions.
During the quarter ended December 31, 2002, the Company declared a
quarterly dividend of $.46 per share. The dividend was paid on January 6, 2003
to holders of record on December 20, 2002.
As of December 31, 2002, the Company had total mortgage indebtedness of
$71,588,863 with a weighted average interest rate of 6.94%. Future scheduled
annual maturities of mortgages payable for the years ending December 31 are as
follows: 2003 - $2,272,069; 2004 - $2,508,601; 2005 - $30,823,905; 2006 -
$1,817,738; 2007 - $1,946,430. The 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 Credit Facility 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 lender'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 Properties which are not otherwise encumbered and
properties to be acquired or developed. As of December 31, 2002, $36,758,232 was
outstanding under the Credit Facility bearing a weighted average interest rate
of 2.94%.
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 lender'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 December 31, 2002, $1,325,000
was outstanding under the Line of Credit bearing a weighted average interest
rate of 3.75%.
25
One of the Company's wholly-owned subsidiaries has obtained
construction financing of approximately $4,350,000 to fund the development of a
retail property. The note requires 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 December 31, 2002, $4,002,873 was outstanding under this note, bearing an
interest rate of 3.70%.
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. The advances are secured by the specific land and buildings
being developed. As of December 31, 2002, $1,609,440 was outstanding under this
arrangement.
The Company has one development project under construction that will
add an additional 13,560 square feet of GLA to the Company's portfolio. The
project was completed during the first quarter of 2003. Additional Company
funding required for this project is estimated to be $1,300,000 and will come
from the Credit Facility.
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 believes that these financing sources will enable the Company to
generate funds sufficient to meet both its short-term and long-term capital
needs.
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 rations, 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
26
permit the Company to seek increased rents upon re-lease at market rates if
rents are below the then existing market rates.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
borrowing activities. There is inherent roll over 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.
The Company's interest rate risk is monitored using a variety of
techniques. The table below presents the principal payments (in thousands) and
the weighted average interest rates on remaining debt, by year of expected
maturity to evaluate the expected cash flows and sensitivity to interest rate
changes.
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
FIXED RATE DEBT 2,272 2,509 30,824 1,818 1,946 32,220 71,589
AVERAGE INTEREST RATE 6.94 6.94 6.90 6.90 6.90 6.90 -
CONSTRUCTION LOANS - 4,003 - - - 1,609 5,612
AVERAGE INTEREST RATE - 3.70 - - - - -
VARIABLE RATE DEBT 1,571 985 985 34,542 - - 38,083
AVERAGE INTEREST RATE 3.70 2.94 2.94 2.94 - - -
The fair value (in thousands) is estimated at $71,600, $5,612 and
$38,083 for fixed rate debt, construction loans and variable rate debt,
respectively.
The table above incorporates those exposures that exist as of December
31, 2002, it does not consider those exposures or positions, which could arise
after that date. As a result, the Company's ultimate realized gain or loss with
respect to interest rate fluctuations will depend on the exposures that arise
during the period and interest rates.
The Company does not enter into financial instruments 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 increase in interest
expense of approximately $115,000.
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 and are included in this Form 10-K following page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 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.
27
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 5, 2003.
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 5, 2003.
The following table summarizes the equity compensation plans under
which the Company's common stock may be issued as of December 31, 2002.
NUMBER OF SECURITIES TO WEIGHTED AVERAGE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF NUMBER OF SECURITIES
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REMAINING AVAILABLE
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FOR FUTURE ISSUANCE
- ----------------------------------------------------------------------------------------------
EQUITY COMPENSATION
PLANS APPROVED
BY SECURITY HOLDERS 23,275 $19.50 138,129
EQUITY COMPENSATION
PLANS NOT APPROVED
BY SECURITY HOLDERS - - -
- ----------------------------------------------------------------------------------------------
TOTAL 23,275 $19.50 138.129
- ----------------------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this Form 10-K with respect to
its Annual Meeting of Stockholders to be held on May 5, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this Form 10-K with respect to
its Annual Meeting of Stockholders to be held on May 5, 2003.
28
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Vice-President, Finance have reviewed
and evaluated the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within
90 days before the filing of this annual report. Based on that evaluation, the
Chief Executive Officer and Vice-President, Finance have concluded that our
current disclosure controls and procedures are effective and timely, providing
them with material information relating to that required to be disclosed in the
reports we file or submit under the Exchange Act.
Changes in Internal Controls
There have not been any significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation. We are not aware of any significant deficiencies
or material weaknesses, therefore no corrective actions were taken.
PART IV
ITEM 15. 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 Data.
