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, 2000
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 1-12928
Agree Realty Corporation
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(Exact name of registrant as specified in its charter)
Maryland 38-3148187
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31850 Northwestern Highway, Farmington Hills, Michigan 48334
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, included area code: (248) 737-4190
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes No
|X| |_|
4,394,669 Shares of Common Stock, $.0001 par value,
were outstanding as of May 4, 2000
Agree Realty Corporation
Form 10-Q
Index
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Page
Part I: Financial Information
Item 1. Interim Consolidated Financial Statements 3
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 4-5
Consolidated Statements of Income for the three months ended
March 31, 2000 and 1999 6
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 2000 7
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II: Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
Agree Realty Corporation
Part I: Financial Information
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3
Agree Realty Corporation
Consolidated Balance Sheets (Unaudited)
March 31, December 31,
2000 1999
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Assets
Real Estate Investments
Land $ 40,274,374 $ 40,270,367
Buildings 137,846,136 135,709,128
Property under development 2,565,532 3,878,611
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180,686,042 179,858,106
Less accumulated depreciation (27,212,478) (26,342,296)
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Net Real Estate Investments 153,473,564 153,515,810
Cash and Cash Equivalents 257,755 1,064,241
Accounts Receivable - Tenants 398,685 565,133
Investments In and Advances To
Unconsolidated Entities 274,885 449,676
Unamortized Deferred Expenses
Financing 1,499,397 1,587,397
Leasing costs 278,572 282,629
Other Assets 849,937 730,651
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$ 157,032,795 $ 158,195,537
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<FN>
See accompanying notes to consolidated financial statements.
4
Agree Realty Corporation
Consolidated Balance Sheets (Unaudited)
March 31, December 31,
2000 1999
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Liabilities and Stockholders' Equity
Mortgage Payable $ 52,615,801 $ 52,936,571
Construction Loans 15,810,637 15,322,071
Notes Payable 27,158,232 27,158,232
Dividends and Distributions Payable 2,333,219 2,317,670
Accrued Interest Payable 346,317 344,875
Accounts Payable
Operating 456,848 855,886
Capital expenditures 569,935 1,315,597
Tenant Deposits 52,177 52,073
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Total Liabilities 99,343,166 100,302,975
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Minority Interest 5,797,222 5,859,012
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Stockholders' Equity
Common stock, $.0001 par value;
20,000,000 shares authorized,
4,398,669 and 4,364,867 shares
issued and outstanding 440 436
Additional paid-in capital 63,688,433 63,217,235
Deficit (11,076,999) (10,673,302)
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52,611,874 52,544,369
Less: unearned compensation - restricted stock (719,467) (510,819)
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Total Stockholders' Equity 51,892,407 52,033,550
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$157,032,795 $158,195,537
============ ============
<FN>
See accompanying notes to consolidated financial statements.
5
Agree Realty Corporation
Consolidated Statements of Income (Unaudited)
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
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Revenues
Rental income $ 5,152,382 $ 4,716,423
Operating cost reimbursement 648,524 656,532
Management fees and other 11,982 9,263
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Total Revenues 5,812,888 5,382,218
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Operating Expenses
Real estate taxes 445,620 422,412
Property operating expenses 410,413 446,303
Land lease payments 140,665 136,915
General and administrative 391,895 316,045
Depreciation and amortization 899,642 848,896
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Total Operating Expenses 2,288,235 2,170,571
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Income From Operations 3,524,653 3,211,647
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Other Income (Expense)
Interest expense, net (1,658,520) (1,386,685)
Equity in net income of
unconsolidated entities 1,600 6,934
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Total Other Expense (1,656,920) (1,379,751)
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Income Before Minority Interest 1,867,733 1,831,896
Minority Interest 248,042 244,897
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Net Income $ 1,619,691 $ 1,586,999
============ ===========
Earnings Per Share $ .37 $ .36
============ ===========
Weighted Average Number of
Common Shares Outstanding 4,398,669 4,364,867
============ ===========
<FN>
See accompanying notes to consolidated financial statements.
6
Agree Realty Corporation
Consolidated Statement of Stockholders' Equity (Unaudited)
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Unearned
Common Stock Additional Compensation-
---------------------- Paid-In Restricted
Shares Amount Capital Deficit Stock
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Balance, January 1, 2000 4,364,867 $ 436 $63,217,235 $(10,673,302) $ (510,819)
Issuance of shares under
Stock Incentive Plan 33,802 4 471,198 -- (267,648)
Vesting of restricted stock -- -- -- -- 59,000
Dividends declared for the period
January 1, 2000 to March 31, 2000 -- -- -- (2,023,388) --
Net income for the period
January 1, 2000 to March 31, 2000 -- -- -- 1,619,691 --
--------- ---------- ----------- ------------ ------------
Balance, March 31, 2000 4,398,669 $ 440 $63,688,433 $(11,076,999) $ (719,467)
========= ========== =========== ============ ============
<FN>
See accompanying notes to consolidated financial statements.
