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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 1-12928
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AGREE REALTY CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 38-3148187
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31850 Northwestern Highway, (248) 737-4190
Farmington Hills, Michigan 48334 Registrant's telephone number,
(Address of principal executive offices) included area code:
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $.0001 par value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. __X__
Shares of common stock outstanding as of March 13, 1998: 4,346,313. The
aggregate market value of the Registrant's shares of common stock held by
non-affiliates on such date was approximately $94,260,663.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incoroprated into Form 10-K
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Portions of the Registrant's Proxy Statement Part III
for its Annual Meeting of Shareholders Items 10-13
to be held on May 11, 1998
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TABLE OF CONTENTS
Part I
Page
Numbers
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Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16
Item 7A Quantitative and Qualitative Disclosures
About Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes and Disagreements With Accountants
on Accounting and Financial Disclosure 22
Part III
Item 10. Directors and Executive Officers of the
Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial
Owners and Management 22
Item 13. Certain Relationships and Related Transactions 22
Part IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 23
Signatures 25
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PART 1
This Form 10-K, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements are based on assumptions and expectations which may not be
realized and are inherently subject to risks and uncertainties, many of which
cannot be predicted with accuracy and some of which might not even be
anticipated. Future events and actual results, financial and otherwise, may
differ materially from the results discussed in the forward-looking
statements. Risks and other factors that might cause such a difference
include, but are not limited to, the effect of economic and market
conditions; risks that the Company's acquisition and development projects
will fail to perform as expected; financing risks, such as the inability to
obtain debt or equity financing on favorable terms; the level and volatility
of interest rates; loss or bankruptcy of one or more of the Company's major
retail tenants; and failure of the Company's properties to generate
additional income to offset increases in operating expenses, as well as other
risks listed herein under Item 1. Business and from time to time in the
Company's reports filed with the Securities and Exchange Commission or
otherwise publicly disseminated by the Company.
References herein to the "Company" include Agree Realty Corporation,
together with its wholly-owned subsidiaries and its majority owned
partnership, Agree Limited Partnership (the "Operating Partnership"), unless
the context otherwise requires.
Item 1. BUSINESS
General
The Company is a self-administered, self-managed real estate investment
trust (a "REIT") which develops, acquires, owns and operates properties which
are primarily leased to major national and regional retail companies under
net leases. As of December 31, 1997, the Company owned, either directly or
through interests in joint ventures, a portfolio of 34 properties located in
12 states and containing an aggregate of approximately 3.1 million square
feet of gross leasable area ("GLA"). The Properties consist of 13
neighborhood and community shopping centers and 21 free-standing properties.
As of December 31, 1997, approximately 98% of GLA in the Portfolio was
leased, and approximately 93% of the Company's base rental income was
attributable to national and regional retailers. Such retailers include Kmart
Corporation ("Kmart"), Borders, Inc. ("Borders"), Roundy's Inc. ("Roundy's"),
Walgreen Co. ("Walgreen") and Fashion Bug (Charming Shoppes, Inc.) which, as
of December 31, 1997, collectively represented approximately 73% of current
base rental income. The Company was the developer of all 13 of the shopping
centers and 16 of the 21 free-standing properties.
The Company was formed in December 1993 to continue and expand the
retail property business founded in 1971 by its current Chairman of the Board
of Directors and President, Richard Agree. Since 1971, the Company and its
predecessors have specialized in building properties to suit for national and
regional retailers who have signed long-term net leases prior to commencement
of construction. The Company believes that
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this strategy provides it with a predictable source of income from primarily
national and regional retail tenants in its existing properties and also
provides opportunities for development of additional properties at attractive
returns on investment, without the lease-up risks inherent in speculative
development.
During May and June 1997, the Company completed a follow-on offering of
1,653,850 shares of common stock which netted proceeds of $31.9 million to
the Company. The Company used the proceeds of the offering to reduce
outstanding indebtedness.
The Company's headquarters are located at 31850 Northwestern Highway,
Farmington Hills, MI 48334 and its telephone number is (248) 737-4190.
Objectives and Strategies
Objectives
The Company's primary objectives are (i) to realize steady and
predictable cash flows through the ownership of high quality properties
leased primarily to national and regional retailers, and (ii) to increase
Funds from Operations through the development or acquisition of additional
properties. The Company presently intends to achieve these objectives by
implementing the growth, operating and financial strategies outlined below.
Growth and Operating Strategies
In seeking to attain these objectives, the Company has applied and
intends to continue to apply the same strategies that have guided its
principals during the past twenty-seven years. These strategies include the
following:
o Developing or acquiring each property with the objective of holding it
for long-term investment value.
o Developing or acquiring properties in what the Company considers
attractive long-term locations. Such locations typically have (i)
convenient access to transportation arteries with traffic count that is
higher than average for the local market; (ii) concentrations of other
retail properties and (iii) demographic characteristics which are
attractive to the retail tenant which will lease the property upon
completion.
o Generally, purchasing land and beginning development of a property only
upon the execution of a lease with a national or regional retailer on
terms that provide a return on estimated cost which is attractive
relative to the Company's cost of capital.
o Directing all aspects of development, including construction, design,
leasing and management. Property management and the majority of its
leasing activities are handled directly by Company personnel. The
Company believes that this approach to development and management
enhances the ability of the Company to develop and maintain assets of
high construction quality which are designed, leased and maintained to
maximize long-term value and enables it to operate efficiently.
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The Company believes that the relationships established by its
principals with national and regional retailers as well as the financing
relationships its principals have developed with lenders provide it with an
advantage in achieving its objectives.
Financing Strategy
As of December 31, 1997, the Company's ratio of indebtedness to market
capitalization was 38%. The Company intends to maintain a ratio of total debt
(including construction and acquisition financing) to market capitalization
of 65% or less. The Company plans to begin construction of additional
pre-leased developments and may acquire additional properties that will
initially be financed by its Credit Facility and Line of Credit (each as
hereinafter defined). Management intends to periodically refinance short-term
construction and acquisition financing with long-term debt and /or equity.