(b) Reports on Form 8-K
No reports on form 8-K were filed by the Company during the quarter
ending December 31, 2002
(c) 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)
4.1 Rights Agreement by and between Agree Realty Corporation and
BankBoston, N.A. as Rights Agent Dated as of December 7, 1998
(incorporated by reference to Exhibit 4.1 to the Company's Form 8-K
filed on December 7, 1998)
10.1 Loan Modification Agreement, dated April 22, 1994, by and among Shawano
Plaza, Plymouth Commons, Chippewa Commons and Nationwide Life Insurance
Company (incorporated by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 (the
"1996 Form 10-K"))
29
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 (incorporated by
reference to Exhibit 10.2 to the 1996 Form 10-K)
10.3 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 (incorporated
by reference to Exhibit 10.6 to the 1996 Form 10-K)
10.4 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)
10.5 + 1994 Stock Incentive Plan of the Company (incorporated by reference
to Exhibit 10.8 to the 1996 Form 10-K)
10.6 Management Agreement, dated April 22, 1994, by and among Mt Pleasant
Shopping Center, Angola Plaza, Shiloh Plaza and the Company
(incorporated by reference to Exhibit 10.9 to the 1996 Form 10-K)
10.7 Contribution Agreement, dated as of April 21, 1994, by and among the
Company, Richard Agree, Edward Rosenberg and the co-partnerships named
therein (incorporated by reference to Exhibit 10.10 to the 1996 Form
10-K)
10.8 + Agree Realty Corporation Profit Sharing Plan (incorporated by reference
to Exhibit 10.13 to the 1996 Form 10-K) 10.9 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 Form 10-K"))
10.10 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 Form
10-K)
10.11 First amendment to $50 million line-of-credit agreement dated August 7,
1997 among Agree Realty Corporation and Michigan National Bank, as
agent (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ending September 30, 1997
(the "September 1997 Form 10-Q"))
10.12 First amendment to $5 million business loan agreement dated September
21, 1997 between Agree Limited Partnership and Michigan National Bank
(incorporated by reference to Exhibit 10.2 to the September 1997 Form
10-Q)
30
10.13 Second amendment to $50 million line-of-credit agreement dated November
17, 1997 among Agree Realty Corporation and Michigan National Bank, as
agent (incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997)
10.14 Second amendment to amended and restated $5 million business Loan
agreement dated October 19, 1998 between Agree Limited Partnership and
Michigan National Bank (incorporated by reference to Exhibit 10.17 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998)
10.15 + Employment Agreement, dated July 1, 1999, by and between the Company,
and Richard Agree (incorporated by reference to exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the period ending June 30,
1999 (the "June 1999 Form 10-Q))
10.16 + Employment Agreement, dated July 1, 1999, by and between the Company,
and Kenneth R. Howe (incorporated by reference to exhibit 10.6 to the
June 1999 Form 10-Q)
10.17 Third amendment to amended and restated $5 million business Loan
agreement dated December 19, 1999 between Agree Limited Partnership and
Michigan National Bank (incorporated by reference to exhibit 10.17 to
the 1999 Form 10-K)
10.18 Assumption Agreement, Mortgage Modification and Amended and Restated
Mortgage and Security Agreement, dated as of March 31, 1999 by Agree
Limited Partnership to and in favor of Nationwide Life Insurance
Company (incorporated by reference to exhibit 10.1 to the June 1999
Form 10-Q)
10.19 Project Loan Agreement dated as of April 30, 1999 between Wilmington
Trust Company not in its individual capacity, but solely as Owner
Trustee and Agree - Columbia Crossing Project L.L.C. (incorporated by
reference to exhibit 10.2 to the June 1999 Form 10-Q)
10.20 Project Loan Agreement dated as of June 11, 1999 between Wilmington
Trust Company not in its individual capacity, but solely as Owner
Trustee and Agree - Milestone Center Project L.L.C. (incorporated by
reference to exhibit 10.3 to the June 1999 Form 10-Q)
10.21 Trust Mortgage dated as of June 27, 1999 from Agree Facility No. 1,
L.L.C. as Grantor to Manufacturers and Traders Trust Company
(incorporated by reference to exhibit 10.4 to the June 1999 Form 10-Q)
10.22 + Employment Agreement, dated January 10, 2000, by and between the
Company, and David J. Prueter (incorporated by reference to exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2000
10.23 Third amendment to $50 million line-of-credit agreement dated August 7,
2000 among Agree Realty Corporation and Michigan National Bank, as
agent (incorporated by reference To exhibit 10.1 to the Company's
Quarterly report on Form 10-Q for the period ended September 30, 2000)
31
10.24 Fourth amendment to amended and restated $5 million business Loan
agreement dated February 19, 2001 between Agree Limited Partnership and
Michigan National Bank (incorporated by reference to exhibit 10.23 to
the Company's Annual Report on Form 10-K for the year ended December
31, 2000 (the "2000 Form 10-K"))
10.25 Mortgage dated as of December 20, 2001, by Agree Limited Partnership to
and in favor of Nationwide Life Insurance Company (incorporated by
reference to exhibit 10.25 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 (the "2001 from 10-K))
10.26 Fifth amendment to amended and restated $5 million business Loan
agreement dated April 30, 2002 between Agree Limited Partnership and
Standard Federal Bank (incorporated by reference to exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended June 30,
2002 (the "June 2002 Form 10-Q"))
10.27 Project Loan Agreement dated as of April 30, 2002 between Royal
Identify Company (together with its successors and assigns) and
Lawrence Store No. 203 L.L.C. (together with its permitted successors
and assigns) (incorporated by reference to exhibit 10.2 to the June
2002 Form 10-Q)
10.28 * Project Loan Agreement dated as of November 25, 2002 between
Wilmington Trust Company, not in its individual capacity, but solely as
Owner Trustee, and Indianapolis Store No. 16 L.L.C.
21.1 * Subsidiaries of Agree Realty Corporation
23 * Consent of BDO Seidman, LLP
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
- -------------------------------------------------------------------------------
* Filed herewith
+ Management contract or compensatory plan or arrangement
32
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, thereunto duly authorized.
AGREE REALTY CORPORATION
By: /s/ Richard Agree
---------------------------------
Name: Richard Agree
President and Chairman of the
Board of Directors
Date: March 22, 2003
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 22nd day of March 2003.
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
Director
33
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard Agree, certify that:
1. I have reviewed this annual report on Form 10-K of Agree Realty
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 22, 2003 /s/ Richard Agree
- --------------------------- -----------------
Name: Richard Agree
Title: President and Chief Executive Officer
34
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth R. Howe, certify that:
1. I have reviewed this annual report on Form 10-K of Agree Realty
Corporation;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 22, 2003 /s/ Kenneth R. Howe
- --------------------------- -------------------
Name: Kenneth R. Howe
Title: Vice President, Finance
35
AGREE REALTY CORPORATION
INDEX
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
NOTES TO FINANCIAL STATEMENTS F-9
SCHEDULE III - Real Estate and Accumulated Depreciation F-23
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, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2002. We have also audited
the schedule listed in the accompanying index. These financial statements and
the schedule are the responsibility of the Company's 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 auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Agree Realty
Corporation at December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2002
in conformity with accounting principles generally accepted in the United States
of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
February 13, 2003
F - 2
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001
- --------------------------------------------------------------------------------------
ASSETS
REAL ESTATE INVESTMENTS (Notes 3, 4 and 5)
Land $ 53,177,464 $ 46,838,530
Buildings 155,536,789 148,283,359
Property under development 2,271,413 1,363,939
- --------------------------------------------------------------------------------------
210,985,666 196,485,828
Less accumulated depreciation (37,456,301) (33,634,461)
- --------------------------------------------------------------------------------------
NET REAL ESTATE INVESTMENTS 173,529,365 162,851,367
CASH AND CASH EQUIVALENTS 1,095,610 1,101,861
ACCOUNTS RECEIVABLE - TENANTS, net of allowance of
$185,000 and $50,000 for possible losses 784,637 666,749
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED ENTITIES 315,496 255,203
UNAMORTIZED DEFERRED EXPENSES
Financing costs 1,117,253 1,355,864
Leasing costs 307,746 352,441
OTHER ASSETS 1,012,065 927,861
- --------------------------------------------------------------------------------------
$178,162,172 $167,511,346
=====================================================================================
See accompanying notes to consolidated financial statements.