7
Agree Realty Corporation
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
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Cash Flows From Operating Activities
Net income $ 1,619,691 $ 1,586,999
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 879,268 827,588
Amortization 108,374 111,308
Stock-based compensation 59,000 48,500
Equity in net income of unconsolidated entities (1,600) (6,934)
Minority interests 248,042 244,897
Decrease in accounts receivable 166,448 323,158
Increase in other assets (128,842) (101,755)
Decrease in accounts payable (399,038) (274,135)
Increase in accrued interest 1,442 37,953
Increase (decrease) in tenant deposits 104 (2,333)
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Net Cash Provided By Operating Activities 2,552,889 2,795,246
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Cash Flows From Investing Activities
Acquisition of real estate investments
(including capitalized interest of
$59,000 in 2000 and $147,000 in 1999) (258,001) (519,953)
Investments in and advances to unconsolidated
entities - net 173,580 124,150
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Net Cash Used In Investing Activities (84,421) (395,803)
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Cash Flows From Financing Activities
Dividends and limited partners' distributions paid (2,317,670) (2,309,136)
Payments of payables for capital expenditures (1,112,044) (1,429,019)
Construction loan proceeds 488,566 40,707
Payments of mortgages payable (320,770) (26,398)
Payment of leasing costs (13,036) (18,000)
Line-of-credit proceeds - 900,000
Payment of financing costs - (297,950)
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Net Cash Used In Financing Activities (3,274,954) (3,139,796)
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Net Decrease In Cash and Cash Equivalents (806,486) (740,353)
Cash and Cash Equivalents, beginning of period 1,064,241 994,159
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Cash and Cash Equivalents, end of period $ 257,755 $ 253,806
============= =============
Supplemental Disclosure of Cash flow Information
Cash paid for interest (net of amounts capitalized) $ 1,573,989 $ 1,263,185
============= =============
Supplemental Disclosure of Non-Cash Transactions
Dividends and limited partners' distributions
declared and unpaid $ 2,333,219 $ 2,317,670
Real estate investments financed with
accounts payable $ 569,935 $ 340,695
Shares issued under Stock Incentive Plan $ 471,202 $ 343,249
============= =============
<FN>
See accompanying notes to consolidated financial statements.
8
Agree Realty Corporation
Notes to Consolidated Financial Statements
1. Basis of The accompanying unaudited 2000 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, 1999
has been derived from the audited consolidated
financial statements at that date. Operating
results for the three months ended March 31,
2000 are not necessarily indicative of the
results that may be expected for the year
ending December 31, 2000, or for any other
interim period. For further information, refer
to the consolidated financial statements and
footnotes thereto included in the Company's
Annual Report for the year ended December 31,
1999.
2. Earnings Per Share Earnings per share has been computed by
dividing the 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.
3. Reclassifications Certain amounts in the 1999 financial
statements have been reclassified to conform
with the 2000 presentation.
9
Agree Realty Corporation
Part I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OEPRATIONS
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Overview
The Company was established to continue to operate and expand the retail
property business of its Predecessors. The Company commenced its operations
on April 22, 1994 with the sale of 2,500,000 shares of common stock in an
initial public offering. The net cash proceeds to the Company from the
completion of this offering were approximately $45.4 million, which were used
primarily to reduce outstanding indebtedness, pay stock issuance costs and
establish a working capital reserve. On May 21, 1997, the Company completed
an offering of 1,625,000 shares of common stock at $20.625 per share; on June
18, 1997 the underwriters exercised their overallotment option for an
additional 28,850 shares at the same per share price (collectively, "the 1997
Offering"). The net proceeds from the 1997 Offering of approximately $31.9
million were used to repay amounts outstanding under the Company's Credit
Facility.
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 86.72% interest as of
March 31, 2000. The Company is operating so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes.
The following should be read in conjunction with the Consolidated Financial
Statements of Agree Realty Corporation, including the respective notes
thereto, which are included in this Form 10-Q.
Comparison of Three Months Ended March 31, 2000 to Three Months Ended March
31, 1999
Rental income increased $436,000, or 9%, to $5,152,000 in 2000, compared to
$4,716,000 in 1999. The increase was the result of the development of four
properties in 1999 and one property in 2000.