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 that are in excess of 50% for extended
periods of time prior to such refinancing.
The Company may from time to time re-evaluate its borrowing policies in
light of then current economic conditions, relative costs of debt and equity
capital, market value of properties, growth and acquisition opportunities and
other factors. However, there is no contractual limit on the Company's ratio
of debt to total market capitalization and, accordingly, the Company may
modify its borrowing policy and may increase or decrease its ratio of debt to
market capitalization.
Tax Status
The Company has operated and intends to operate in a manner to qualify
as a REIT under Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the "Code"). In order to maintain qualification as a REIT,
the Company must distribute at least 95% of its real estate investment trust
income and meet certain other asset and income tests. Additionally, ownership
of the Company, directly or constructively, by any single person is limited
to 9.8% of the total number of outstanding shares, subject to certain
exceptions. As a REIT, the Company is not subject to federal income tax with
respect to that portion of its income that meets certain criteria and is
distributed annually to the stockholders.
Competition
The Company faces competition in seeking properties for acquisition and
tenants who will lease space in these properties from insurance companies,
credit companies, pension funds, private individuals, investment companies
and other REITs, many of which have greater financial and other resources
than the Company. There can be no assurance that the Company will be able to
successfully compete with such entities in its development, acquisition and
leasing activities in the future.
-5-
Potential Environmental Risks
Investments in real property create a potential for environmental
liability on the part of the owner or operator of such real property. If
hazardous substances are discovered on or emanating from any of the
Properties, the owner or operator of the property (including the Company) may
be held strictly liable for all costs and liabilities relating to such
hazardous substances. The Company has had a Phase I environmental study
(which involves inspection without soil sampling or ground water analysis)
conducted on each Property by independent environmental consultants.
Furthermore, the Company has adopted a policy of conducting a Phase I
environmental study on each property it acquires.
The Phase I environmental studies conducted by the Company have not
revealed the existence of any hazardous substance or environmental liability
on the Properties. In addition, the management of the Company has no reason
to believe that any hazardous substances exist on such Properties in
violation of any applicable laws; however, no assurance can be given that
such substances are not located on any of the Properties. The Company
presently carries no insurance coverage for the types of environmental risks
described above.
The Company believes that it is in compliance, in all material respects,
with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances. The Company has not been notified by any
governmental authority of any noncompliance, liability or other claim in
connection with any of the Properties.
Employees
As of March 15, 1998, the Company employed eight persons. Employee
responsibilities include accounting, construction, leasing, property
coordination and administrative functions for the Properties. The Company's
employees are not covered by a collective bargaining agreement and the
Company considers its employee relations to be satisfactory.
Item 2. PROPERTIES
The Properties consist of 13 neighborhood and community shopping centers
and 21 free-standing properties. As of December 31, 1997, approximately 98%
of GLA in the Portfolio was leased, and approximately 93% of the Company's
base rental income was attributable to, national and regional retailers. Such
retailers include Kmart, Borders, Roundy's, Walgreen and Fashion Bug which,
at December 31, 1997, collectively represented approximately 73% of current
base rental income.
A substantial portion of the Company's income consists of rent received
under net leases. Most of the leases provide for the payment of fixed base
rentals monthly in advance and for the payment by tenants of a pro rata share
of the real estate taxes, insurance, utilities and common area maintenance of
the shopping center as well as payment to the Company of a percentage of such
tenant's sales. However the payments of percentage rents to the Company
historically have not been material and the Company does not anticipate that
they will become material in the future. Although a majority of the leases
require the Company to make roof and structural repairs, as needed, a number
of leases place that
-6-
responsibility on the tenant. The Company's management places a strong
emphasis on sound construction and maintenance on its properties.
Location of Properties in the Portfolio
Total Gross Percent of
Number of Leasable Area GLA Leased on
State Properties (Sq. feet) December 31, 1997
----- ---------- ------------- -----------------
California 1 38,015 100%
Florida 5 (1) 487,269 93
Indiana 1 (1) 15,844 100
Illinois 1 20,000 100
Kansas 2 45,000 100
Kentucky 1 135,009 100
Michigan 12 (1) 1,563,663 99
Nebraska 2 (1) 55,000 100
Ohio 2 108,543 100
Oklahoma 3 (1) 74,282 100
Pennsylvania 1 37,004 100
Wisconsin 3 523,036 99
-- --------- ---
Total/Average 34 3,102,665 98%
-- --------- ---
<FN>
- ------------
(1) Includes Joint Venture Properties in which the Company owns interests
ranging from 8 to 20%.
Annualized Base Rent of the Company's Properties
The following is a breakdown of Base Rents in place at December 31, 1997
for each type of retail tenant:
Percent of
Annualized Annualized
Type of Tenant Base Rent (1) Base Rent
-------------- ------------- ----------
National (2) $14,185,514 82%
Regional (3) 1,882,863 11
Local 1,280,476 7
----------- ---
Total $17,348,853 100%
----------- ---
<FN>
- --------------------
(1) Includes the Company's share of annualized base rent for each of the
Joint Venture Properties.
(2) Includes the following national tenants: Kmart, Borders, Fashion Bug,
Winn Dixie, Rite Aid, JC Penney, Avco Financial, GNC Group, Radio Shack,
On Cue, Super Value, Maurices, Petrie Stores, Walgreen, Payless Shoes,
Food Lion, Blockbuster Video, Sears, A&P, TGI Friday's and Circuit City.
(3) Includes the following regional tenants: Roundy's, Dunham's Sports,
Brauns Fashions and Hollywood Video.