F - 3
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001
- ------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
MORTGAGES PAYABLE (Note 3) $ 71,588,863 $ 69,209,337
CONSTRUCTION LOANS (Note 4) 5,612,313 16,560,202
NOTES PAYABLE (Note 5) 38,083,232 19,958,232
DIVIDENDS AND DISTRIBUTIONS PAYABLE (Note 6) 2,356,156 2,341,591
ACCRUED INTEREST PAYABLE 249,706 218,598
ACCOUNTS PAYABLE
Capital expenditures 589,760 598,362
Operating 1,179,273 1,244,950
TENANT DEPOSITS 93,138 50,020
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES 119,752,441 110,181,292
- ------------------------------------------------------------------------------------
MINORITY INTEREST (Note 7) 5,787,007 5,698,101
- ------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Note 6)
Common stock, $.0001 par value; 20,000,000
shares authorized; 4,448,531 and 4,416,869
shares issued and outstanding 445 442
Additional paid-in capital 64,506,772 63,937,682
Deficit (11,135,499) (11,724,832)
- ------------------------------------------------------------------------------------
53,371,718 52,213,292
Less: unearned compensation - restricted stock (Note 10) (748,994) (581,339)
- ------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 52,622,724 51,631,953
- ------------------------------------------------------------------------------------
$178,162,172 $167,511,346
====================================================================================
See accompanying notes to consolidated financial statements.
F - 4
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
REVENUES
Minimum rents $ 22,842,824 $21,722,471 $20,864,329
Percentage rents 247,994 413,058 301,474
Operating cost reimbursement 2,724,366 2,452,866 2,521,947
Management fees and other (Note 8) 9,250 40,573 42,695
- --------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 25,824,434 24,628,968 23,730,445
- --------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Real estate taxes 1,765,758 1,752,402 1,726,751
Property operating expenses 1,747,145 1,433,449 1,363,663
Land lease payments 738,915 738,960 685,043
General and administrative 2,011,854 1,756,709 1,556,817
Depreciation and amortization 3,937,626 3,844,520 3,689,526
- --------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 10,201,298 9,526,040 9,021,800
- --------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 15,623,136 15,102,928 14,708,645
- --------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (6,196,153) (6,720,318) (7,045,176)
Equity in net income of unconsolidated entities 673,580 694,319 522,339
Gain on sale of assets - 218,543 -
- --------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (5,522,573) (5,807,456) (6,522,837)
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 10,100,563 9,295,472 8,185,808
MINORITY INTEREST 1,328,233 1,229,819 1,087,921
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 8,772,330 $ 8,065,653 $ 7,097,887
==============================================================================================================
EARNINGS PER SHARE (Note 2) $ 1.97 $ 1.83 $ 1.61
==============================================================================================================
See accompanying notes to consolidated financial statements.
F - 5
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Unearned
------------------------------- Paid-In Compensation -
Shares Amount Capital Deficit Restricted Stock
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, January 1, 2000 4,364,867 $ 436 $ 63,217,235 $ (10,673,302) $ (510,819)
Issuance of shares under the Stock
Incentive Plan 33,802 4 471,198 - (267,648)
Shares redeemed under the Stock
Incentive Plan (4,000) - (56,000) - -
Vesting of restricted stock - - - - 236,126
Dividends declared, $1.84 per share - - - (8,088,031) -
Net income - - - 7,097,887 -
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2000 4,394,669 440 63,632,433 (11,663,446) (542,341)
Issuance of shares under the Stock
Incentive Plan 27,291 2 375,249 - (305,250)
Shares redeemed under the Stock
Incentive Plan (5,091) - (70,000) - -
Vesting of restricted stock - - - - 266,252
Dividends declared, $1.84 per share - - - (8,127,039) -
Net income - - - 8,065,653 -
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2001 4,416,869 442 63,937,682 (11,724,832) (581,339)
Issuance of shares under the Stock
Incentive Plan 37,662 3 680,030 - (482,900)
Shares redeemed under the Stock
Incentive Plan (6,000) - (110,940) - -
Vesting of restricted stock - - - - 315,245
Dividends declared, $1.84 per share - - - (8,182,997) -
Net income - - - 8,772,330 -
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2002 4,448,531 $ 445 $ 64,506,772 $ (11,135,499) $ (748,994)
=================================================================================================================================
See accompanying notes to consolidated financial statements.
F - 6
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,772,330 $ 8,065,653 $ 7,097,887
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 3,861,751 3,767,240 3,602,678
Amortization 357,589 454,196 453,094
Stock-based compensation 315,245 266,252 236,126
Gain on sale of assets - (218,543) -
Equity in net income of unconsolidated entities (673,580) (694,319) (522,339)
Minority interests 1,328,233 1,229,819 1,087,921
Decrease (increase) in accounts receivable (117,888) 74,816 (176,432)
Decrease in other assets (191,958) (29,313) (306,780)
Increase (decrease) in accounts payable (65,677) 227,457 161,607
Increase (decrease) in accrued interest 31,108 (96,009) (30,268)
Increase (decrease) in tenant deposits 43,118 (1,220) (833)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,660,271 13,046,029 11,602,661
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate investments (including
capitalized interest of $118,000 in 2002,
$165,800 in 2001 and $394,400 in 2000) (13,910,078) (4,839,564) (10,079,123)
Distributions from unconsolidated entities 673,580 694,319 694,320
Proceeds from sale of assets - 280,000 -
- --------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (13,236,498) (3,865,245) (9,384,803)
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F - 7
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Line-of-credit net borrowings (payments) 18,125,000 (15,400,000) 8,200,000
Dividends and limited partners' distributions paid (9,407,759) (9,356,153) (9,313,647)
Payment on construction loans (7,766,219) (53,800) -
Payments of mortgages payable (2,104,010) (1,910,433) (1,316,801)
Mortgage proceeds 1,301,866 19,000,000 500,000
Payments of payables for capital expenditures (401,229) (1,040,672) (1,112,043)
Redemption of restricted stock (110,940) (70,000) (56,000)
Payments for financing costs (43,103) (256,679) (254,949)
Payments of leasing costs (23,630) (110,258) (101,518)
Proceeds from construction loans - - 1,291,931
- -------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (430,024) (9,197,995) (2,163,027)
- -------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (6,251) (17,211) 54,831
CASH AND CASH EQUIVALENTS, beginning of year 1,101,861 1,119,072 1,064,241
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 1,095,610 $ 1,101,861 $ 1,119,072
=============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest (net of amounts capitalized) $ 5,889,778 $ 6,486,219 $ 6,718,068
=============================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Construction loan paid with mortgage $ 3,181,670 $ - $ -
Dividends and limited partners' distributions
declared and unpaid $ 2,356,156 $ 2,341,591 $ 2,331,379
Shares issued under Stock Incentive Plan $ 680,033 $ 375,251 $ 471,202
Real estate investments financed with accounts
payable $ 589,760 $ 598,362 $ 1,110,673
=============================================================================================================
See accompanying notes to consolidated financial statements.
