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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 1-12928
AGREE REALTY CORPORATION
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(Exact name of registrant as specified in its charter)
MARYLAND 38-3148187
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31850 NORTHWESTERN HIGHWAY, FARMINGTON HILLS, MICHIGAN 48334
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, included area code: (248) 737-4190
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No
|X| [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No
|X| [ ]
4,479,345 Shares of Common Stock, $.0001 par value, were outstanding as of May
12, 2003
AGREE REALTY CORPORATION
FORM 10-Q
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1. Interim Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income for the three months ended
March 31, 2003 and 2002 5
Consolidated Statement of Stockholders' Equity for the three months ended
March 31, 2003 6
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 18
2
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, December 31,
2003 2002
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ASSETS
REAL ESTATE INVESTMENTS
Land $ 54,905,054 $ 53,177,464
Buildings 163,559,275 155,536,789
Property under development 1,131,576 2,271,413
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219,595,905 210,985,666
Less accumulated depreciation (38,493,278) (37,456,301)
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NET REAL ESTATE INVESTMENTS 181,102,627 173,529,365
CASH AND CASH EQUIVALENTS 185,043 1,095,610
ACCOUNTS RECEIVABLE - TENANTS, net of allowance of
$200,000 and $185,000 for possible losses 386,677 784,637
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES 274,757 315,496
UNAMORTIZED DEFERRED EXPENSES
Financing 1,077,395 1,117,253
Leasing costs 298,501 307,746
OTHER ASSETS 960,410 1,012,065
- -------------------------------------------------------------------------------------------
$ 184,285,410 $ 178,162,172
===========================================================================================
See accompanying notes to consolidated financial statements.
3
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, December 31,
2003 2002
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LIABILITIES AND STOCKHOLDERS' EQUITY
MORTGAGE PAYABLE $ 78,700,752 $ 71,588,863
CONSTRUCTION LOANS 5,598,863 5,612,313
NOTES PAYABLE 37,658,232 38,083,232
DIVIDENDS AND DISTRIBUTIONS PAYABLE 2,473,388 2,356,156
ACCRUED INTEREST PAYABLE 245,830 249,706
ACCOUNTS PAYABLE
Operating 668,108 1,179,273
Capital expenditures 177,238 589,760
TENANT DEPOSITS 88,829 93,138
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TOTAL LIABILITIES 125,611,240 119,752,441
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MINORITY INTEREST 5,801,089 5,787,007
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STOCKHOLDERS' EQUITY
Common stock, $.0001 par value; 20,000,000 shares authorized, 448 445
4,479,345 and 4,448,531 shares issued and outstanding
Additional paid-in capital 65,027,522 64,506,772
Deficit (11,041,595) (11,135,499)
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53,986,375 53,371,718
Less: unearned compensation - restricted stock (1,113,294) (748,994)
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TOTAL STOCKHOLDERS' EQUITY 52,873,081 52,622,724
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$ 184,285,410 $ 178,162,172
======================================================================================================
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED Three Months Ended
MARCH 31, 2003 March 31, 2002
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REVENUES
Minimum rents $ 6,211,785 $ 5,476,530
Percentage rents 41,409 35,196
Operating cost reimbursement 764,335 653,811
Other income 1,726 3,907
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TOTAL REVENUES 7,019,255 6,169,444
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OPERATING EXPENSES
Real estate taxes 506,085 441,012
Property operating expenses 662,484 548,654
Land lease payments 184,740 184,740
General and administrative 556,597 475,005
Depreciation and amortization 1,062,700 979,160
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TOTAL OPERATING EXPENSES 2,972,606 2,628,571
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INCOME FROM OPERATIONS 4,046,649 3,540,873
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OTHER INCOME (EXPENSE)
Interest expense, net (1,584,105) (1,477,695)
Equity in net income of unconsolidated entities 118,831 173,580
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TOTAL OTHER EXPENSE (1,465,274) (1,304,115)
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INCOME BEFORE MINORITY INTEREST 2,581,375 2,236,758
MINORITY INTEREST 337,385 294,365
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NET INCOME $ 2,243,990 $ 1,942,393
=====================================================================================================
EARNINGS PER SHARE $ .50 $ .44
=====================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,479,345 4,446,031
=====================================================================================================
See accompanying notes to consolidated financial statements.
