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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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] [ ]
6,434,345 Shares of Common Stock, $.0001 par value, were outstanding as of
August 14, 2003
AGREE REALTY CORPORATION
FORM 10-Q
INDEX
PART I: FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 3-4
Consolidated Statements of Income for the six months ended June 30, 2003 and 2002 5
Consolidated Statements of Income for the three months ended June 30, 2003 and 2002 6
Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2003 7
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and 10-16
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, December 31,
2003 2002
------------- -------------
ASSETS
REAL ESTATE INVESTMENTS
Land $ 54,905,054 $ 53,177,464
Buildings 163,668,782 155,536,789
Property under development 1,909,997 2,271,413
------------- -------------
220,483,833 210,985,666
Less accumulated depreciation (39,527,249) (37,456,301)
------------- -------------
NET REAL ESTATE INVESTMENTS 180,956,584 173,529,365
CASH AND CASH EQUIVALENTS 201,202 1,095,610
ACCOUNTS RECEIVABLE - TENANTS, net of allowance of
$200,000 and $185,000 for possible losses 415,906 784,637
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES 271,946 315,496
UNAMORTIZED DEFERRED EXPENSES
Financing 1,030,583 1,117,253
Leasing costs 291,345 307,746
OTHER ASSETS 950,558 1,012,065
------------- -------------
$ 184,118,124 $ 178,162,172
============= =============
See accompanying notes to consolidated financial statements.
3
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, December 31,
2003 2002
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
MORTGAGE PAYABLE $ 78,071,649 $ 71,588,863
CONSTRUCTION LOANS 5,585,413 5,612,313
NOTES PAYABLE 37,458,232 38,083,232
DIVIDENDS AND DISTRIBUTIONS PAYABLE 2,499,153 2,356,156
ACCRUED INTEREST PAYABLE 241,299 249,706
ACCOUNTS PAYABLE
Operating 836,433 1,179,273
Capital expenditures 345,514 589,760
TENANT DEPOSITS 82,516 93,138
------------- -------------
TOTAL LIABILITIES 125,120,209 119,752,441
------------- -------------
MINORITY INTEREST 5,831,345 5,787,007
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STOCKHOLDERS' EQUITY
Common stock, $.0001 par value; 20,000,000 shares authorized,
4,479,345 and 4,448,531 shares issued and outstanding 448 445
Additional paid-in capital 65,027,522 64,506,772
Deficit (10,840,106) (11,135,499)
------------- -------------
54,187,864 53,371,718
Less: unearned compensation - restricted stock (1,021,294) (748,994)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 53,166,570 52,622,724
------------- -------------
$ 184,118,124 $ 178,162,172
============= =============
See accompanying notes to consolidated financial statements.
4
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED Six Months Ended
JUNE 30, 2003 June 30, 2002
---------------- -----------------
REVENUES
Minimum rents $ 12,511,193 $ 11,041,706
Percentage rents 51,060 43,597
Operating cost reimbursements 1,541,303 1,278,492
Other income 1,777 4,565
------------ ------------
TOTAL REVENUES 14,105,333 12,368,360
------------ ------------
OPERATING EXPENSES
Real estate taxes 1,031,557 895,235
Property operating expenses 1,119,003 826,167
Land lease payments 369,480 369,480
General and administrative 1,123,000 963,441
Depreciation and amortization 2,122,400 1,959,262
------------ ------------
TOTAL OPERATING EXPENSES 5,765,440 5,013,585
------------ ------------
INCOME FROM OPERATIONS 8,339,893 7,354,775
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense, net (3,259,020) (3,023,125)
Equity in net income of unconsolidated entities 231,399 347,159
------------ ------------
TOTAL OTHER EXPENSE (3,027,621) (2,675,966)
------------ ------------
INCOME BEFORE MINORITY INTEREST 5,312,272 4,678,809
MINORITY INTEREST (694,311) (615,743)
------------ ------------
NET INCOME $ 4,617,961 $ 4,063,066
============ ============
EARNINGS PER SHARE - BASIC AND DILUTIVE $ 1.03 $ .91
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 4,479,345 4,446,031
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - DILUTIVE 4,480,654 4,446,031
============ ============
See accompanying notes to consolidated financial statements.