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Community Shopping Centers
Thirteen of the Company's properties are community shopping centers ranging
in size from 20,000 to 228,476 square feet of GLA. The centers are located in
5 states as follows: Florida (2), Illinois (1), Kentucky (1), Michigan (6)
and Wisconsin (3). The location, general character and primary occupancy
information with respect to the community shopping centers at December 31,
1997 are set forth below:
Summary of Community Shopping Centers at December 31, 1997
(2) (3)
(4) Total (1) Average Percent Percent
Year Land Leasable Annualized Base Leased at Occupied Anchor Tenants
Completed/ Area Area Base Rent per at Dec 31, at Dec 31, (Lease expiration/
Property Location Expanded (acres) (Sq. Ft.) Rent Sq. Ft. 1997 1997 Option expiration)
- --------------------------------------------------------------------------------------------------------------------------
Capital Plaza 1978/ 11.58 135,009 $405,268 $3.00 100% 100% Kmart (2003/2053)
Frankfort, KY 1991 Winn Dixie (2010/2035)
Fashion Bug (2004/2024)
Charleviox Commons 1991 14.79 137,375 650,995 4.81 99% 72% Kmart (2015/2065)
Charlevoix, MI Roundy's (2011/2031)
Chippewa Commons 1991 16.37 168,311 909,783 5.41 100% 100% Kmart (2014/2064)
Chippewa Falls, WI Roundy's (2011/2031)
Fashion Bug (2001/2021)
Iron Mountain Plaza 1991 21.20 176,352 822,033 4.81 97% 77% Kmart (2015/2065)
Iron Mountain, MI Roundy's (2011/2031)
Fashion Bug (2002/2022)
Ironwood Commons 1991 23.92 185,535 943,754 5.09 100% 100% Kmart (2015/2065)
Ironwood, MI Super Value (2011/2036)
J.C. Penney Co. (2006/2026)
Fashion Bug (2002/2022)
Marshall Plaza 1990 10.74 119,279 623,055 5.31 98% 98% Kmart (2015/2065)
Marshall, MI Fashion Bug (2002/2022)
North Lakeland Plaza 1987 16.67 171,334 1,280,893 7.48 100% 100% Kmart (2011/2061)
Lakeland, FL Best Buy (2013/2028)
-8-
Summary of Community Shopping Centers at December 31, 1997 (continued)
(2) (3)
(4) Total (1) Average Percent Percent
Year Land Leasable Annualized Base Leased at Occupied Anchor Tenants
Completed/ Area Area Base Rent per at Dec 31, at Dec 31, (Lease expiration/
Property Location Expanded (acres) (Sq. Ft.) Rent Sq. Ft. 1997 1997 Option expiration)
- -----------------------------------------------------------------------------------------------------------------------
Petoskey Town Center 1990 22.08 174,870 917,928 5.64 93% 93% Kmart (2015/2065)
Petoskey, MI Roundy's (2010/2030)
Fashion Bug (2002/2022)
Plymouth Commons 1990 16.30 162,031 856,369 5.40 98% 98% Kmart (2015/2065)
Plymouth, WI Roundy's (2010/2030)
Fashion Bug (2001/2021)
Rapids Associates 1990 16.84 173,557 978,257 5.64 100% 100% Kmart (2015/2065)
Big Rapids, MI Roundy's (2010/2030)
Fashion Bug (2001/2021)
Shawano Plaza 1990 17.91 192,694 972,079 5.14 98% 98% Kmart (2014/2064)
Shawano, WI Roundy's (2010/2030)
J.C. Penney Co. (2005/2025)
Fashion Bug (2001/2021)
West Frankfort Plaza 1982 1.45 20,000 105,225 5.26 100% 100% Fashion Bug (1997/2007)
West Frankfort, IL
Winter Garden Plaza 1988 22.34 228,476 1,120,348 5.70 86% 64% Kmart (2013/2063)
Winter Garden, FL Food Lion (2009/2029)
Sears Roebuck & Co. (2000/2010)
------ --------- ----------- ----- --- ---
Total/Average 212.19 2,044,823 $10,585,987 $5.33 97% 91%
====== ========= =========== ===== === ===
<FN>
(1) Total annualized base rents of the Company as of December 31, 1997
(2) Calculated as total annualized base rents, divided by GLA actually leased
as of December 31, 1997
(3) Roundy's does not currently occupy the space it leases at Iron Mountain
Plaza (35,285 square feet, rented at a rate of $5.87 per square foot) and
Charlevoix Commons (35,896 square feet, rented at a rate of $5.97 per
square foot). Both of these leases expire in 2011 (assuming they are not
extended by Roundy's). Sears, Roebuck & Co. leases but does not currently
occupy, the 50,000 square feet it leases at Winter Garden Plaza. This
lease expires in 2000 (assuming that it is not extended by Sears) and is
rented at a rate of $5.00 per square foot.
(4) All community shopping centers except Capital Plaza (which is subject
to a long-term ground lease expiring in 2053 from a third party) are
wholly-owned by the Company.
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Free-Standing Properties
Twenty-one (21) of the Properties are free-standing properties net
leased to either A&P (1), Borders (15), Circuit City Stores (1), Kmart (3) or
Walgreen (1), which in the aggregate comprise approximately 1,000,000 square
feet. The free-standing properties range in size from 13,905 to 226,000
square feet of GLA and are located in the following states: California (1),
Florida (3), Indiana (1), Kansas (2), Michigan (6), Nebraska (2), Ohio (2),
Oklahoma (3) and Pennsylvania (1). Included in the Company's 21 retail
properties are seven Joint Venture Properties in which the Company owns
interests ranging from 8% to 20% and 14 wholly-owned Properties. The
Company's fourteen (14) wholly owned free-standing Properties provide
$6,068,547 of annualized base rent at an average base rent per square foot of
$10.00 during the 12 months ended December 31, 1997. The Company (or the
joint ventures in which the Company has an interest) own each of the twenty
one (21) free-standing properties in fee, except as indicated below. The
location, general character and primary occupancy information with respect to
the wholly-owned free-standing properties are set forth in the following
table:
Wholly-Owned Free Standing Properties
Year Lease expiration
Tenant/Location Completed Total GLA (Option expiration)
- --------------- --------- --------- -------------------
A&P, Roseville, MI 1977 104,000 May 21, 2002 (2022)
Borders, (1)
Aventura, FL 1996 30,000 Jan 31, 2016 (2036)
Borders, Columbus, OH 1996 21,000 Jan 23, 2016 (2036)
Borders,
Monroeville, PA 1996 37,004 Nov 8, 2016 (2036)
Borders, Norman, OK 1996 24,641 Sep 20, 2016 (2036)
Borders, Omaha, NE 1995 30,000 Nov 3, 2015 (2035)
Borders,
Santa Barbara, CA 1995 38,015 Nov 17, 2015 (2035)
Borders, Wichita, KS 1995 25,000 Nov 10, 2015 (2035)
Borders, (1)
Lawrence, KS 1997 20,000 Nov 21, 2020 (2040)
Circuit City Stores
Boynton Beach, FL 1996 32,459 Dec 15, 2016 (2036)
Kmart, Grayling, MI 1984 52,320 Sep 30, 2009 (2059)
Kmart, Oscoda, MI 1984 90,470 Sep 30, 2009 (2059)
Kmart, (1)
Perysburg, OH 1983 87,543 Oct 31, 2008 (2058)
Walgreen, Waterford, MI 1997 13,905 Feb 28, 2018 (2058)
-------
Total 606,357
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<FN>
(1) These properties are subject to long-term ground leases where a third
party owns the underlying land and has leased the land to the Company
to construct or operate three free-standing properties. The Company
pays rent for the use of the land and generally is responsible for
all costs and expenses associated with the building and improvements.