5
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Unearned
Common Stock Additional Compensation -
----------------------- Paid-In Restricted
Shares Amount Capital Deficit Stock
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, January 1, 2003 4,448,531 $ 445 $ 64,506,772 $ (11,135,499) $ (748,994)
Issuance of shares under
Stock Incentive Plan 36,814 3 622,150 - (456,300)
Shares redeemed under the (6,000) (101,400)
stock Incentive Plan - - -
Vesting of restricted stock - - - - 92,000
Dividends declared for the period (2,150,086)
January 1, 2003 to March 31, 2003 - - - -
Net income for the period 2,243,990
January 1, 2003 to March 31, 2003 - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, March 31, 2003 4,479,345 $ 448 $ 65,027,522 $ (11,041,595) $(1,113,294)
===================================================================================================================================
See accompanying notes to consolidated financial statements.
6
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED Three Months Ended
MARCH 31, 2003 March 31, 2002
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,243,990 $ 1,942,393
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 1,046,567 960,188
Amortization 62,945 89,122
Stock-based compensation 92,000 78,000
Equity in net income of unconsolidated entities (118,831) (173,580)
Minority interests 337,385 294,365
Decrease in accounts receivable 397,960 344,945
Decrease (increase) in other assets 80,918 (84,861)
Decrease in accounts payable (511,165) (405,482)
Decrease in accrued interest (3,876) (16,155)
Increase (decrease) in tenant deposits (4,309) 30,983
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NET CASH PROVIDED BY OPERATING ACTIVITIES 3,623,584 3,059,918
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate investments (including capitalized (8,433,001) (512,624)
interest of $60,000 in 2003 and $45,000 in 2002)
Distributions from unconsolidated entities 118,831 173,580
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NET CASH USED IN INVESTING ACTIVITIES (8,314,170) (339,044)
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CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage proceeds 7,699,151 -
Dividends and limited partners' distributions paid (2,356,156) (2,341,591)
Payments of mortgages payable (587,262) (502,542)
Line-of-credit proceeds (payments) (425,000) (200,000)
Payments of payables for capital expenditures (423,910) (401,229)
Redemption of restricted stock (101,400) (110,940)
Payment of construction loan (13,450) (13,450)
Payments for financing costs (6,954) (25,888)
Payment of leasing costs (5,000) (23,630)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,780,019 (3,619,270)
- -----------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (910,567) (898,396)
CASH AND CASH EQUIVALENTS, beginning of period 1,095,610 1,101,861
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 185,043 $ 203,465
===========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest (net of amounts capitalized) $ 1,541,170 $ 1,449,199
===========================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Dividends and limited partners' distributions declared and unpaid $ 2,473,388 $ 2,355,006
Real estate investments financed with accounts payable $ 177,238 $ 296,013
Shares issued under Stock Incentive Plan $ 622,153 $ 630,783
===========================================================================================================
See accompanying notes to consolidated financial statements.
7
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF The accompanying unaudited 2003 consolidated
PRESENTATION financial statements have been prepared in accordance
with generally accepted accounting principles for
interim financial information and with the
instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by
generally accepted accounting principles for complete
financial statements. In the opinion of management,
all adjustments (consisting of normal recurring
accruals) considered necessary for a fair
presentation have been included. The consolidated
balance sheet at December 31, 2002 has been derived
from the audited consolidated financial statements at
that date. Operating results for the three months
ended March 31, 2003 are not necessarily indicative
of the results that may be expected for the year
ending December 31, 2003, or for any other interim
period. For further information, refer to the
consolidated financial statements and footnotes
thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
2. EARNINGS Earnings per share has been computed by dividing the
PER SHARE income by the weighted average number of common
shares outstanding. The per share amounts reflected
in the consolidated statements of income are
presented in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings per
Share"; the amounts of the Company's "basic" and
"diluted" earnings per share (as defined in SFAS No.