5
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED Three Months Ended
JUNE 30, 2003 June 30, 2002
------------------ ------------------
REVENUES
Minimum rents $ 6,299,408 $ 5,565,176
Percentage rents 9,651 8,401
Operating cost reimbursements 776,968 624,681
Other income 51 658
----------- -----------
TOTAL REVENUES 7,086,078 6,198,916
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OPERATING EXPENSES
Real estate taxes 525,472 454,223
Property operating expenses 456,519 277,513
Land lease payments 184,740 184,740
General and administrative 566,403 488,436
Depreciation and amortization 1,059,700 980,102
----------- -----------
TOTAL OPERATING EXPENSES 2,792,834 2,385,014
----------- -----------
INCOME FROM OPERATIONS 4,293,244 3,813,902
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense, net (1,674,915) (1,545,430)
Equity in net income of unconsolidated entities 112,568 173,579
----------- -----------
TOTAL OTHER EXPENSE (1,562,347) (1,371,851)
----------- -----------
INCOME BEFORE MINORITY INTEREST 2,730,897 2,442,051
MINORITY INTEREST (356,926) (321,378)
----------- -----------
NET INCOME $ 2,373,971 $ 2,120,673
=========== ===========
EARNINGS PER SHARE - BASIC AND DILUTIVE $ .53 $ .48
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 4,479,345 4,446,031
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - DILUTIVE 4,481,962 4,446,031
=========== ===========
See accompanying notes to consolidated financial statements.
6
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 -- -- -- -- 184,000
Dividends declared for the period
January 1, 2003 to June 30, 2003 -- -- -- (4,322,568) --
Net income for the period
January 1, 2003 to June 30, 2003 -- -- -- 4,617,961 --
--------- ------------ ------------ ------------ ------------
BALANCE, June 30, 2003 4,479,345 $ 448 $ 65,027,522 $(10,840,106) $ (1,021,294)
========= ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
7
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED Six Months Ended
JUNE 30, 2003 June 30, 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,617,961 $ 4,063,066
Adjustments to reconcile net income to net cash provided by
operating Activities
Depreciation 2,090,134 1,921,318
Amortization 125,890 178,244
Stock based-compensation 184,000 156,000
Equity in net income of unconsolidated entities (231,399) (347,159)
Minority interests 694,311 615,743
Decrease in accounts receivable 368,731 486,635
Decrease (increase) in other assets 82,098 (9,729)
Decrease in accounts payable (342,840) (437,169)
Increase (decrease) in accrued interest (8,407) 12,492
Increase (decrease) in tenant deposits (10,622) 30,983
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,569,857 6,670,424
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate investments (including capitalized
interest of $91,000 in 2003 and $59,000 in 2002) (9,152,653) (841,188)
Distributions from unconsolidated entities 231,399 347,159
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (8,921,254) (494,029)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage proceeds 7,699,151 --
Dividends and limited partners' distributions paid (4,829,544) (4,696,597)
Payments of mortgages payable (1,216,365) (1,019,539)
Line-of-credit net borrowings (payments) (625,000) (200,000)
Repayment of capital expenditure payables (423,910) (401,229)
Redemption of restricted stock (101,400) (110,940)
Payments on construction loan (26,900) (26,900)
Payment of leasing costs (12,089) (23,630)
Payment for financing costs (6,954) (37,951)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 456,989 (6,516,786)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (894,408) (340,391)
CASH AND CASH EQUIVALENTS, beginning of period 1,095,610 1,101,861
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 201,202 $ 761,470
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest (net of amounts capitalized) $ 3,173,823 $ 2,875,402
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Construction loan paid with mortgage $ -- $ 3,181,670
Dividends and limited partners' distributions declared and unpaid $ 2,499,153 $ 2,355,006
Real estate investments financed with accounts payable $ 345,514 $ 148,326
Shares issued under Stock Incentive Plan $ 622,153 $ 630,783
=========== ===========
See accompanying notes to consolidated financial statements.
8
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. BASIS OF The accompanying unaudited 2003 consolidated financial statements have been prepared in
PRESENTATION 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
June 30, 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 PER SHARE Earnings per share has been computed by dividing the net 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".
3. SUBSEQUENT EVENT On August 4, 2003, the Company completed an offering of 1,700,000 shares of
common stock at $23.50 per share; on August 12, 2003 the underwriters exercised their over
allotment option for an additional 255,000 shares at the same per share price (collectively, "the
2003 Offering"). The net proceeds from the 2003 Offering of approximately $43.2 million were used
to repay amounts outstanding under the Company's credit facility.
9
AGREE REALTY CORPORATION
PART I
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
OVERVIEW
Agree Realty Corporation ( 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 June 30, 2003. The Company
is operating so as to qualify as a real estate investment trust ("REIT") for
federal income tax purposes.
