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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 September 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
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 38-3148187
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31850 NORTHWESTERN HIGHWAY, FARMINGTON HILLS, MICHIGAN 48334
- --------------------------------------------------------------------------------
(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
November 13, 2003
AGREE REALTY CORPORATION
FORM 10-Q
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 3-4
Consolidated Statements of Income for the six months ended September 30, 2003 and 2002 5
Consolidated Statements of Income for the three months ended September 30, 2003 and 2002 6
Consolidated Statement of Stockholders' Equity for the six months ended September 30, 2003 7
Consolidated Statements of Cash Flows for the six months ended September 30, 2003 and 2002 8-9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, December 31,
2003 2002
-----------------------------
ASSETS
REAL ESTATE INVESTMENTS
Land $ 55,298,606 $ 51,546,016
Buildings 159,275,073 146,934,887
-----------------------------
214,573,679 198,480,903
Less accumulated depreciation (37,666,649) (34,705,790)
-----------------------------
176,907,030 163,775,113
Operating property held for sale 7,321,554 7,482,839
Property under development 1,473,487 2,271,413
-----------------------------
NET REAL ESTATE INVESTMENTS 185,702,071 173,529,365
CASH AND CASH EQUIVALENTS 234,099 1,095,610
ACCOUNTS RECEIVABLE - TENANTS, net of allowance of
$200,000 and $200,000 for possible losses 155,694 784,637
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES 333,127 315,496
UNAMORTIZED DEFERRED EXPENSES
Financing 764,207 1,117,253
Leasing costs 278,530 307,746
OTHER ASSETS 678,052 1,012,065
-----------------------------
$ 188,145,780 $ 178,162,172
=============================
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, December 31,
2003 2002
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
MORTGAGE PAYABLE $ 41,434,760 $ 71,588,863
CONSTRUCTION LOANS 1,569,000 5,612,313
NOTES PAYABLE 39,500,000 38,083,232
DIVIDENDS AND DISTRIBUTIONS PAYABLE 3,447,328 2,356,156
ACCRUED INTEREST PAYABLE 168,251 249,706
ACCOUNTS PAYABLE
Operating 557,317 1,179,273
Capital expenditures 432,471 589,760
TENANT DEPOSITS 97,339 93,138
----------------------------
TOTAL LIABILITIES 87,206,466 119,752,441
----------------------------
MINORITY INTEREST 5,704,168 5,787,007
----------------------------
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value; 20,000,000 shares authorized,
6,434,345 and 4,479,345 shares issued and outstanding 643 445
Additional paid-in capital 108,267,762 64,506,772
Deficit (12,103,965) (11,135,499)
----------------------------
96,164,440 53,371,718
Less: unearned compensation - restricted stock (929,294) (748,994)
----------------------------
TOTAL STOCKHOLDERS' EQUITY 95,235,146 52,622,724
$ 188,145,780 $178,162,172
============================
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, 2003 September 30, 2002
---------------------------------------
REVENUES
Minimum rents $ 18,072,243 $ 15,883,900
Percentage rents 98,708 77,996
Operating cost reimbursements 2,037,014 1,723,741
Other income 1,878 4,897
-----------------------------------
TOTAL REVENUES 20,209,843 17,690,534
-----------------------------------
OPERATING EXPENSES
Real estate taxes 1,370,264 1,258,721
Property operating expenses 1,500,088 1,097,178
Land lease payments 554,220 554,175
General and administrative 1,676,007 1,465,993
Depreciation and amortization 3,040,640 2,778,118
-----------------------------------
TOTAL OPERATING EXPENSES 8,141,219 7,154,185
-----------------------------------
INCOME FROM CONTINUING OPERATIONS 12,068,624 10,536,349
-----------------------------------
OTHER INCOME (EXPENSE)
Interest expense, net (4,561,282) (4,580,025)
Early extinguishment of debt (961,334) -
Equity in net income of unconsolidated entities 341,537 520,738
-----------------------------------
TOTAL OTHER EXPENSE (5,181,079) (4,059,287)
-----------------------------------
INCOME BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATIONS 6,887,545 6,477,062
MINORITY INTEREST (835,457) (851,678)
-----------------------------------
INCOME BEFORE DISCONTINUED OPERATIONS 6,052,088 5,625,384
INCOME FROM DISCONTINUED OPERATIONS, net of
minority interest of $58,347 and $87,109 422,671 574,814
-----------------------------------
NET INCOME $ 6,474,759 $ 6,200,198
===================================
EARNINGS PER SHARE - BASIC AND DILUTIVE $ 1.33 $ 1.39
===================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 4,880,993 4,446,205
===================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - DILUTIVE 4,883,401 4,446,205
===================================
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED Three Months Ended
SEPTEMBER 30, 2003 September 30, 2002
---------------------------------------