128) are the same.
8
AGREE REALTY CORPORATION
PART I
ITEM 2. 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 86.93% interest as of
March 31, 2003. 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
is to evaluate the performance of every store and the terms of every lease in
its portfolio, with the objective of closing unprofitable or under performing
stores.
The Kmart stores in the Company's Portfolio provided 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 March 31, 2003, all Kmart
stores in the Company's Portfolio are 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 second 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 were included in this initial list of stores to be
closed. On January 24, 2003, Kmart announced that it intended to close an
additional 317 stores and emerge from bankruptcy by April 30, 2003. Kmart's
actual date of emergence from bankruptcy was May 6, 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 second quarter 2003.
Annual rental from this Kmart of approximately $489,000 and Kmart's annual
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 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 reductions are located in
Perrysburg, Ohio and Winter Garden, Florida. There can be no assurance that
Kmart won't announce
9
AGREE REALTY CORPORATION
PART I
additional store closing 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 in this Form 10-Q.
CRITICAL ACCOUNTING POLICIES
In the course of developing and evaluating accounting policies and procedures,
the Company used estimates, assumptions and judgements 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.
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 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
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 TO THREE MONTHS ENDED MARCH 31,
2002
Rental income increased $735,000, or 13%, to $6,212,000 in 2003, compared to
$5,477,000 in 2002. The increase was the result of rental increases of $249,000
from existing properties; an increase of $394,000 due to additional rent as a
result of the acquisition of the joint venture partner's interest in three Joint
Venture Properties in 2002 and one Joint Venture Property in 2003; and an
increase of $92,000 from the development of one property in 2002.
10
AGREE REALTY CORPORATION
PART I
Percentage rental income increased $6,000, or 18%, to $41,000 in 2003, compared
to $35,000 in 2002. The increase was primarily the result of increased tenant
sales.
Operating cost reimbursement, which represents additional rent required by
substantially all of the Company's leases to cover the tenants' proportionate
share of real estate taxes and property operating expenses, increased $110,000,
or 17%, to $764,000 in 2003, compared to $654,000 in 2002. Operating cost
reimbursement increased due to the increase in the property operating expenses
as explained below.
Other income remained relatively constant at $2,000 in 2003, compared to $4,000
in 2002.
Real estate taxes increased $65,000, or 15%, to $506,000 in 2003, compared to
$441,000 in 2002. The increase is the result of general assessment charges on
the Company's properties and additional real estate taxes related to a closed
Kmart store.
Property operating expenses (shopping center maintenance, insurance and
utilities), which are reimbursed by the tenants, increased $113,000, or 21%, to
$662,000 in 2003, compared to $549,000 in 2002. The increase was the result of
decreased snow removal costs of ($6,000); an increase in shopping center
maintenance costs of $42,000; an increase in utility costs of $6,000; and an
increase in insurance cost of $71,000.
Land lease payments remained constant at $185,000 for 2003 and 2002.
General and administrative expenses increased $82,000, or 17%, to $557,000 in
2003, compared to $475,000 in 2002. The increase was primarily the result of
increased compensation related expenses and property management related
expenses. General and administrative expenses as a percentage of rental income
increased from 8.6% for 2002 to 8.9% for 2003.
Depreciation and amortization increased $84,000, or 9%, to $1,063,000 in 2003,
compared to $979,000 in 2002. The increase was the result of the development of
one property in 2002; the acquisition of the joint venture partner's interest in
three (3) Joint Venture Properties in 2002 and one (1) Joint venture Property in
2003.
Interest expense increased $106,000, or 7%, to $1,584,000 in 2003, from
$1,478,000 in 2002. The increase in interest expense was the result of increased
borrowings to fund acquisitions and developments.
Equity in net income of unconsolidated entities decreased $55,000, or 32%, to
$119,000 in 2003 compared to $174,000 in 2002 as a result of the acquisition of
the joint venture partner's interest in three Joint Venture Properties in 2002
and one Joint Venture Property in 2003.