At the end of the lease terms, as extended (Aventura, FL 2036,
Lawrence, KS 2027 and Perrysburg, OH 2038), the
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land together with all improvements revert to the land owner. The
Company has an option to purchase the Perrysburg property during its
lease term. The Company has an option to purchase the Lawrence
property during the period October 1, 2006 to September 30, 2016.
Joint Venture Properties
During 1996, the Company developed or acquired seven free-standing
Properties which are leased to Borders, including Borders' corporate
headquarters, its central administrative building and Properties operated as
Borders Books and Music. Each of these Properties is owned by a separate
limited liability company or a limited partnership that is owned jointly by
the Company and an affiliate of Borders. The Company's economic interest in
the Joint Ventures ranges from 8% to 20%. The financing for the development
of the Joint Venture Properties was provided through a financing facility
established by Borders and its affiliates (the "Borders Financing Facility").
The lease between Borders and each of the Joint Ventures has a term
expiring November 21, 2000, unless the Borders Financing Facility is extended
or earlier terminated. At any time during the term of the lease, Borders has
the right to refinance the Property or to purchase the Property for various
percentages of total project costs, provided that, prior to such refinancing
or purchase, the Company may elect to provide alternative financing for the
Property or purchase the Property and purchase the interest of the Borders'
affiliate in the Joint Venture. In the event the Company elects to provide
financing or to purchase the Property, and is subsequently unable to obtain
the requisite financing, or in the event that the Company defaults in its
development obligations to the Joint Venture, Borders may purchase the
Property. If the Company provides refinancing or purchases the Property, the
Company will be required to acquire the interest of the Borders' affiliate in
the Joint Venture, and Borders and the Joint Venture will enter into a new
lease providing for a term of 20 years, with four five-year extension
options.
Under certain circumstances, the Company may elect to allow Borders to
place long-term financing on such Properties, in which case, the Company will
maintain its current interest in the Joint Venture and become the sole equity
member of the entity which owns such Property. In such a circumstance, the
Company will own the Property subject to a first mortgage loan which could
exceed 90% of the Property's estimated value, and lease payments received by
the Company would be adjusted to reflect Borders' financing.
Prior to one of the financing transactions discussed above, the
Company's investment in the seven Joint Venture properties is expected to
provide in excess of $600,000 annualized base rent. Of this amount, the
Company estimates that approximately $116,000 is variable based on short-term
financing. Under certain circumstances relating to refinancing of such
assets, the rents paid pursuant to such leases are subject to adjustment. The
following table provides additional information on the Joint Venture
Properties.
-11-
Joint Venture Properties
The Company's
Tenant / Location Interest Total GLA Lease Expirations
- ----------------- ------------- --------- -----------------
Borders, Inc.
Ann Arbor, MI 11% 110,000 November 21, 2000
Borders, Inc.
Ann Arbor, MI 8% 226,000 November 21, 2000
Borders, Inc.
Boynton Beach, FL 12% 25,000 November 21, 2000
Borders, Inc.
Indianapolis, IN 8% 15,844 November 21, 2000
Borders, Inc.
Oklahoma City, OK 20% 24,641 November 21, 2000
Borders, Inc.
Omaha, NE 18% 25,000 November 21, 2000
Borders, Inc.
Tulsa, OK 15% 25,000 November 21, 2000
-------
Total 451,485
-------
Major Tenants
The following table sets forth certain information with respect to the
Company's major tenants:
Annualized Base Percent of Total
Number Rent as of Annualized Base Rent as
of Leases December 31, 1997 of December 31, 1997
--------- ----------------- -----------------------
Kmart 15 $ 5,317,602 31%
Borders 15 4,427,180 (1) 26
Roundy's 7 1,730,063 10
Walgreen 4 604,733 3
Fashion Bug
(Charming Shoppes) 10 573,420 3
-- ----------- --
Total 51 $12,652,998 73%
-- ----------- --
<FN>
- --------------
(1) Includes the Company's share of base rent for each of the Joint
Venture Properties
Fifteen of the Properties are anchored by Kmart, a publicly-traded
retailer with over 2,100 stores. Kmart's principal business is general
merchandise retailing through a chain of department stores and it is one of
the world's largest retailers based on sales volume. The Company derived
approximately 31% of its base rental income for the year ended December 31,
1997 from, and approximately 38% of the Company's future minimum rentals are
attributable to, Kmart.
Borders Group, Inc. ("BGI"), a publicly-traded company, is the second
largest retailer of book superstores and the largest operator of mall-based
bookstores in the United States based on sales and number of stores. Two of
BGI's subsidiaries, Borders, Inc. and Walden Books Co., Inc. together operate
in over 1,000 locations. The Company derived approximately 26% of its base
rental income for the year ended December 31, 1997 from, and approximately
31% of the Company's future minimum rentals are attributable to, Borders.