On August 4, 2003, the Company completed an offering of 1,700,000 shares of
common stock at $23.50 per share; on August 12, 2003 the underwriters
exercised their over allotment option for an additional 255,000 shares at
the same per share price (collectively, "the 2003 Offering"). The net
proceeds from the 2003 Offering of approximately $43.2 million were used to
repay amounts outstanding under the Company's credit facility.
The Company has fifteen (15) leases with Kmart Corporation. Twelve (12) of
the Kmart stores are currently anchors in the Company's Community Shopping
Centers and three (3) Kmart stores are free-standing properties. The Kmart
stores in the Company's Portfolio provided 19% of the Company's Annual Base
Rent as of June 30, 2003. Nine of the Kmart stores paid percentage rent in
addition to their minimum rent during 2002. As of June 30, 2003, all of the
Kmart stores in the Company's Portfolio were open and operating as Kmart
discount stores.
In May 2003, Kmart Corporation emerged from the bankruptcy proceeding which
it had initiated in January 2002. Pursuant to the confirmed plan of
reorganization, Kmart closed a number of stores, including one that was
located on our property in Lakeland, Florida. Kmart vacated the premises in
Lakeland, Florida in April 2003 and we are actively marketing the space
formerly occupied by Kmart. Kmart's annual rent on this property was
approximately $480,000
10
AGREE REALTY CORPORATION
PART I
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and Kmart's annual contribution under the lease for real estate taxes, insurance
and common area maintenance was approximately $110,000. Certain tenants in the
Lakeland, Florida community shopping center have co-tenancy clauses in their
leases which provide either for modification of their rent to be based on gross
sales or an option to terminate their lease when the Kmart store closes, if we
are unable to obtain a replacement anchor tenant. As of June 30, 2003, none of
these tenants have indicated that they will exercise their option to terminate
their leases with us. We believe it will take between six to 12 months to re-let
the Kmart location. In connection with this re-letting of the Kmart location, we
may have to agree to make capital expenditures with respect to the property. In
addition, we have agreed to rent reductions aggregating $300,000 per year under
two other Kmart leases, for the stores in Perrysburg, Ohio and Winter Garden,
Florida. In both cases, the rent reductions are for a 5-year periods.
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, and insurance. 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
11
AGREE REALTY CORPORATION
PART I
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COMPARISON OF SIX MONTHS ENDED JUNE 30, 2003 TO SIX MONTHS ENDED JUNE 30, 2002
Minimum rental income increased $1,469,000, or 13%, to $12,511,000 in 2003,
compared to $11,042,000 in 2002. The increase was the result of rental
increases of $371,000 from existing properties; an increase of $908,000 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 $190,000 from the development
of one property in 2002 and one property in 2003.
Percentage rental income increased $7,000, or 17%, to $51,000 in 2003,
compared to $44,000 in 2002. The increase was primarily the result of
increased tenant sales.
Operating cost reimbursements, which represent additional rent required by
substantially all of the Company's leases to cover the tenants'
proportionate share of real estate taxes and property operating expenses,
increased $263,000, or 21%, to $1,541,000 in 2003, compared to $1,278,000 in
2002. Operating cost reimbursements increased due to the increase in real
estate taxes and property operating expenses as explained below.
Other income remained relatively constant at $2,000 in 2003, compared to
$5,000 in 2002.
Real estate taxes increased $137,000, or 15%, to $1,032,000 in 2003 compared
to $895,000 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 $293,000, or 35%,
to $1,119,000 in 2003 compared to $826,000 in 2002. The increase was the
result of increased snow removal costs of $19,000; an increase in shopping
center maintenance costs of $118,000; an increase in insurance costs of
$143,000 and an increase in utilities of $13,000 in 2003 as compared to
2002.
Land lease payments remained constant at $369,000 for 2003 and 2002.
General and administrative expenses increased $160,000, or 17%, to
$1,123,000 in 2003 compared to $963,000 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 8.7% for 2002 to 8.9% for 2003.
Depreciation and amortization increased $163,000, or 8%, to $2,122,000 in
2003 compared to $1,959,000 in 2002. The increase was the result of the
development of one property in 2002 and one property in 2003; 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 $236,000, or 8%, to $3,259,000 in 2003, from
$3,023,000 in 2002. The increase in interest expense was the result of
increased borrowings to fund acquisitions and developments.