The Company's income before minority interest increased $344,000, or 15%, to
$2,581,000 in 2003, from $2,237,000 in 2002 as a result of the foregoing
factors.
11
AGREE REALTY CORPORATION
PART I
FUNDS FROM OPERATIONS
Management considers Funds from Operations ("FFO") to be a supplemental measure
of the Company's operating performance. FFO is defined by the National
Association of Real Estate Investments Trusts, Inc. ("NAREIT") to mean net
income computed in accordance with generally accepted accounting principles
("GAAP"), excluding gains (or losses) from 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 REIT and, accordingly may be different from similarly titled
measures reported by other companies.
The following tables illustrate the calculation of FFO for the three months
ended March 31, 2003 and 2002:
Three Months Ended March 31, 2003 2002
- ------------------------------------------------------------------------------------------------------
Net income before minority interest $ 2,581,375 $ 2,236,758
Depreciation of real estate assets 1,041,677 955,072
Amortization of leasing costs 14,245 17,084
- ------------------------------------------------------------------------------------------------------
FUNDS FROM OPERATIONS $ 3,637,297 $ 3,208,914
======================================================================================================
WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING 5,152,892 5,119,578
======================================================================================================
FORWARD-LOOKING STATEMENTS
Management has included herein certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. When used,
statements which are not historical in nature including the words "anticipate,"
"estimate," "should," "expect," "believe," "intend" and similar expressions are
intended to identify forward-looking statements. Such statements are, by their
nature, subject to certain risks and uncertainties. Risks and other factors that
might cause such a difference include, but are not limited to, the effect of
economic and market conditions; risks that the Company's acquisition and
development projects will fail to perform as expected; financing risks, such as
the inability to obtain debt or equity financing on favorable terms; the level
and volatility of interest rates; loss or bankruptcy of one or more of the
Company's major retail tenants; and failure of the Company's properties to
generate additional income to offset increases in operating expenses.
12
AGREE REALTY CORPORATION
PART I
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal demands for liquidity are distributions to its
stockholders, debt repayment, development of new properties and future property
acquisitions.
During the quarter ended March 31, 2003, the Company declared a quarterly
dividend of $.48 per share. The dividend was paid on April 15, 2003, to holders
of record on March 28, 2003.
As of March 31, 2003, the Company had total mortgage indebtedness of $78,700,752
with a weighted average interest rate of 6.90%. Future scheduled annual
maturities of mortgages payable for the years ending March 31 are as follows:
2004 - $2,506,701; 2005 - $2,760,417; 2006 - $30,834,292; 2007 - $2,086,140; and
2008 - $2,228,198. This mortgage debt is all fixed rate debt.
In addition, the Operating Partnership has in place a $50 million line of Credit
Facility (the "Credit Facility") which is guaranteed by the Company. The loan
matures in August 2003 and can be extended by the Company for an additional
three years. Advances under the Credit Facility bear interest within a range of
one-month to six-month LIBOR plus 150 basis points to 213 basis points or the
bank's prime rate, at the option of the Company, based on certain factors such
as debt to property value and debt service coverage. The Credit Facility is used
to fund property acquisitions and development activities and is secured by most
of the Company's Properties which are not otherwise encumbered and properties to
be acquired or developed. As of March 31, 2003, $36,758,232 was outstanding
under the Credit Facility bearing a weighted average interest rate of 2.92%.
The Company also has in place a $5 million line of credit (the "Line of
Credit"), which matures on April 30, 2003, and which the Company expects to
renew for an additional 12-month period. The Line of Credit bears interest at
the bank's prime rate less 50 basis points or 175 basis points in excess of the
one-month LIBOR rate, at the option of the Company. The purpose of the Line of
Credit is to provide working capital to the Company and fund land options and
start-up costs associated with new projects. As of March 31, 2003, $900,000 was
outstanding under the Line of Credit at a rate of 3.75%.
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, at a weighted average
interest rate based on LIBOR, computed by the lender. The note matures on June
20, 2004 and is secured by the underlying land and buildings. As of March 31,
2003, $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 agreement bear no
interest and are secured by the specific land and buildings being developed. As
of March 31, 2003, $1,595,990 was outstanding under this arrangement.