-12-
Roundy's and its subsidiaries are engaged principally in the wholesale
distribution of food and non-food products to supermarkets and warehouse food
stores. The Company derived approximately 10% of its base rental income for
the year ended December 31, 1997 from, and approximately 11% of the Company's
future minimum rentals are attributable to, Roundy's.
Walgreen is a leader of the U.S. chain drugstore industry and operates
over 2,350 stores nationwide. The Company derived approximately 3% of its
base rental income for the year ended December 31, 1997 from, and
approximately 3% of the Company's future minimum rentals are attributable to,
Walgreen.
Charming Shoppes, Inc. operates, through its subsidiaries, a chain of
women's specialty clothing stores in over 40 states. Its retail properties
operate under the names Fashion Bug and Fashion Bug Plus. The Company derived
approximately 3% of its base rental income for the year ended December 31,
1997 from, and approximately 1% of the Company's future minimum rentals are
attributable to, Charming Shoppes, Inc.
Lease Expirations
The following table shows lease expirations for the next 10 years for
the Company's community shopping centers and wholly-owned free-standing
properties, assuming that none of the tenants exercise renewal options.
December 31, 1997
Gross Lesable Area Annualized Base Rent
------------------ --------------------
Number
Expiration of Leases Square Percent Percent
Year Expiring Footage of Total Amount of Total
- ---------- --------- ------- -------- ------ --------
1998 17 69,450 2.62% $ 463,762 2.78%
1999 5 26,100 .98 172,100 1.03
2000 11 136,630 5.15 942,622 5.66
2001 27 110,614 4.17 919,798 5.52
2002 16 180,390 6.80 963,032 5.78
2003 13 125,092 4.72 592,375 3.56
2004 1 4,800 .18 33,600 .20
2005 2 34,204 1.29 131,714 .79
2006 2 31,204 1.18 155,265 0.93
2007 1 2,000 .09 18,000 0.12
-- ------- ----- ---------- -----
Total 95 720,484 27.18% $4,392,268 26.37%
-- ------- ----- ---------- -----
Leases on the seven Joint Venture Properties are for an initial term
through November 2000. In the event a refinancing is consummated, Borders is
required to enter into a twenty year net lease with a fixed lease rate.
-13-
Item 3. LEGAL PROCEEDINGS
The Company is not presently involved in any litigation nor, to
management's knowledge, is any litigation threatened against the Company,
except for routine litigation arising in the ordinary course of business
which is expected to be covered by the Company's liability insurance.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1997.
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
under the symbol ADC. The following table sets forth the high and low sales
prices of the Company's Common Stock, as reported on the New York Stock
Exchange Composite Tape, and the dividends declared per share of Common Stock
by the Company for each calendar quarter in the last two fiscal years.
Dividends were paid in the periods immediately subsequent to the periods in
which such dividends were declared.
Market Information
- ------------------
Dividends Per
High Low Common Share
---- --- ------------
Quarter Ended
March 31, 1996 $18.250 $14.500 $0.45
June 30, 1996 $18.875 $16.500 $0.45
September 30, 1996 $19.750 $17.500 $0.45
December 31, 1996 $21.500 $18.750 $0.45
March 31, 1997 $22.250 $19.500 $0.45
June 30, 1997 $21.125 $19.000 $0.45
September 30, 1997 $22.063 $19.813 $0.46
December 31, 1997 $21.875 $20.313 $0.46
At December 31, 1997, there were 4,328,980 shares of the Company's
Common Stock issued and outstanding which were held by approximately 245
stockholders of record. The stockholders of record do not reflect persons or
entities who held their shares in nominee or "street" name.
The Company intends to continue to declare quarterly dividends to its
stockholders. However, distributions by the Company are determined by the
Board of Directors and will depend on a number of factors, including the
amount of Funds from Operations, the financial and other condition of its
properties, its capital requirements, the annual distribution requirements
under the provisions of the Code applicable to REITs and such other factors
as the Board of Directors deems relevant.
During the year ended December 31, 1997, there were no sales of
unregistered securities by the Company, except the grant under the Company's
1994 Stock Incentive Plan of 28,955 shares of restricted stock to certain
employees of the Company. Such shares vest in equal annual installments over
a five-year period from the date of the grant, but entitle the holder thereof
to receive dividends from the date of the grant.
-14-
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the
Company and the Agree Predecessors on a historical basis and should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and all of the financial statements and
notes thereto included elsewhere in this Form 10-K. The balance sheet data
for the periods ended December 31, 1993 through December 31, 1997 and
operating data for for each of the periods presented were derived from the
audited financial statements of the Company and the Agree Predecessors.