12
AGREE REALTY CORPORATION
PART I
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Equity in net income of unconsolidated entities decreased $116,000, or 33%,
to $231,000 in 2003 compared to $347,000 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 $633,000, or 14%, to
$5,312,000 in 2003 from $4,679,000 in 2002 as a result of the foregoing
factors.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2003 TO THREE MONTHS ENDED JUNE 30,
2002
Minimum rental income increased $734,000, or 13%, to $6,299,000 in 2003,
compared to $5,565,000 in 2002. The increase was the result of rental
increases of $122,000 from existing properties; an increase of $514,000 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 $98,000 from the development of
one property in 2002 and one property in 2003.
Percentage rental income increased $2,000, or 15%, to $10,000 in 2003,
compared to $8,000 in 2002. The increase was the result of increased tenant
sales.
Operating cost reimbursements increased $152,000, or 24%, to $777,000 in
2003, compared to $625,000 in 2002. Operating cost reimbursements increased
due to the increase in real estate taxes and property operating expenses as
explained below.
Other income remained relatively constant at $-0- in 2003, compared to
$1,000 in 2002.
Real estate taxes increased $71,000, or 16%, to $525,000 in 2003 compared to
$454,000 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 $179,000, or 64%,
to $457,000 in 2003 compared $278,000 in 2002. The increase was the result
of increased snow removal costs of $25,000; an increase in shopping center
maintenance of $77,000; an increase in insurance costs of $71,000 and an
increase in utilities of $6,000.
Land lease payments remained constant at $185,000 for 2003 and 2002.
General and administrative expenses increased $78,000, or 16%, to $566,000
in 2003 compared to $488,000 in 2002. The increase was primarily the result
of an increase in compensation-related expenses and property management
expenses. General and administrative expenses as a percentage of rental
income increased from at 8.8% in 2002 to 9.0% in 2003.
Depreciation and amortization increased $80,000, or 8%, to $1,060,000 in
2003 compared to $980,000 in 2002. The increase was the result of the
development of one property in 2002 and one property in 2003 and the
acquisition of the joint venture partner's interest in three Joint Venture
Properties in 2002 and one Joint Venture Property in 2003.
Interest expense increased $130,000, or 8%, to $1,675,000 in 2003, from
$1,545,000 in 2002. The increase in interest expense was the result of
increased borrowings to fund acquisitions and developments.
13
AGREE REALTY CORPORATION
PART I
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Equity in net income of unconsolidated entities decreased $61,000, or 35%, to
$113,000 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 $289,000, or 12%, to
$2,731,000 in 2003, from $2,442,000 in 2002 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 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. The Company calculates FFO using NAREIT's
definition. 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 tables illustrate the calculation of FFO and shows reconciling
items to income before minority interest for the six months and three months
ended June 30, 2003 and 2002:
Six Months Ended June 30, 2003 2002
- ------------------------- ---------- ----------
Income before minority interest $5,312,272 $4,678,809
Depreciation of real estate assets 2,080,347 1,911,045
Amortization of leasing costs 28,490 34,168
---------- ----------
FUNDS FROM OPERATIONS $7,421,109 $6,624,022
========== ==========
WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING - DILUTIVE 5,154,201 5,119,578
========== ==========
Three Months Ended June 30, 2003 2002
- --------------------------- ---------- ----------
Income before minority interest $2,730,897 $2,442,051
Depreciation of real estate assets 1,038,670 955,973
Amortization of leasing costs 14,245 17,084
---------- ----------
FUNDS FROM OPERATIONS $3,783,812 $3,415,108
========== ==========
WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING - DILUTIVE 5,155,509 5,119,578
========== ==========
14
AGREE REALTY CORPORATION
PART I
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal demands for liquidity are distributions to its
stockholders, debt repayment, development of new properties and future property
acquisitions.
During the quarter ended June 30, 2003, the Company declared a quarterly
dividend of $.485 per share. The dividend was paid on July 15, 2003, to holders
of record on June 30, 2003.
As of June 30, 2003, the Company had total mortgage indebtedness of $78,071,649
with a weighted average interest rate of 6.90%. Future scheduled annual
maturities of mortgages payable for the years ending June 30 are as follows:
2004 - $2,550,052; 2005 - $2,808,168; 2006 - $30,622,398; 2007 - $2,121,905; and
2008 - $2,261,672. 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 credit
facility has a draw termination date in November 2003 and matures in August
2006. During the period between termination and maturity, the Company will have
no further ability to borrow under this facility and will be required to repay a
portion of the unpaid principal on a quarterly basis. Advances under the Credit
Facility bear interest within a range of one-month to six-month LIBOR plus 150
basis points to 213 basis points or the bank's prime rate, at the option of the
Company, based on certain factors such as debt to property value and debt
service coverage. The Credit Facility is used to fund property acquisitions and
development activities and is secured by most of the Company's properties which
are not otherwise encumbered and properties to be acquired or developed. As of
June 30, 2003, $36,758,232 was outstanding under the Credit Facility bearing a
weighted average interest rate of 2.78%.