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, decreased $8,000,
or 1%, to $648,000 in 2000, compared to $656,000 in 1999. Operating cost
reimbursement decreased due to the net decrease in real estate taxes and
property operating expenses.
Management fees and other income remained relatively constant at $12,000 in
2000 compared to $9,000 in 1999.
Real estate taxes increased 24,000, or 5%, to $446,000 in 2000 compared to
$422,000 in 1999. The increase is the result of general assessment increases
on the Company's properties.
Property operating expenses (shopping center maintenance, insurance and
utilities) decreased $36,000, or 8%, to $410,000 in 2000 compared $446,000 in
1999. The decrease was the result of decreased snow removal costs of $55,000;
an increase in shopping center maintenance costs of $18,000 and an increase
in insurance cost of $1,000.
10
Land lease payments remained relatively constant at $141,000 in 2000 compared
to $137,000 in 1999.
General and administrative expenses increased $76,000, or 24%, to $392,000 in
2000 compared to $316,000 in 1999. The increase was primarily the result of
an increase in compensation-related expenses as a result of the addition of
an employee. General and administrative expenses as a percentage of rental
income increased from 6.7% for 1999 to 7.6% for 2000.
Depreciation and amortization increased $51,000, or 6%, to $900,000 in 2000
compared to $849,000 in 1999. The increase was the result of the development
and acquisition of four properties in 1999 and one property in 2000.
Interest expense increased $272,000, or 20%, to $1,659,000 in 2000, from
$1,387,000 in 1999. The increase in interest expense was the result of the
Company's additional borrowing to finance its development projects.
Equity in net income of unconsolidated entities decreased $5,000 to $2,000 in
2000 compared to $7,000 in 1999 as a result of increased depreciation expense
in 2000 related to certain of the Joint Venture Properties in which the
Company holds interests ranging from 8% to 20%.
The Company's income before minority interest increased $36,000 as a result
of the foregoing factors.
11
Funds from Operations
Management considers Funds from Operations ("FFO") to be a supplemental
measure of the Company's operating performance. FFO is defined by the
National Association of Real Estate Investments Trusts, Inc. ("NAREIT") to
mean net income computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from debt restructuring and
sales of property, plus real estate related depreciation and amortization,
and after adjustments for unconsolidated entities in which the REIT holds an
interest. FFO does not represent cash generated from operating activities in
accordance with GAAP and is not necessarily indicative of cash available to
fund cash needs. FFO should not be considered as an alternative to net income
as the primary indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity.
The following tables illustrate the calculation of FFO for the three months
ended March 31, 2000 and 1999:
Three Months Ended March 31, 2000 1999
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Net income before minority interest $1,867,733 $1,831,896
Depreciation of real estate assets 876,274 827,525
Amortization of leasing costs 17,093 16,686
Amortization of stock awards 59,000 48,500
Depreciation of real estate assets
held in unconsolidated entities 171,980 166,645
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Funds from Operations $2,992,080 $2,891,252
========== ==========
Weighted Average Shares and OP Units Outstanding 5,072,216 5,038,414
========== ==========
FFO increased $101,000, or 3%, for the three months ended March 31, 2000,
to $2,992,000. The increase in FFO is primarily the result of the
development of four properties in 1999 and one property in 2000.
12
Forward-Looking Statements
Management has included herein certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. When used,
statements which are not historical in nature including the words
"anticipate," "estimate," "should," "expect," "believe," "intend" and similar
expressions are intended to identify forward-looking statements. Such
statements are, by their nature, subject to certain risks and uncertainties.
Risks and other factors that might cause such a difference include, but are
not limited to, the effect of economic and market conditions; risks that the
Company's acquisition and development projects will fail to perform as
expected; financing risks, such as the inability to obtain debt or equity
financing on favorable terms; the level and volatility of interest rates;
loss or bankruptcy of one or more of the Company's major retail tenants; and
failure of the Company's properties to generate additional income to offset
increases in operating expenses.
Liquidity and Capital Resources
The Company's principal demands for liquidity are distributions to its
stockholders, debt repayment, development of new properties and future
property acquisitions.
During the quarter ended March 31, 2000, the Company declared a quarterly
dividend of $.46 per share. The dividend was paid on April 13, 2000, to
holders of record on March 31, 2000.