F - 8
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY Agree Realty Corporation (the "Company") is a
self-administered, self-managed real estate
investment trust, which develops, acquires, owns and
operates properties, which are primarily leased to
national and regional retail companies under net
leases. At December 31, 2002, the Company's
properties are comprised of fourteen shopping
centers, twenty-nine single tenant retail facilities
and one land lease property located in thirteen
states. In addition, the Company owns joint venture
interests ranging from 8% to 15% in four
free-standing retail properties. During the year
ended December 31, 2002, approximately 95% of the
Company's base rental revenues were received from
national and regional tenants under long-term leases,
including approximately 28% from Borders, Inc., 20%
from Kmart Corporation, and 17% from Walgreen Co.
2. SUMMARY OF SIGNIFICANT PRINCIPLES OF CONSOLIDATION
ACCOUNTING POLICIES
The consolidated financial statements of Agree Realty
Corporation include the accounts of the Company, its
majority-owned partnership, Agree Limited Partnership
(the "Operating Partnership"), and its wholly-owned
subsidiaries. The Company controlled, as the sole
general partner, 86.85% and 86.77% of the Operating
Partnership as of December 31, 2002 and 2001,
respectively. All material intercompany accounts and
transactions are eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity
with generally accepted accounting principles,
requires management to make estimates and assumptions
that affect the reported amounts of (1) assets and
liabilities and 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.
F - 9
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as real estate investments are
evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of
the assets may not be recoverable through the
estimated undiscounted future cash flows from the use
of these assets. When any such impairment exists, the
related assets will be written down to fair value. No
impairment loss recognition has been required through
December 31, 2002.
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 and recorded as "Property under
development" until construction has been completed.
As of December 31, 2002, the cost to complete the
properties under development is approximately
$1,330,000.
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 money
market accounts.
F - 10
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTS RECEIVABLE - TENANTS
Accounts receivable from tenants reflect primarily
reimbursement of specified common area expenses. The
Company determines its allowance for uncollectible
accounts based on historical trends, existing
economic conditions, and known financial position of
its tenants. Tenant accounts receivable are
written-off by the Company only when receipt is
remote.
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.
OTHER ASSETS
The Company records prepaid expenses, deposits and
miscellaneous receivables as "other assets" in the
accompanying balance sheets.
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
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MINORITY INTEREST
This amount represents the limited partners' interest
("OP Units") of 13.15% and 13.23% (convertible into
673,547 shares) in the Operating Partnership as of
December 31, 2002 and 2001, respectively.
REVENUE RECOGNITION
Minimum rental income attributable to leases is
recorded when due from tenants. Certain leases
provide for additional percentage rents based on
tenants' sales volume. These percentage rents are
recognized as received by the Company. 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.
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 elected to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended (the
"Code"), and began operating as such on April 22,
1994. As a result, the Company is not subject to
federal income taxes to the extent that it
distributes annually at least 90% of its taxable
income to its shareholders and satisfies certain
other requirements defined in the Code. Accordingly,
no provision was made for federal income taxes in the
accompanying consolidated financial statements.
STOCK OPTIONS
The Company has elected to adopt the recognition
provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for
Stock-Based Compensation" (SFAS 123) using the
prospective method beginning January 1, 2003. SFAS
123 establishes a fair value based method of
accounting for stock-based compensation plans under
which employees receive shares of stock or other
equity instruments of the Company or the Company
incurs liabilities to employees in amounts based on
the price of its stock. The Company does not believe
that the adoption of the recognition
F - 12
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provisions will have any impact on the financial
position or results of operations of the Company.
DIVIDENDS
The Company declared dividends of $1.84 per share
during the years ended December 31, 2002, 2001, and
2000; the dividends have been reflected for federal
income tax purposes as follows:
December 31, 2002 2001 2000
------------------------------------------------------------------------------
Ordinary income $ 1.84 $ 1.76 $ 1.52
Return of capital - .08 .32
------------------------------------------------------------------------------
TOTAL $ 1.84 $ 1.84 $ 1.84
==============================================================================
The aggregate federal income tax basis of Real Estate
Investments is approximately $18.3 million less than
the financial statement basis.
EARNINGS PER SHARE
Earnings per share reflected in the consolidated
statements of operations are presented for all
periods in accordance with SFAS No. 128, "Earnings
per Share". In connection therewith, any conversion
of OP Units to common stock would have no effect on
the earnings per share calculation since the
allocation of earnings to an OP Unit is equivalent to
earnings allocated to a share of common stock.
The following table sets forth the computation of
basic and diluted earnings per share:
December 31, 2002 2001 2000
--------------------------------------------------------------------------------
NUMERATOR
Net income $ 8,772,330 $ 8,065,653 $ 7,097,887
Income allocated to minority interests 1,328,233 1,229,819 1,087,921
--------------------------------------------------------------------------------
NUMERATOR FOR BASIC AND DILUTED
EARNINGS PER SHARE - INCOME
AVAILABLE TO SHAREHOLDERS AFTER
ASSUMED CONVERSIONS $10,100,563 $ 9,295,472 $ 8,185,808
--------------------------------------------------------------------------------
F - 13
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 2001 2000
------------------------------------------------------------------------------
DENOMINATOR
Weighted average shares outstanding 4,446,791 4,416,869 4,395,806
Weighted average OP Units outstanding,
Assuming conversion 673,547 673,547 673,547
------------------------------------------------------------------------------
DENOMINATOR FOR BASIC EARNINGS PER
SHARE - ADJUSTED WEIGHTED AVERAGE
SHARES AND ASSUMED CONVERSIONS 5,120,338 5,090,416 5,069,353
EMPLOYEE STOCK OPTIONS - - -
------------------------------------------------------------------------------
DENOMINATOR FOR DILUTED EARNINGS PER
SHARE 5,120,338 5,090,416 5,069,353
==============================================================================
Options to purchase shares of common stock were
outstanding (see Note 9) but were not included in the
computation of diluted earnings per share because the
options exercise price was greater than the average
market price of the common shares and, therefore, any
additional shares would be anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144). SFAS 144
establishes a single accounting model for the
impairment or disposal of long-lived assets,
including discontinued operations. SFAS superceded
Statement of Financial Accounting Standards No 121,
Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of (SFAS
121), and APB Opinion No. 30, Reporting the Results
of Operations-Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transaction. The
provisions of SFAS 144 are effective in fiscal years
beginning after December 15, 2001, with early
adoption permitted, and in general are to be applied
prospectively.