The Company is currently in discussions with its lender regarding the further
extension of the termination date, the extension of the maturity date and other
terms of the credit facility. There can be no assurance that the Company will
receive the requested extensions or that the terms of the extensions will be
acceptable to the Company.
The Company also has in place a $5 million line of credit (the "Line of
Credit"), which matures on April 30, 2004, and which the Company expects to
renew for an additional 12-month period. The Line of Credit bears interest at
the bank's prime rate less 50 basis points or 175 basis points in excess of the
one-month LIBOR rate, at the option of the Company. The purpose of the Line of
Credit is to provide working capital to the Company and fund land options and
start-up costs associated with new projects. As of June 30, 2003, $700,000 was
outstanding under the Line of Credit at a rate of 3.50%.
15
AGREE REALTY CORPORATION
PART I
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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 June 30,
2003, $4,002,873 was outstanding under this note, bearing an interest rate of
2.75%.
The Company has received funding from an unaffiliated third party for the
construction of certain of its properties. Advances under this agreement bear no
interest and are secured by the specific land and buildings being developed. As
of June 30, 2003, $1,582,540 was outstanding under this arrangement.
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 refinanced in the past and intends to
periodically refinance short-term construction and acquisition financing with
long-term debt or equity. Upon completion of any 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.
16
AGREE REALTY CORPORATION
PART I
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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.
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 June 30,
--------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
FIXED RATE DEBT 2,550 2,808 30,622 2,122 2,262 37,708 78,072
AVERAGE INTEREST RATE 6.90 6.90 6.83 6.83 6.83 6.83 --
CONSTRUCTION LOANS -- 4,003 -- -- -- 1,582 5,585
AVERAGE INTEREST RATE -- 2.75 -- -- -- -- --
VARIABLE RATE DEBT 1,685 985 985 33,803 -- -- 37,458
AVERAGE INTEREST RATE 2.78 2.78 2.78 2.78 -- -- --
The fair value (in thousands) is estimated at $78,500, $5,585 and $37,458 for
fixed rate debt, construction loans and variable rate debt, respectively.
The table above incorporates those exposures that exist as of June 30, 2003; it
does not consider those exposures or position, 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 $101,000.
17
AGREE REALTY CORPORATION
PART I
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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 13a-15(e) and 15d-15(e) as of the end of the
period covered by 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.
18
AGREE REALTY CORPORATION
PART II
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OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 5, 2003, the Company held its Annual Meeting of
Stockholders. The following were the results of the meeting:
The stockholders elected Farris Kalil and Gene Silverman as
Directors until the annual meeting of stockholders in 2006 or
until a successor is elected and qualified.
The vote was as follows: Farris Kalil Gene Silverman
------------- --------------
Votes cast for 4,279,830 4,278,560
Votes withheld 26,420 27,690
Not voting 173,095 173,095
Item 5. Other Information
None
19
AGREE REALTY CORPORATION
PART II
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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 Sixth amendment to amended and restated $5 million business
loan agreement dated April 30, 2003, between Agree Limited
Partnership and Standard Federal Bank.
10.2 Fourth amendment to $50 million Line of Credit agreement
dated July 11, 2003 among Agree Realty Corporation and
Standard Federal Bank, N.A.
31.1 Certification of Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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
32.2 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
o On July 24, 2003, the Company filed a Form 8-K under Item 7
and Item 12 furnishing its second quarter 2003 results of
operations and financial condition.
o On April 22, 2003, the Company filed a Form 8-K under Item 7
and Item 12 furnishing its first quarter 2003 results of
operations and financial condition.
20
AGREE REALTY CORPORATION
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGREE REALTY CORPORATION
/s/ RICHARD AGREE
- --------------------------------------
Richard Agree
President and Chief Executive Officer
/s/ KENNETH R. HOWE
- --------------------------------------
Kenneth R. Howe
Vice-President - Finance and Secretary
(Principal Financial Officer)
Date: August 14, 2003
- --------------------------------------
21
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Sixth amendment to amended and restated $5 million business
loan agreement dated April 30, 2003, between Agree Limited
Partnership and Standard Federal Bank.
10.2 Fourth amendment to $50 million Line of Credit agreement
dated July 11, 2003 among Agree Realty Corporation and
Standard Federal Bank, N.A.
31.1 Certification of Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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
32.2 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