As of March 31, 2000, the Company had total mortgage indebtedness of
$52,615,801 with a weighted average interest rate of 6.92%. Future scheduled
annual maturities of mortgages payable for the years ending March 31 are as
follows: 2001 - $1,320,140; 2002 - $1,433,456; 2003 - $1,535,387; 2004 -
$1,644,572; and 2005 - $1,761,523. 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 2000 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 less 50 basis points to plus 13 basis
points, 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, 2000, $27,158,232 was
outstanding under the Credit Facility.
13
The Company also has in place a $5 million line of credit (the "Line of
Credit"), which matures on December 19, 2000, 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,
2000, there were no outstanding borrowings under the Line of Credit.
The Company's wholly-owned subsidiaries have obtained construction financing
of approximately $16,100,000 to fund the development of four retail
properties. The notes require quarterly interest payments, based on a
weighted average interest rate based on LIBOR, computed by the lender. The
notes mature on October 16, 2002 and are secured by the underlying land and
buildings. As of March 31, 2000, $14,080,147 was outstanding under these
notes.
The Company has received funding from an unaffiliated third party for the
construction of certain of its Properties. Advances under this agreement bear
no interest and are required to be repaid within sixty (60) days after the
date construction has been completed. The advances are secured by the
specific land and buildings being developed. As of March 31, 2000, $1,730,490
was outstanding under this arrangement.
The Company has one development project under construction that will add an
additional 14,000 square feet of retail space to the Company's portfolio. The
project is expected to be completed during the second quarter of 2000.
Additional Company funding required for this project is estimated to be
$200,000 and will come from the Credit Facility. Management expects the
development of this project to have a positive effect on cash generated by
operating activities and Funds from Operations.
The Company intends to meet its short-term liquidity requirements, including
capital expenditures related to the leasing and improvement of the
Properties, through its cash flow provided by operations and the Line of
Credit. Management believes that adequate cash flow will be available to fund
the Company's operations and pay dividends in accordance with REIT
requirements. The Company may obtain additional funds for future development
or acquisitions through other borrowings or the issuance of additional shares
of capital stock. The Company intends to incur additional debt in a manner
consistent with its policy of maintaining a ratio of total debt (including
construction and acquisition financing) to total market capitalization of 65%
or less.
14
The Company plans to begin construction of additional pre-leased developments
and may acquire additional properties, which will initially be financed by
the Credit Facility and Line of Credit. Management intends to periodically
refinance short-term construction and acquisition financing with long-term
debt and/or equity. Upon completion of refinancing, the Company intends to
lower the ratio of total debt to market capitalization to 50% or less.
Nevertheless, the Company may operate with debt levels or ratios which are in
excess of 50% for extended periods of time prior to such refinancing.
Inflation
The Company's leases generally contain provisions designed to mitigate the
adverse impact of inflation on net income. These provisions include clauses
enabling the Company to pass through to tenants certain operating costs,
including real estate taxes, common area maintenance, utilities and
insurance, thereby reducing the Company's exposure to increases in costs and
operating expenses resulting from inflation. Certain of the Company's leases
contain clauses enabling the Company to receive percentage rents based on
tenants' gross sales, which generally increase as prices rise, and, in
certain cases, escalation clauses, which generally increase rental rates
during the terms of the leases. In addition, expiring tenant leases permit
the Company to seek increased rents upon re-lease at market rates if rents
are below the then existing market rates.
15
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its borrowing
activities. There is inherent rollover risk for borrowings as they mature and
are renewed at current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future interest
rates and the Company's future financing requirements.
Mortgages payable - As of March 31, 2000 the Company had three mortgages
outstanding. The first mortgage in the amount of $32,990,741 bears interest
at 7.00%. The mortgage matures on November 15, 2005. The second mortgage in
the amount of $7,488,937 bears interest at 7.00%. The mortgage matures on
April 1, 2013 and is subject to a rate review after the 7th year (April 1,
2006). The third mortgage in the amount of $12,136,123 bears interest at
6.63%. The mortgage matures on February 5, 2017.
Construction loans - As of March 31, 2000 the Company had Construction loans
outstanding of $14,080,147. Under the terms of the construction loans the
Company bears no interest rate risk.
Notes Payable - As of March 31, 2000 the Company had $27,158,232 outstanding
on its Lines-of Credit which were subject to interest at a variable interest
rate based on LIBOR.
The Company does not enter into financial instrument transactions for trading
or other speculative purposes or to manage interest rate exposure.
A 10% adverse change in interest rates on the portion of the Company's debt
bearing interest at variable rates would result in an annual increase in
interest expense of approximately $200,000.
16
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 Employment Agreement, dated January 10, 2000, by and
between the Company, and David J. Prueter
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
17
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 4, 2000
- --------------------------------------------
18