The Company adopted this standard on January 1, 2002.
The adoption had no impact on its results of
operations and financial position.
F - 14
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MORTGAGES PAYABLE Mortgages payable consisted of the following:
December 31, 2002 2001
-----------------------------------------------------------------------------------
Note payable in monthly installments
of $249,750 including interest at
7.0% per annum, with the remaining
balance of $28,221,503 due November
2005; collateralized by related
real estate and tenants' leases $ 30,910,623 $ 31,713,595
Note payable in monthly installments
of $153,838 including interest at
6.90% per annum, with the final
monthly payment due January 2020;
collateralized by related real
estate and tenants' leases 18,447,700 19,000,000
Note payable in monthly installments
of $99,598 including interest at
6.63% per annum, with the final
monthly payment due February 2017;
collateralized by related real
estate and tenants' leases 10,961,509 11,413,540
Note payable in monthly installments
of $61,948 including interest at
7.0% per annum (with rate to be
modified to prevailing interest
rate in December 2005),
collateralized by related real
estate and tenants' leases, final
balloon installment of
approximately $2,907,000 scheduled
to be due April 2013 6,826,478 7,082,202
F - 15
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note payable in monthly installments
of $25,631 including interest at
7.50% per annum, with the final
monthly payment due May 2022;
collateralized by related real
estate and tenant lease 3,140,687 -
Note payable in monthly installments
of $12,453 including interest at
6.95% per annum, with the final
monthly payment due December 2017;
collateralized by related real
estate and tenant lease 1,301,866 -
-----------------------------------------------------------------------------------
TOTAL $ 71,588,863 $ 69,209,337
===================================================================================
Future scheduled annual maturities of mortgages
payable for years ending December 31 are as follows:
2003 - $2,272,069; 2004 - $2,508,601; 2005 -
$30,823,905; 2006 - $1,817,738; 2007 - $1,946,430;
and $32,220,120 thereafter.
4. CONSTRUCTION LOANS The Company's wholly-owned subsidiaries have obtained
construction financing totalling approximately
$4,350,000 in 2002 and $16,100,000 in 2001, which is
available to fund the development of four retail
properties. Quarterly interest payments are made
based on LIBOR. The notes matures on June 20, 2004
and are secured by the related land and building. The
Company owed $4,002,873 and $14,896,962 for these
loans at December 31, 2002 and 2001 with a weighted
average interest rate of 3.70% and 2.77%,
respectively.
The Company has also received funding from an
unaffiliated third party for certain of its single
tenant retail properties. Borrowings under this
arrangement bear no interest. The advances are
secured by the specific land and buildings being
developed. The Company owed $1,609,440 and $1,663,240
for these advances as of December 31, 2002 and 2001,
respectively.
F - 16
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE The Operating Partnership has in place a $50 million
line-of-credit agreement, which is guaranteed by the
Company. The agreement expires in August 2003 and can
be extended, solely at the option of the Operating
Partnership, 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. At December 31, 2002 and 2001,
$36,758,232 and $18,158,232, respectively, was
outstanding under this facility with a weighted
average interest rate of 2.94% and 3.23%,
respectively.
In addition, the Company maintains a $5,000,000
line-of-credit agreement with a bank. Monthly
interest payments are required, either 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. At December 31, 2002 and 2001,
$1,325,000 and $1,800,000, respectively, was
outstanding under this agreement with a weighted
average interest rate of 3.75% and 3.85%,
respectively.
6. DIVIDENDS AND On December 9, 2002 the Company declared a dividend
DISTRIBUTIONS of $.46 per share for the quarter ended December 31,
PAYABLE 2002. The holders of OP Units were entitled to an
equal distribution per OP Unit held as of December
31, 2002. The dividends and distributions payable are
recorded as liabilities in the Company's balance
sheet at December 31, 2002. The dividend has been
reflected as a reduction of stockholders' equity and
the distribution has been reflected as a reduction of
the limited partners' minority interest. These
amounts were paid on January 6, 2003.
F - 17
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. MINORITY INTEREST The following summarizes the changes in minority
interest since January 1, 2000:
MINORITY INTEREST AT JANUARY 1, 2000 $ 5,859,012
Minority interests' share of income for the year 1,087,921
Distributions for the year (1,239,325)
-------------------------------------------------------------------
MINORITY INTEREST AT DECEMBER 31, 2000 5,707,608
Minority interests' share of income for the year 1,229,819
Distributions for the year (1,239,326)
-------------------------------------------------------------------
MINORITY INTEREST AT DECEMBER 31, 2001 5,698,101
Minority interests' share of income for the year 1,328,233
Distributions for the year (1,239,327)
-------------------------------------------------------------------
MINORITY INTEREST AT DECEMBER 31, 2002 $ 5,787,007
===================================================================
8. RELATED PARTY During 2001 and 2000, the Company managed certain
TRANSACTIONS additional properties, which are owned by certain
officers and directors of the Company, but are not
included in the consolidated financial statements.
Income related to these activities is reflected as
"Management fees and other" in the accompanying
consolidated statements of income.
9. STOCK INCENTIVE PLAN The Company has established a stock incentive plan
(the "Plan") under which 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, and
expire upon employment termination. All 23,275
options outstanding were exercisable at December 31,
2002 and 2001. No options were exercised or granted
during 2002, 2001 or 2000.