(In thousands, except per share information)
The Agree
Agree Realty Corporation Predecessors
-----------------------------------------------------------------
Year Year Year April 22, January 1, Year
Ended Ended Ended Through Through Ended
Dec 31, Dec 31, Dec 31, Dec 31, April 21, Dec 31,
Operating Data 1997 1996 1995 1994 1994 1993
- ---------------------------------------------------------------------------------------------------------
Total Revenue $ 18,234 $ 16,291 $ 13,699 $ 9,280 $ 4,080 $ 13,156
-------- -------- -------- -------- -------- --------
Expenses
Property expense (1) 2,785 2,485 2,049 1,245 681 1,872
General and administrative 1,107 1,105 966 668 159 660
Interest 5,552 6,101 4,335 2,972 2,584 8,803
Depreciation and amortization 2,782 2,620 2,317 1,627 680 2,292
-------- -------- -------- -------- -------- --------
Total Expenses 12,226 12,311 9,667 6,512 4,104 13,627
-------- -------- -------- -------- -------- --------
Other Income (Expense) (2) 155 653 -- (375) 85 448
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item and minority interest 6,163 4,633 4,032 2,393 61 (23)
Extraordinary Item - Early
Extinguishment of Debt -- -- -- (2,139) -- --
-------- -------- -------- -------- -------- --------
Income (loss) before Minority Interest 6,163 4,633 4,032 254 61 (23)
Minority Interest 943 899 785 49 -- --
-------- -------- -------- -------- -------- --------
Net Income (Loss) $ 5,220 $ 3,734 $ 3,247 $ 205 $ 61 $ (23)
======== ======== ======== ======== ======== ========
Funds from Operations $ 9,581 $ 7,076 $ 6,389 $ 4,544 -- --
======== ======== ======== ======== ======== ========
Number of Properties 34 32 20 17 17 17
======== ======== ======== ======== ======== ========
Number of Square Feet 3,103 3,068 2,470 2,377 2,377 2,377
======== ======== ======== ======== ======== ========
Per Share Data
- --------------
Net income (3) $ 1.41 $ 1.41 $ 1.23 $ 0.08 -- --
======== ======== ======== ======== ======== ========
Cash dividends $ 1.82 $ 1.80 $ 1.80 $ 1.25 -- --
======== ======== ======== ======== ======== ========
Weighted average of common
shares outstanding 3,695 2,649 2,638 2,638 -- --
======== ======== ======== ======== ======== ========
Balance Sheet Data
Real Estate
(before accumulated depreciation) $142,748 $132,474 $118,360 $ 96,852 $ 96,548
Total Assets $130,492 $121,382 $108,928 $ 89,653 $ 89,835
Total debt, including accrued interest $ 65,419 $ 88,252 $ 73,741 $ 54,431 $ 94,334
<FN>
- ----------
(1) Property expense includes real estate taxes, property maintenance,
insurance, utilities and land lease expense.
(2) Other income (expense) is composed of development fee income, gain on
land sales, equity in net income of unconsolidated entities and
reorganization costs.
(3) Net income per share has been computed by dividing the net income by the
weighted average number of shares of Common Stock outstanding. The per
share amounts shown are presented in accordance with SFAS No. 128
"Earnings per Share". The Company's basic and diluted earnings per share
are the same
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANYALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was established to continue to operate and expand the retail
property business of its predecessors. The Company commenced its operations
on April 22, 1994 with the sale of 2,500,000 shares of common stock in an
additional 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 87.16% interest as of
December 31, 1997. 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 elsewhere in this Form 10-K.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Rental income increased $1,702,000, or 12%, to $16,152,000 in 1997,
compared to $14,450,000 in 1996. The increase was the result of the
development and acquisition of five Properties in 1996.
Operating cost reimbursement, which represents additional rent required
by substantially all of the Company's leases to cover the tenants'
proportionate share of property operating expenses, increased $236,000, or
13%, to $1,997,000 in 1997, compared to $1,761,000 in 1996. Operating cost
reimbursement increased due to the increase in real estate taxes and property
operating expenses from 1996 to 1997, as explained below.
Management fees and other income remained relatively constant at $85,000
in 1997 compared to $81,000 in 1996.
Real estate taxes increased $229,000, or 20%, to $1,398,000 in 1997
compared to $1,169,000 in 1996. The increase is the result of the addition of
new properties.
Property operating expenses (shopping center maintenance, insurance and
utilities) decreased $45,000, or 5%, to $935,000 in 1997 compared $980,000 in
1996. The decrease was the result of decreased snow removal costs of $56,000;
an increase in shopping center maintenance costs of $25,000; a decrease in
utility costs of $6,000 and a decrease in insurance costs of $8,000 in 1997
versus 1996.
-16-
Land lease payments increased $116,000 to $452,000 in 1997 compared to
$336,000 in 1996 as a result of the acquisition of a ground lease of the free
standing Property in Aventura, Florida.
General and administrative expenses remained relatively constant at
$1,107,000 in 1997 compared to $1,105,000 in 1996. General and administrative
expenses as a percentage of rental income decreased from 7.6% for 1996 to
6.9% for 1997.
Depreciation and amortization increased $162,000, or 6%, to $2,782,000 in
1997 compared to $2,620,000 in 1996. The increase was the result of the
completion of five new properties in 1996.
Interest expense decreased $549,000, or 9%, to $5,552,000 in 1997, from
$6,101,000 in 1996. The decrease in interest expense was the result of the
Company using the proceeds of the 1997 Offering to reduce the Company's
indebtedness.
Development fee income decreased $452,000, to $57,000 in 1997, from
$509,000 in 1996. The decrease in development fee income was the result of
the Company substantially completing the development of four Joint Venture
Properties in 1996. Development fee income is not included in the Company's
calculation of Funds from Operations, due to the non-recurring nature of this
type of income.
The Company recognized income of $103,000 on the sale of a parcel of
land in 1997 compared to the recognition of $84,000 of income on the sale of
a parcel of land in 1996.
Equity in net income (loss) of unconsolidated entities decreased $64,000
to ($5,000) in 1997 compared to $59,000 in 1996 as a result of additional
expenses in 1997 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 $1,530,000 as a
result of the foregoing factors.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Rental income increased $2,514,000, or 21%, to $14,450,000 in 1996,
compared to $11,936,000 in 1995. The increase was the result of the
development and acquisition of five Properties in 1996 and the development of
three Properties in the fourth quarter of 1995.
Operating cost reimbursements increased $90,000, or 5%, to $1,761,000 in
1996, compared to $1,671,000 in 1995. Operating cost reimbursements increased
due to the increase in real estate taxes and property operating expenses from
1995 to 1996, as explained below.
Management fees and other income remained relatively constant at $81,000
in 1996 compared $92,000 in 1995.
Real estate taxes increased $49,000, or 4%, to $1,169,000 in 1996
compared to $1,120,000 in 1995. The increase is the result of general
assessment increases relating to the shopping center properties and the
addition of new properties.
-17-
Property operating expenses (shopping center maintenance, insurance and
utilities) increased $109,000, or 12%, to $980,000 in 1996 compared to
$871,000 in 1995. The increase was the result of increased snow removal costs
of $26,000; an increase in shopping center maintenance costs of $95,000; an
increase in utility costs of $8,000 and a decrease in insurance costs of
$20,000 in 1996 versus 1995.