REVENUES
Minimum rents $ 6,088,431 $ 5,400,772
Percentage rents 47,648 34,399
Operating cost reimbursements 596,629 530,203
Other income 101 332
-----------------------------------
TOTAL REVENUES 6,732,809 5,965,706
-----------------------------------
OPERATING EXPENSES
Real estate taxes 457,368 420,486
Property operating expenses 467,061 332,765
Land lease payments 184,740 184,695
General and administrative 553,007 502,552
Depreciation and amortization 1,025,763 925,980
-----------------------------------
TOTAL OPERATING EXPENSES 2,687,939 2,366,478
-----------------------------------
INCOME FROM CONTINUING OPERATIONS 4,044,870 3,599,228
-----------------------------------
OTHER INCOME (EXPENSE)
Interest expense, net (1,302,262) (1,556,900)
Early extinguishment of debt (961,334) -
Equity in net income of unconsolidated entities 110,138 -
-----------------------------------
TOTAL OTHER EXPENSE (2,153,458) (1,383,321)
-----------------------------------
INCOME BEFORE MINORITY INTEREST AND DISCONTINUED
OPERATIONS 1,891,412 2,215,907
MINORITY INTEREST (181,983) (290,923)
-----------------------------------
INCOME BEFORE DISCONTINUED OPERATIONS 1,709,429 1,924,984
INCOME FROM DISCONTINUED OPERATIONS, net of
minority interest of $17,510 and $32,121 147,369 212,148
-----------------------------------
NET INCOME $ 1,856,798 $ 2,137,132
===================================
EARNINGS PER SHARE - BASIC AND DILUTIVE $ .33 $ .48
===================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - BASIC 5,671,193 4,446,547
===================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING - DILUTIVE 5,675,806 4,446,547
===================================
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
Stock Incentive Plan (6,000) - (101,400) - -
Issuance of common stock 1,955,000 195 43,240,240 - -
Vesting of restricted stock - - - - 276,000
Dividends declared for the period
January 1, 2003 to September 30, 2003 - - - (7,443,225) -
Net income for the period
January 1, 2003 to September 30, 2003 - - - 6,474,759 -
------------------------------------------------------------------------
BALANCE, September 30, 2003 6,434,345 $ 643 $108,267,762 $ (12,103,965) $ (929,294)
========================================================================
See accompanying notes to consolidated financial statements.
7
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, 2003 September 30, 2002
---------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,474,759 $ 6,200,198
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation 3,152,834 2,881,888
Amortization 174,093 267,366
Stock-based compensation 276,000 236,000
Write-off of deferred finance costs 406,152 -
Equity in net income of unconsolidated entities (341,537) (520,738)
Minority interests 893,804 938,787
Decrease in accounts receivable 628,943 526,915
Decrease in other assets 280,032 185,840
Decrease in accounts payable (621,956) (594,737)
Increase (decrease) in accrued interest (81,455) 31,116
Increase in tenant deposits 4,201 46,238
---------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,245,870 10,198,873
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate investments (including capitalized interest of
$118,000 in 2003 and $76,000 in 2002) (14,862,379) (3,227,728)
Distributions from unconsolidated entities 341,537 520,738
---------------------------------
NET CASH USED IN INVESTING ACTIVITIES (14,520,842) (2,706,990)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from the issuance of common stock 43,240,435 -
Payments of mortgages payable (37,853,254) (1,557,103)
Mortgage proceeds 7,699,151 -
Dividends and limited partners' distributions paid (7,328,697) (7,051,603)
Payment on construction loan (4,043,313) (40,350)
Line-of-credit net borrowings 1,416,768 800,000
Repayments of capital expenditure payables (423,910) (401,229)
Payments for financing costs (178,108) (16,353)
Redemption of restricted stock (101,400) (110,940)
Payment of leasing costs (14,211) (23,630)
---------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,413,461 (8,401,208)
---------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (861,511) (909,325)
CASH AND CASH EQUIVALENTS, beginning of period 1,095,610 1,101,861
---------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 234,099 $ 192,536
=================================
8
AGREE REALTY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, 2003 September 30, 2002
---------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest (net of amounts capitalized) $ 4,535,514 $ 4,344,074
=================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Dividends and limited partners' distributions declared and unpaid $ 3,447,328 $ 2,356,156
Shares issued under Stock Incentive Plan $ 622,153 $ 680,033
Real estate investments financed with accounts payable $ 432,471 $ 301,820
Construction loan paid with mortgage $ - $ 3,181,670
=================================
See accompanying notes to consolidated financial statements.