F - 18
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. UNEARNED As part of the Company's stock incentive plan,
COMPENSATION- restricted common shares are granted to certain
RESTRICTED STOCK employees. On the date of the award, the Company
increases unearned compensation - restricted stock on
the balance sheet by the stock price multiplied by
the number of shares awarded. The restricted shares
vest and are charged to expense in increments of 20%
per year for five years. Plan participants are
entitled to receive the quarterly dividends on their
respective restricted shares. The following table
summarizes the restricted shares for the years ended
December 31, 2002, 2001 and 2000:
2002 2001 2000
------------------------------------------------------------------------------
Restricted shares outstanding January 1 137,334 115,134 85,332
Restricted shares granted during the
year 37,662 27,291 33,802
Restricted shares redeemed during the
year (6,000) (5,091) (4,000)
------------------------------------------------------------------------------
Restricted shares outstanding
December 31 168,996 137,334 115,134
==============================================================================
COMPENSATION EXPENSE RECORDED RELATED
TO RESTRICTED COMMON SHARES $ 315,245 $ 266,252 $ 236,126
==============================================================================
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
2002, 2001 or 2000.
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.
F - 19
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2002, 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):
2003 $ 23,984
2004 23,053
2005 22,440
2006 21,125
2007 20,652
Thereafter 173,638
-----------------------------------------------------
TOTAL $ 284,892
=====================================================
Of these future minimum rentals, approximately 34% of
the total is attributable to Borders, Inc.,
approximately 25% of the total is attributable to
Walgreen and approximately 18% is attributable to
Kmart Corporation. Borders is a major operator of
book superstores in the United States, Walgreen
operates in the national drugstore chain industry and
Kmart's principal business is general merchandise
retailing through a chain of discount department
stores. The loss of any of these anchor tenants or
the inability of any of them to pay rent could have
an adverse effect on the Company's business.
On January 22, 2002 Kmart Corporation and 37 of its
U.S. subsidiaries filed voluntary petitions for
reorganization under chapter 11 of the U.S.
Bankruptcy Code. In its filings in the U.S.
Bankruptcy Court for the Northern District of
Illinois, Kmart indicated that it will reorganize on
a fast-track basis. 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 terms of
every lease in its portfolio, with the objective of
closing unprofitable or under performing stores. On
March 8, 2002, Kmart announced that it would close
284 under-performing stores as part of its initial
Chapter 11 financial objectives review. On January
24, 2003, Kmart announced that it intends to close an
additional 326 stores and emerge from bankruptcy by
April 30, 2003.
F - 20
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Kmart stores are located in five
states as follows: Michigan (9), Wisconsin (3),
Florida (2), Ohio (1) and Kentucky (1). At December
31, 2002, all sixteen (16) of the Kmart stores were
open and operating as Kmart discount stores; however,
the Company has been notified by Kmart Corporation
that it intends to terminate one of the Company's
leases and vacate the store located in Lakeland,
Florida during the first quarter of 2003. Annual
rental from Kmart of approximately $480,000 and
Kmart's contribution for real estate taxes, insurance
and common area maintenance of approximately $110,000
will cease on the actual date Kmart vacates the
premises. In addition, the Company has agreed to rent
reductions totaling $300,000 per year on two Kmart
leases. The rent reductions are for a five (5) year
period. The stores receiving the rent concessions are
located in Ohio and Florida. There can be no
assurance that Kmart won't announce additional store
closings in the future, which may include some of the
Company's stores.
13. LEASE COMMITMENTS The Company has entered into certain land lease
agreements for four of its properties. As of December
31, 2002, future annual lease commitments under these
agreements are as follows:
Year Ended December 31,
----------------------------------------------------
2003 $ 725,443
2004 725,443
2005 764,768
2006 768,343
2007 774,619
Thereafter 12,039,311
----------------------------------------------------
TOTAL $ 15,797,927
====================================================
14. SUBSEQUENT EVENT During February 2003, the Company purchased the
interest of its joint venture partner in a single
tenant property located in Ann Arbor, Michigan. The
cost of the acquisition was approximately $7,700,000
and was financed with a twenty year mortgage at a
rate of 6.50%.
F - 21
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INTERIM RESULTS The following summary represents the unaudited
(UNAUDITED) results of operations of the Company, expressed in
thousands except per share amounts, for the periods
from January 1, 2001 through December 31, 2002:
Three Months Ended
--------------------------------------------------------------------------------------------
2002 March 31, June 30, September 30, December 31,
--------------------------------------------------------------------------------------------
REVENUES $ 6,169 $ 6,199 $ 6,328 $ 7,128
============================================================================================
Income before minority interest $ 2,237 $ 2,442 $ 2,460 $ 2,962
Minority interest 295 321 323 390
--------------------------------------------------------------------------------------------
NET INCOME $ 1,942 $ 2,121 $ 2,137 $ 2,572
============================================================================================
EARNINGS PER SHARE $ .44 $ .48 $ .48 $ .57
============================================================================================
Three Months Ended
--------------------------------------------------------------------------------------------
2001 March 31, June 30, September 30, December 31,