Land lease payments increased $280,000 to $336,000 in 1996 compared to
$56,000 in 1995 as a result of the acquisition of a ground lease of the free
standing Property in Aventura, Florida.
General and administrative expenses increased by $139,000, or 14%, to
$1,105,000 in 1996 compared to $966,000 in 1995. The increase was primarily
the result of an increase in compensation related expenses of $24,000;
increases in state franchise and income taxes of $40,000; additional
administrative expenses in connection with its secured line of credit of
$25,000 and increased expenses in connection with the management of the
Company's properties of $50,000. General and administrative expenses as a
percentage of rental income decreased from 8.1% for 1995 to 7.6% for 1996.
Depreciation and amortization increased $303,000, or 13%, to $2,620,000
in 1996 compared to $2,317,000 in 1995. The increase was the result of the
completion of eight new properties in late 1995 and 1996.
Interest expense increased $1,766,000, or 41%, to $6,101,000 in 1996,
from $4,335,000 in 1995. The increase in interest expense was the result of
the Company financing the development and acquisition of eight new Properties
in late 1995 and 1996.
The Company received $510,000 of development fee income in 1996 in
connection with the development of four Joint Venture Properties. There was
no development fee income in 1995. The above amount was not included in the
Company's calculation of Funds from Operations, due to the non-recurring
nature of this type of income.
The Company recognized income of $85,000 on the sale of a parcel of land
in 1996. There were no land sale gains in 1995.
Equity in net income (loss) of unconsolidated entities represents the
Company's share of the net income of $59,000, from the seven Joint Ventures
formed for the purpose of acquiring and developing the single tenant
properties for Borders. These entities were not in existence during the year
ended December 31, 1995.
The Company's income before minority interest increased $601,000 as a
result of the foregoing factors.
-18-
Funds From Operations
Management considers Funds from Operations ("FFO") to be a supplemental
measure of the Company's operating performance. FFO is defined by the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT") to
mean net income computed in accordance with generally accepted accounting
principals ("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 table illustrates the calculation of FFO for the years
ended December 31, 1997, 1996 and 1995:
Year ended December 31, 1997 1996 1995
- ----------------------- -----------------------------------
Net income before minority interest $6,163,510 $4,633,295 $4,032,381
Depreciation of real estate assets 2,726,066 2,556,603 2,248,720
Amortization of leasing costs 40,504 52,033 58,867
Amortization of stock awards 113,380 82,873 48,750
Depreciation of real estate assets
held in unconsolidated entities 698,141 345,972 --
Gain on sale of assets (103,270) (84,688) --
Development fee income (57,089) (509,673) --
---------- ---------- ----------
Funds from Operations $9,581,242 $7,076,415 $6,388,718
---------- ---------- ----------
Funds from Operations per share $2.21 $2.15 $1.95
---------- ---------- ----------
Weighted average shares and
OP Units outstanding 4,333,121 3,287,434 3,276,144
---------- ---------- ----------
FFO increased $2,505,000, or 35%, for the year ended December 31, 1997,
to $9,581,000. FFO increased $688,000, or 11%, for the year ended December
31, 1996, to $7,076,000. The increase in FFO is primarily the result of the
reduction in interest expense as a result of the completion of the 1997
Offering and the development and acquisition of five Properties in 1996.
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 December 31, 1997, the Company declared a
quarterly dividend of $.46 per share. The dividend was paid on January 6,
1998 to holders of record on December 23, 1997.
-19-
As of December 31, 1997, the Company had total mortgage indebtedness of
$50,954,026 with a weighted average interest rate of 7.55%. Future scheduled
annual maturities of mortgages payable for the years ending December 31 are
as follows: 1998 - $353,024; 1999 - $8,395,468; 2000 - $969,964; 2001 -
$1,046,875; 2002 - $1,130,071. 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 December 31, 1997, $6,865,459
was outstanding under the Credit Facility.
The Company also has in place a $5 million line of credit (the "Line of
Credit"), which matures in September 1998, 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 or 200 basis points in excess of the one-month LIBOR
rate, at the option of the Company. The purpose of the Line of Credit is to
provide working capital to the Company and fund land options and start-up
costs associated with new projects. As of December 31, 1997, $1,775,557 was
outstanding under the Line of Credit.
The Company's two wholly-owned subsidiaries have obtained construction
financing of approximately $6,850,000 to fund the development of two 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 December 31, 1997, $3,844,601 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
arrangement 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 December 31, 1997,
$1,730,490 was outstanding under this arrangement.
In December 1997, the Company completed development of two properties
that added 33,905 square feet to the its portfolio. The properties are
located in Lawrence, Kansas and Waterford, Michigan. The development of these
retail projects is expected to have a positive effect on cash generated by
operating activities and Funds from Operations.
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 1998.
Additional Company funding required for this project is estimated to be
$1,600,000 and will come from the Credit Facility. In addition, the Company
recently announced that, it would develop two additional projects located in
Tulsa, Oklahoma and Pontiac,
-20-
Michigan. These two projects will add approximately 39,000 square feet of
retail space to the Company's portfolio. The budgeted cost of the two
additional projects is $7.4 million. Management expects the development of
these projects 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.
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.
Year 2000 Costs
The Company, like most owners of computer software, will be required
to modify certain portions of its software so that it will function properly
in the year 2000. Maintenance or modification costs will be expensed as
incurred, while the costs of any new software will be capitalized and
amortized over the software's useful life. Management believes these "year
2000" costs will be immaterial.
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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income", and SFAS No. 131 "Disclosures
about segments of an Enterprise and Related Information." These statements
are effective for financial periods beginning after December
-21-
15, 1997 and require comparative information for earlier years to be
restated. Management has not determined the impact, if any, the statements
may have on future financial statement disclosures.
Item 7A QUANTITATIVE AND QUALATATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed in the
Index to Financial Statements and Financial Statement Schedules appearing on
Page F-1 of this Form 10-K and are included in this Form 10-K following page
F-1.