9
AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited 2003 consolidated
1. BASIS OF financial statements have been prepared in accordance
PRESENTATION 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 September 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 Earnings per share has been computed by dividing the
SHARE 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. ISSUANCE OF During August 2003, the Company sold 1,955,000 shares
COMMON STOCK of common stock. The cash proceeds (net of
underwriting fees and related issuance costs) to the
Company from the stock issuance were approximately
$43.2 million, which was used to reduce outstanding
indebtedness.
4. SUBSEQUENT EVENT During October 2003 the Company completed the sale of
a shopping center for approximately $8.5. The
shopping center was anchored by Kmart Corporation and
Kash N Karry and was located in Winter Garden,
Florida. The results of operations for this property
are presented as discontinued operations in the
Company's Consolidated Statements of Income.
The revenues from this property were $930,272 and
$1,005,332 for the nine months ended September 30,
2003 and 2002, respectively. The expenses for this
property were $507,601 and $430,518, including
minority interest charges of $58,347 and $87,109, for
the nine months ending September 30, 2003 and 2002,
respectively.
The revenues from this property were $301,974 and
$361,800 for the three months ended September 30,
2003 and 2002, respectively. The expenses for this
property were $154,605 and $149,652, including
minority interest charges of $17,510 and $32,121, for
the three months ending September 30, 2003 and 2002,
respectively.
10
AGREE REALTY CORPORATION
PART I
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 90.52% interest as of September 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
September 30, 2003. Nine of the Kmart stores paid percentage rent in addition to
their minimum rent during 2002. As of September 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
11
AGREE REALTY CORPORATION
PART I
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 September 30, 2003, none
of these tenants has indicated that it will exercise its option to terminate its
lease with us. We believe it will take between nine 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 period.
During October 2003, the Company completed the sale of the Winter Garden,
Florida shopping center.
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.
12
AGREE REALTY CORPORATION
PART I
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 NINE MONTHS ENDED SEPTEMBER 30, 2003 TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
Minimum rental income increased $2,188,000, or 14%, to $18,072,000 in 2003,
compared to $15,884,000 in 2002. The increase was the result of rental increases
of $459,000 from existing properties; an increase of $1,444,000 due to
additional rent as a result of the acquisition of our joint venture partner's
interest in three Joint Venture Properties in 2002 and two Joint Venture
Properties in 2003; and an increase of $285,000 from the development of one
property in 2002 and two properties in 2003.
Percentage rental income increased $21,000, or 27%, to $99,000 in 2003, compared
to $78,000 in 2002. The increase was primarily the result of increased tenant
sales.
Operating Cost Reimbursements increased $313,000, or 18%, to $2,037,000 in 2003,
compared to $1,724,000 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 $111,000, or 9%, to $1,370,000 in 2003, compared to
$1,259,000 in 2002. The increase is the result of general assessment changes on
the Company's properties and additional real estate taxes paid directly by the
Company related to a closed Kmart store.
Property operating expenses (shopping center maintenance, insurance and
utilities), which are reimbursed by the tenants, increased $403,000, or 37%, to
$1,500,000 in 2003 compared to $1,097,000 in 2002. The increase was the result
of increased snow removal costs of $19,000; an increase in shopping center
maintenance costs of $179,000; an increase in utility costs of $20,000; and an
increase in insurance costs of $185,000 in 2003 versus 2002.
Land lease payments remained constant at $554,000 for 2003 and 2002.
General and administrative expenses increased by $210,000, or 14%, to $1,676,000
in 2003, compared to $1,466,000 in 2002. The increase was primarily the result
of an increase in compensation-related expenses and property management related
expenses. General and administrative expenses as a percentage of total rental
income remained constant at 9.2% in 2003 and 2002.
13
AGREE REALTY CORPORATION
PART I
Depreciation and amortization increased $263,000, or 9%, to $3,041,000 in 2003,
compared to $2,778,000 in 2002. The increase was the result of the development
of one property in 2002 and two properties in 2003; and the acquisition of the
joint venture partner's interest in three (3) Joint Venture Properties in 2002
and two (2) Joint Venture Properties in 2003.