--------------------------------------------------------------------------------------------
REVENUES $ 6,182 $ 6,119 $ 6,097 $ 6,281
============================================================================================
Income before minority interest $ 2,118 $ 2,321 $ 2,458 $ 2,398
Minority interest 280 307 325 318
--------------------------------------------------------------------------------------------
NET INCOME $ 1,838 $ 2,014 $ 2,133 $ 2,080
============================================================================================
EARNINGS PER SHARE $ .42 $ .46 $ .48 $ .47
============================================================================================
F - 22
AGREE REALTY CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
Column A Column B Column C Column D
-------- ----------- --------------------------- -------------
Initial Cost Costs
--------------------------- Capitalized
Buildings and Subsequent to
Description Encumbrance Land Improvements Acquisition
- ----------- ----------- ----------- ------------- -------------
COMPLETED RETAIL FACILITIES
Borman Center, MI $ 1,011,976 $ 550,000 $ 562,404 $ 1,087,596
Capital Plaza, KY 1,279,736 7,379 2,240,607 534,115
Charlevoix Common, MI 3,662,909 305,000 5,152,992 106,718
Chippewa Commons, WI 4,695,324 1,197,150 6,367,560 224,769
Grayling Plaza, MI 910,161 200,000 1,778,657 -
Iron Mountain Plaza, MI 3,764,881 677,820 7,014,996 491,900
Ironwood Commons, MI 3,956,118 167,500 8,181,306 251,653
Marshall Plaza Two, MI 3,134,337 - 4,662,230 115,294
North Lakeland Plaza, FL 6,826,478 1,641,879 6,364,379 824,023
Oscoda Plaza, MI 945,806 183,295 1,872,854 --
Perrysburg Plaza, OH - 21,835 2,291,651 354,704
Petoskey Town Center, MI 5,131,163 875,000 8,895,289 209,653
Plymouth Commons, WI 4,426,401 535,460 5,667,504 279,073
Rapids Associates, MI 4,710,779 705,000 6,854,790 27,767
Shawano Plaza, WI 5,149,710 190,000 9,133,934 101,471
West Frankfort Plaza, IL 430,245 8,002 784,077 143,258
Winter Garden Plaza, FL - 1,631,448 8,459,024 357,512
Omaha Store, NE 1,730,197 1,705,619 2,053,615 2,152
Wichita Store, KS 1,267,043 1,039,195 1,690,644 24,666
Santa Barbara Store, CA 2,575,309 2,355,423 3,240,557 2,650
Monroeville, PA 3,947,573 6,332,158 2,249,724 -
Norman, OK 1,152,762 879,562 1,626,501 -
Columbus, OH 1,454,850 826,000 2,336,791 -
Aventura, FL 1,459,601 - 3,173,121 -
Boyton Beach, FL 2,367,594 3,103,942 2,043,122 -
Lawrence, KS 3,140,687 - 3,000,000 155,407
Waterford, MI 2,639,531 971,009 1,562,869 135,390
Chesterfield Township, MI 2,898,223 1,350,590 1,757,830 (46,164)
Column A Column E
-------- ---------------------------------------------
Gross Amount at Which Carried
at Close of Period
---------------------------------------------
Buildings and
Description Land Improvements TOTAL
- ----------- ----------- ----------- -----------
COMPLETED RETAIL FACILITIES
Borman Center, MI $ 550,000 $ 1,650,000 $ 2,200,000
Capital Plaza, KY 7,379 2,774,722 2,782,101
Charlevoix Common, MI 305,000 5,259,710 5,564,710
Chippewa Commons, WI 1,197,150 6,592,329 7,789,479
Grayling Plaza, MI 200,000 1,778,657 1,978,657
Iron Mountain Plaza, MI 677,820 7,506,896 8,184,716
Ironwood Commons, MI 167,500 8,432,959 8,600,459
Marshall Plaza Two, MI -- 4,777,524 4,777,524
North Lakeland Plaza, FL 1,641,879 7,188,402 8,830,281
Oscoda Plaza, MI 183,295 1,872,854 2,056,149
Perrysburg Plaza, OH 345,538 2,322,651 2,668,189
Petoskey Town Center, MI 875,000 9,104,942 9,979,942
Plymouth Commons, WI 535,460 5,946,577 6,482,037
Rapids Associates, MI 705,000 6,882,557 7,587,557
Shawano Plaza, WI 190,000 9,235,405 9,425,405
West Frankfort Plaza, IL 8,002 927,335 935,337
Winter Garden Plaza, FL 1,631,448 8,816,536 10,447,984
Omaha Store, NE 1,705,619 2,055,767 3,761,386
Wichita Store, KS 1,039,195 1,715,310 2,754,505
Santa Barbara Store, CA 2,355,423 3,243,207 5,598,630
Monroeville, PA 6,332,158 2,249,724 8,581,882
Norman, OK 879,562 1,626,501 2,506,063
Columbus, OH 826,000 2,336,791 3,162,791
Aventura, FL -- 3,173,121 3,173,121
Boyton Beach, FL 3,103,942 2,043,122 5,147,064
Lawrence, KS -- 3,155,407 3,155,407
Waterford, MI 971,009 1,698,259 2,669,268
Chesterfield Township, MI 1,350,590 1,711,666 3,062,256
Column A Column F Column G Column H
-------- ------------ ------------ ------------
Life
on Which
Depreciation
in Latest
Income
Accumulated Date of Statement
Description Depreciation Construction is Computed
- ----------- ------------ ------------ ------------
COMPLETED RETAIL FACILITIES
Borman Center, MI $ 1,123,031 1977 40 Years
Capital Plaza, KY 1,480,933 1978 40 Years
Charlevoix Common, MI 1,583,803 1991 40 Years
Chippewa Commons, WI 2,040,248 1990 40 Years
Grayling Plaza, MI 844,215 1984 40 Years
Iron Mountain Plaza, MI 2,100,330 1991 40 Years
Ironwood Commons, MI 2,419,906 1991 40 Years
Marshall Plaza Two, MI 1,386,320 1990 40 Years
North Lakeland Plaza, FL 2,690,842 1987 40 Years
Oscoda Plaza, MI 883,420 1984 40 Years
Perrysburg Plaza, OH 1,106,926 1983 40 Years
Petoskey Town Center, MI 2,672,180 1990 40 Years
Plymouth Commons, WI 1,782,400 1990 40 Years
Rapids Associates, MI 2,099,520 1990 40 Years
Shawano Plaza, WI 2,894,665 1990 40 Years
West Frankfort Plaza, IL 418,750 1982 40 Years
Winter Garden Plaza, FL 2,965,144 1988 40 Years
Omaha Store, NE 366,176 1995 40 Years
Wichita Store, KS 305,464 1995 40 Years
Santa Barbara Store, CA 577,687 1995 40 Years
Monroeville, PA 344,236 1996 40 Years
Norman, OK 253,949 1996 40 Years
Columbus, OH 404,067 1996 40 Years
Aventura, FL 532,159 1996 40 Years
Boyton Beach, FL 310,537 1996 40 Years
Lawrence, KS 407,901 1997 40 Years
Waterford, MI 211,250 1997 40 Years
Chesterfield Township, MI 193,141 1998 40 Years
F - 23
AGREE REALTY CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
Column A Column B Column C Column D
- ---------------------------- --------------- ---------------------------- ---------------
Initial Cost Costs
---------------------------- Capitalized
Buildings and Subsequent to
Description Encumbrance Land Improvements Acquisition
- ---------------------------------------------------------------------------------------------
Grand Blanc, MI 2,768,877 1,104,285 1,998,919 13,968
Pontiac, MI 2,654,877 1,144,190 1,808,955 (113,506)
Mt. Pleasant Shopping
Center, MI - 907,600 8,081,968 200,662
Tulsa, OK 4,002,873 1,100,000 2,394,512 -
Columbia, MD 1,805,825 1,545,509 2,093,700 286,589
Rochester, MI 3,696,919 2,438,740 2,188,050 1,949