13
AGREE REALTY CORPORATION
PART I
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 Credit Facility. 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. Management has and intends to periodically refinance short-term
construction and acquisition financing with long-term debt and/or equity. Upon
completion of refinancing, the Company intends to lower the ratio of total debt
to market capitalization to 50% or less. Nevertheless, the Company may operate
with debt levels or ratios which are in excess of 50% for extended periods of
time prior to such refinancing.
INFLATION
The Company's leases generally contain provisions designed to mitigate the
adverse impact of inflation on net income. These provisions include clauses
enabling the Company to pass through to tenants certain operating costs,
including real estate taxes, common area maintenance, utilities and insurance,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation. Certain of the Company's leases contain
clauses enabling the Company to receive percentage rents based on tenants' gross
sales, which generally increase as prices rise, and, in certain cases,
escalation clauses, which generally increase rental rates during the terms of
the leases. In addition, expiring tenant leases permit the Company to seek
increased rents upon re-lease at market rates if rents are below the then
existing market rates.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its borrowing
activities. There is inherent 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.
14
AGREE REALTY CORPORATION
PART I
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.
Year ended March 31,
----------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
FIXED RATE DEBT 2,507 2,761 30,834 2,086 2,228 38,285 78,701
AVERAGE INTEREST RATE 6.90 6.90 6.83 6.83 6.83 6.83 -
CONSTRUCTION LOANS - 4,003 - - - 1,596 5,599
AVERAGE INTEREST RATE - 3.70 - - - - -
VARIABLE RATE DEBT 1,146 985 985 34,542 - - 37,658
AVERAGE INTEREST RATE 2.94 2.92 2.92 2.92 - - -
The fair value (in thousands) is estimated at $78,500, $5,599 and $37,658 for
fixed rate debt, construction loans and variable rate debt, respectively.
The table above incorporates those exposures that exist as of March 31, 2003; 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 $109,000.
ITEM 4. 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 date of this quarterly 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 us 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.
15
AGREE REALTY CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation and Articles of Amendment of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-11
(Registration Statement No. 33-73858, as amended ("Agree
S-11"))
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.3 to Agree S-11)
10.1 Project Loan Agreement dated as of January 30, 2003
between Modern Woodman of America and Phoenix Drive L.L.C.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, Richard Agree, Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, Kenneth R. Howe, Chief Financial Officer
(b) Reports on Form 8-K
On April 22, 2003, the Company filed an 8-K disclosing its first
quarter 2003 results of operations and financial condition.
16
AGREE REALTY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGREE REALTY CORPORATION
/s/ RICHARD AGREE
- ------------------------------------------------------
Richard Agree
President and Chief Executive Officer
/s/ KENNETH R. HOWE
- -------------------------------------------------------
Kenneth R. Howe
Vice-President - Finance and Secretary
(Principal Financial Officer)
Date: May 12, 2003
- -------------------------------------------------------
17
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard Agree, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Agree Realty
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer 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 quarterly 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 quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation of the Evaluation Date;
5) The registrant's other certifying officer 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 officer and I have indicated in
this quarterly 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: May 12, 2003 /s/ Richard Agree
- ------------------ -----------------
Name: Richard Agree
Title: President and Chief Executive
Officer
18
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth R. Howe, certify that:
5. I have reviewed this quarterly report on Form 10-Q of Agree Realty
Corporation;
6. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state 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 quarterly report;
7. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report;
8. The registrant's other certifying officer 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 quarterly 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 quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation of the Evaluation Date;
5) The registrant's other certifying officer 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 officer and I have indicated in
this quarterly 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: May 12, 2003 /s/ Kenneth R. Howe
- ------------------ -------------------
Name: Kenneth R. Howe
Title: Vice President, Finance
19
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-10.1 Project Loan Agreement dated as of January 30, 2003
between Modern Woodman of America and Phoenix Drive
L.L.C.
EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002