Interest expense decreased $19,000, or .4%, to $4,561,000 in 2003, from
$4,580,000 in 2002. The decrease in interest expense was the result of decreased
borrowings as a result of the Company reducing outstanding indebtedness with the
net proceeds from the issuance of additional common stock.
Equity in net income of unconsolidated entities decreased $179,000, or 34%, to
$342,000 in 2003 compared to $521,000 in 2002 as a result of the acquisition of
our joint venture partner's interest in three Joint Venture Properties in 2002
and two Joint Venture Properties in 2003.
Early extinguishment of debt totaled $961,000 in 2003, as a result of the
Company repaying in August 2003 three mortgages totaling approximately
$37,000,000 prior to their scheduled maturity. In connection with this
transaction the Company incurred a pre-payment penalty of $555,000 and wrote-off
unamortized mortgage costs in the amount of $406,000.
The Company's income before minority interest and discontinued operations
increased $411,000, or 6%, to $6,888,000 in 2003 from $6,477,000 in 2002 as a
result of the foregoing factors.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2003 TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
Minimum rental income increased $687,000, or 13%, to $6,088,000 in 2003,
compared to $5,401,000 in 2002. The increase was the result of rental increases
of $56,000 from existing properties; an increase of $536,000 due to additional
rent as a result of the acquisition of our joint venture partner's interest in
three Joint Venture Properties in 2002 and two Joint Venture Properties in 2003;
and an increase of $95,000 from the development of two properties in 2003.
Percentage rental income increased $14,000, or 39%, to $48,000 in 2003, compared
to $34,000 in 2002. The increase was primarily the result of increased tenant
sales.
Operating cost reimbursements increased $67,000, or 13%, to $597,000 in 2003,
compared to $530,000 in 2002. Operating cost reimbursements increased due to the
increase in real estate taxes and property operating expense as explained below.
Real estate taxes increased $37,000, or 9%, to $457,000 in 2003, compared to
$420,000 in 2002. The increase is the result of general assessment changes on
the Company's properties and additional real estate taxes related to a closed
Kmart store.
14
AGREE REALTY CORPORATION
PART I
Property operating expenses (shopping center maintenance, insurance and
utilities), which are reimbursed by the tenants, increased $134,000, or 40%, to
$467,000 in 2003 compared to $333,000 in 2002. The increase was the result of
increased shopping center maintenance costs of $68,000; an increase in utility
costs of $7,000; and an increase in insurance costs of $59,000 in 2003 versus
2002.
Land lease payments remained constant at $185,000 for 2003 and 2002.
General and administrative expenses increased by $50,000, or 10%, to $553,000 in
2003, compared to $503,000 in 2002. The increase was primarily the result of an
increase in compensation-related expenses and property management related
expenses. General and administrative expenses as a percentage of total rental
income decreased from 9.2% in 2002 to 9.0% in 2003.
Depreciation and amortization increased $100,000, or 11%, to $1,026,000 in 2003,
compared to $926,000 in 2002. The increase was the result of the development of
two properties in 2003; the acquisition of the joint venture partner's interest
in three (3) Joint Venture Properties in 2002 and two (2) Joint Venture
Properties in 2003.
Interest expense decreased $255,000, or 16%, to $1,302,000 in 2003, from
$1,557,000 in 2002. The decrease in interest expense was the result of decreased
borrowings as a result of the Company reducing outstanding indebtedness with the
net proceeds from the issuance of additional common stock.
Equity in net income of unconsolidated entities decreased $64,000, or 37%, to
$110,000 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 two Joint Venture Properties in 2003.
Early extinguishment of debt totaled $961,000 in 2003, as a result of the
Company repaying in August 2003 three mortgages totaling $37,000,000 prior to
their scheduled maturity. In connection with this transaction the Company
incurred a pre-payment penalty of $555,000 and wrote-off unamortized mortgage
costs in the amount of $406,000.
The Company's income before minority interest and discontinued operations
decreased $325,000, or 15%, to $1,891,000 in 2003 from $2,216,000 in 2002 as a
result of the foregoing factors.