Ypsilanti, MI 3,339,034 2,050,000 2,222,097 29,624
Germantown, MD 1,717,549 1,400,000 2,288,890 45,000
Petoskey, MI 2,322,565 - 2,332,473 (16,325)
Flint, MI 3,503,218 2,026,625 1,879,700 (1,201)
Flint, MI 3,014,354 1,477,680 2,241,293 -
New Baltimore, MI 2,571,609 1,250,000 2,285,781 (15,683)
Flint, MI 1,622,815 1,729,851 1,798,091 -
Oklahoma City, OK 1,914,656 1,914,859 2,057,034 -
Omaha, NE 1,824,884 1,530,000 2,237,702 -
Indianapolis, IN 1,301,866 180,000 1,117,616 -
- ---------------------------------------------------------------------------------------------
SUB TOTAL 112,731,315 49,259,605 150,045,809 5,814,684
- ---------------------------------------------------------------------------------------------
RETAIL FACILITIES
UNDER DEVELOPMENT
Waterford, MI 536,614 800,081 366,498 -
Big Rapids, MI 1,171,989 1,201,675 1,346,187 -
Flint, MI 844,490 1,512,400 323,487 -
Other - 80,000 235,241 -
- ---------------------------------------------------------------------------------------------
2,553,093 3,594,156 2,271,413 -
- ---------------------------------------------------------------------------------------------
TOTAL $115,284,408 $52,853,761 $152,317,222 $5,814,684
=============================================================================================
Column A Column E
- ---------------------------- -------------------------------------------
Gross Amount at Which Carried
at Close of Period
-------------------------------------------
Buildings and
Description Land Improvements Total
- ---------------------------------------------------------------------------
Grand Blanc, MI 1,104,285 2,012,887 3,117,172
Pontiac, MI 1,144,190 1,695,449 2,839,639
Mt. Pleasant Shopping
Center, MI 907,600 8,282,630 9,190,230
Tulsa, OK 1,100,000 2,394,512 3,494,512
Columbia, MD 1,545,509 2,380,289 3,925,798
Rochester, MI 2,438,740 2,189,999 4,628,739
Ypsilanti, MI 2,050,000 2,251,721 4,301,721
Germantown, MD 1,400,000 2,333,890 3,733,890
Petoskey, MI - 2,316,148 2,316,148
Flint, MI 2,026,625 1,878,499 3,905,124
Flint, MI 1,477,680 2,241,293 3,718,973
New Baltimore, MI 1,250,000 2,270,098 3,520,098
Flint, MI 1,729,851 1,798,091 3,527,942
Oklahoma City, OK 1,914,859 2,057,034 3,971,893
Omaha, NE 1,530,000 2,237,702 3,767,702
Indianapolis, IN 180,000 1,117,616 1,297,616
- ---------------------------------------------------------------------------
SUB TOTAL 49,583,308 155,536,789 205,120,097
- ---------------------------------------------------------------------------
RETAIL FACILITIES
UNDER DEVELOPMENT
Waterford, MI 800,081 366,498 1,166,579
Big Rapids, MI 1,201,675 1,346,187 2,547,862
Flint, MI 1,512,400 323,487 1,835,887
Other 80,000 235,241 315,241
- ---------------------------------------------------------------------------
3,594,156 2,271,413 5,865,569
- ---------------------------------------------------------------------------
TOTAL $53,177,464 $157,808,202 $210,985,666
===========================================================================
Column A Column F Column G Column H
- ---------------------------- --------------- -------------- --------------
Life
on Which
Depreciation
in Latest
Income
Accumulated Date of Statement
Description Depreciation Construction is Computed
- -----------------------------------------------------------------------------------
Grand Blanc, MI 201,635 1998 40 Years
Pontiac, MI 181,850 1998 40 Years
Mt. Pleasant Shopping
Center, MI 1,191,788 1973 40 Years
Tulsa, OK 268,639 1998 40 Years
Columbia, MD 195,826 1999 40 Years
Rochester, MI 191,601 1999 40 Years
Ypsilanti, MI 168,923 1999 40 Years
Germantown, MD 172,124 2000 40 Years
Petoskey, MI 156,729 2000 40 Years
Flint, MI 93,926 2000 40 Years
Flint, MI 105,060 2001 40 Years
New Baltimore, MI 78,181 2001 40 Years
Flint, MI 31,847 2002 40 Years
Oklahoma City, OK 7,203 2002 40 Years
Omaha, NE 7,811 2002 40 Years
Indianapolis, IN 3,958 2002 40 Years
- -----------------------------------------------------------------------------------
SUB TOTAL 37,456,301
- -----------------------------------------------------------------------------------
RETAIL FACILITIES
UNDER DEVELOPMENT
Waterford, MI - N/A N/A
Big Rapids, MI - N/A N/A
Flint, MI - N/A N/A
Other - N/A N/A
- -----------------------------------------------------------------------------------
-
- -----------------------------------------------------------------------------------
TOTAL $37,456,301
===================================================================================
F - 24
AGREE REALTY CORPORATION
NOTES TO SCHEDULE III
DECEMBER 31, 2002
1) RECONCILIATION OF REAL ESTATE PROPERTIES
The following table reconciles the Real Estate Properties from January 1,
2000 to December 31, 2002:
2002 2001 2000
- -----------------------------------------------------------------------------------------
Balance at January 1 $ 196,485,828 $ 191,047,902 $ 179,858,106
Construction and acquisition costs 14,499,838 5,437,926 11,189,796
- -----------------------------------------------------------------------------------------
Balance at December 31 $ 210,985,666 $ 196,485,828 $ 191,047,902
- -----------------------------------------------------------------------------------------
2) RECONCILIATION OF ACCUMULATED DEPRECIATION
The following table reconciles the accumulated depreciation from January
1, 2000 to December 31, 2002:
2002 2001 2000
- -------------------------------------------------------------------------------------
Balance at January 1 $ 33,634,461 $ 29,907,682 $ 26,342,296
Current year depreciation expense 3,821,840 3,726,779 3,565,386
- -------------------------------------------------------------------------------------
Balance at December 31 $ 37,456,301 $ 33,634,461 $ 29,907,682
- ------------------------------------------------------------------------------------
3) TAX BASIS OF BUILDINGS AND IMPROVEMENTS
The aggregate cost of Building and Improvements for federal income tax
purposes is approximately $1,249,000 less than the cost basis used for
financial statement purposes.
F - 25
Exhibit Index
No. Description
10.28 Project Loan Agreement dated as of November 25, 2002 between
Wilmington Trust Company, not in its individual capacity, but solely
as Owner Trustee, and Indianapolis Store No. 16 L.L.C.
21.1 Subsidiaries of Agree Realty Corporation
23 Consent of BDO Seidman, LLP
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