FUNDS FROM OPERATIONS
Management considers Funds from Operations ("FFO") to be a useful supplemental
measure to evaluate operating performance. The Company considers FFO to be an
appropriate supplemental measure of operating performance because, by excluding
gains or losses on dispositions and excluding depreciation, FFO can help one
compare the operating performance of a company's real estate between periods or
as compared to different companies. 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 should not be considered as an alternative to net income
as the primary
15
AGREE REALTY CORPORATION
PART I
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 for the nine months and
three months ended September 30, 2003 and 2002 and a reconciliation of net
income to FFO:
Nine Months Ended September 30, 2003 2002
- -----------------------------------------------------------------------------------------
Net income $ 6,474,759 $ 6,200,198
Depreciation of real estate assets 3,336,243 2,866,054
Amortization of leasing costs 43,427 51,252
Minority interest 893,804 938,787
---------------------------
FUNDS FROM OPERATIONS $ 10,748,233 $ 10,056,291
===========================
WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING - DILUTIVE 5,556,948 5,119,752
===========================
Three Months Ended September 30, 2003 2002
- -----------------------------------------------------------------------------------------
Net income $ 1,856,798 $ 2,137,132
Depreciation of real estate assets 1,055,896 955,009
Amortization of leasing costs 14,937 17,084
Minority interest 199,493 323,044
---------------------------
FUNDS FROM OPERATIONS $ 3,127,124 $ 3,432,269
===========================
WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING - DILUTIVE 6,349,353 5,120,094
===========================
16
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 September 30, 2003, the Company declared a
quarterly dividend of $.485 per share. The dividend was paid on October
16, 2003, to holders of record on September 30, 2003.
As of September 30, 2003, the Company had total mortgage indebtedness of
$41,434,760 with a weighted average interest rate of 6.78%. Future
scheduled annual maturities of mortgages payable for the years ending
September 30 are as follows: 2004 - $1,447,043; 2005 - $1,601,600; 2006 -
$1,713,463; 2007 - $1,833,147; and 2008 - $1,946,772. This mortgage debt
is all fixed rate debt.
In addition, our 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 2006
and matures in November 2009. 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 September 30, 2003, $39,000,000 was outstanding under the
Credit Facility bearing a weighted average interest rate of 2.62%.
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 September 30, 2003, $500,000 was outstanding under the Line of Credit
with an annual interest rate of 3.50%.
17
AGREE REALTY CORPORATION
PART I
The Company has received funding from an unaffiliated third party for the
construction of one of its properties. Advances under this agreement bear
no interest and are secured by the specific land and buildings being
developed. As of September 30, 2003, $1,569,000 was outstanding under this
arrangement.
During the third quarter 2003, the Company negotiated an early payment on
three mortgage notes totaling approximately $37 million and bearing an
interest rate of 7.00%. The mortgages were secured by eight (8) community
shopping centers. Two of the mortgages totaling approximately $30.3
million were scheduled to mature in November, 2005 and required a final
payment in the amount of approximately $28.2 million on the maturity date.
The third mortgage in the amount of approximately $6.7 million had a
scheduled maturity date of April 2013 and required a final payment in the
amount of approximately $2.9 million on the maturity date. This mortgage
contained a provision that would reset the interest rate to the then
current rate in December 2005. The Company incurred a pre-payment penalty
of 1.50% on the outstanding mortgage balance.
The Company has one development project under construction that will add
an additional 14,560 square feet of GLA to the Company's portfolio. The
project is expected to be completed during the fourth quarter of 2003.
Additional Company funding required to complete this project is estimated
to be $2,500,000 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
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.
18
AGREE REALTY CORPORATION
PART I
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.
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 September 30,
------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
FIXED RATE DEBT 1,447 1,602 1,713 1,833 1,947 32,893 41,435
AVERAGE INTEREST RATE 6.78 6.78 6.79 6.79 6.79 6.79
CONSTRUCTION LOANS - - - - - 1,569 1,569
AVERAGE INTEREST RATE - - - - - - -
VARIABLE RATE DEBT 1,541 1,041 36,918 - - - 39,500
AVERAGE INTEREST RATE 4.00 4.00 4.00 - - - -
The fair value (in thousands) is estimated at $41,400, $1,569 and $39,500
for fixed rate debt, construction loans and variable rate debt,
respectively.
The table above incorporates those exposures that exist as of September
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 $103,000.
19
AGREE REALTY CORPORATION
PART I
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.
20
AGREE REALTY CORPORATION
PART II
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
None
Item 5. Other Information
None
21
AGREE REALTY CORPORATION
PART II
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 Amended and Restated $50 million Line of Credit
agreement dated November 5, 2003 among Agree Realty
Corporation and Standard Federal Bank, N.A. and
Bank One.
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
- 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.
22
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: November 13, 2003
23
AGREE REALTY CORPORATION
EXHIBIT INDEX
Exhibit No. DESCRIPTION
- ----------- -----------
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 Amended and Restated $50 million Line of Credit agreement
dated November 5, 2003 among Agree Realty Corporation and
Standard Federal Bank, N.A. and Bank One.
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
24