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
During the Company's last two fiscal years, there have been no
changes in the independent accountants nor disagreements with such
accountants as to accounting and financial disclosures of the type required
to be disclosed in this Item 9.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to its Annual
Meeting of Stockholders to be held on May 11, 1998.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the year covered by this Form 10-K with respect to its Annual
Meeting of Stockholders to be held on May 11, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this Form 10-K with respect
to its Annual Meeting of Stockholders to be held on May 11, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this Form 10-K with respect
to its Annual Meeting of Stockholders to be held on May 11, 1998.
-22-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report
(1)(2) The financial statements indicated by Part II,
Item 8, Financial Statements and Supplementary
Data.
(3) 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 Loan Modification Agreement, dated April 22, 1994, by and
among Shawano Plaza, Plymouth Commons, Chippewa Commons and
Nationwide Life Insurance Company (incorporated by reference
to Exhibit 10.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (the 1996 "Form 10-K"))
10.2 Loan Modification Agreement, dated April 22, 1994, by and
among Rapids Associates, Marshall Plaza Phase Two, Petoskey
Town Center, Charlevoix Commons and Nationwide Life
Insurance Company (incorporated by reference to Exhibit 10.2
to the 1996 Form 10-K
10.3 Modification Agreement, dated as of March 28, 1994, by and
between North Lakeland Plaza and the Travelers Indemnity
Company (incorporated by reference to Exhibit 4.2 to Agree
S-11)
10.4 Loan Agreement, dated August 19, 1992, by and among Richard
Agree, Edward Rosenberg and Michigan National Bank
(incorporated by reference to Exhibit 4.3 to Agree S-11)
10.5 Loan Agreement dated March 7, 1990, and Modification of
Mortgage and Security Agreement, dated July 10, 1990, by
and between Winter Garden Plaza and American United Life
Insurance Company (incorporated by reference to Exhibit 4.4
to Agree S-11)
10.6 First Amended and Restated Agreement of Limited Partnership
of Agree Limited Partnership, dated as of April 22, 1994, by
and among the Company, Richard Agree, Edward Rosenberg and
Joel Weiner (incorporated by reference to Exhibit 10.6 to
the 1996 Form 10-K)
10.7 Amended and Restated Registration Rights Agreement, dated
July 8, 1994 by and among the Company, Richard Agree, Edward
Rosenberg and Joel Weiner (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 (the "1994 Form 10-K"))
10.8 + 1994 Stock Incentive Plan of the Company (incorporated by
reference to Exhibit 10.8 to the 1996 Form 10-K)
10.9 Management Agreement, dated April 22, 1994, by and among Mt
Pleasant Shopping Center, Angola Plaza, Shiloh Plaza and the
Company (incorporated by reference to Exhibit 10.9 to the
1996 Form 10-K)
-23-
10.10 Contribution Agreement, dated as of April 21, 1994, by and
among the Company, Richard Agree, Edward Rosenberg and the
co-partnerships named therein (incorporated by reference to
Exhibit 10.10 to the 1996 Form 10-K)
10.11 + Employment Agreement, dated April 22, 1994, by and
between the Company and Richard Agree (incorporated by
reference to Exhibit 10.11 to the 1996 Form 10-K)
10.12 + Employment Agreement, dated April 22, 1994, by and between
the Company and Edward Rosenberg (incorporated by reference
to Exhibit 10.12 to the 1996 Form 10-K)
10.13 + Agree Realty Corporation Profit Sharing Plan (incorporated by
reference to Exhibit 10.13 to the 1996 Form 10-K)
10.14 Business Loan Agreement by and between Agree Limited
Partnership and Michigan National Bank (incorporated by
reference to Exhibit 10.8 to the 1994 10-K)
10.15 Business Loan Agreement, dated as of September 21, 1995,
by and between Agree Limited Partnership and Michigan
National Bank (incorporated by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (the "1995 10-K"))
10.16 Line of Credit Agreement by and among Agree Limited
Partnership, the Company, the lenders parties thereto, and
Michigan National Bank as Agent (incorporated by reference
to Exhibit 10.10 to the 1995 10-K)
10.17 First amendment to $50 million line-of-credit agreement dated
August 7, 1997 among Agree Realty Corporation and Michigan
National Bank, as agent (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
period ending September 30, 1997 (the September
1997 "Form 10-Q"))
10.18 First amendment to $5 million business loan agreement dated
September 21, 1997 between Agree Limited Partnership and Michigan
National Bank (incorporated by reference to Exhibit 10.2 to the
September 1997 Form 10-Q)
10.19 * Second amendment to $50 million line-of-credit agreement
dated November 17, 1997 among Agree Realty Corporation and
Michigan National Bank, as agent
27.1 * Financial Data Schedule
- -----------------------------------------------------------------------------
* Filed herewith
+ Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ending December 31, 1997.
-24-
SIGNATURES
PURSUANT to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AGREE REALTY CORPORATION
By: /s/ Richard Agree
-----------------------------
Name: Richard Agree
President and Chairman of the
Board of Directors
Date: March 23, 1998
PURSUANT to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 23rd day of March 1998.
By: /s/Richard Agree By: /s/ Farris G. Kalil
----------------------------- ---------------------
Richard Agree Farris G. Kalil
President and Chairman of the Director
Board of Directors
(Principal Executive Officer)
By: /s/ Michael Rotchford
---------------------
Michael Rotchford
Director
By: /s/Kenneth R. Howe
-----------------------------
Kenneth R. Howe
Vice President, Finance By: /s/ Ellis G. Wachs
and Secretary ---------------------
(Principal Financial and Ellis G. Wachs
Accounting Officer) Director
By: /s/ Gene Silverman
---------------------
Gene Silverman
By: /s/ Edward Rosenberg Director
-----------------------------
Edward Rosenberg
Director
-25-
Agree Realty Corporation
Index
- -----------------------------------------------------------------------------
Page
----
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Financial Statements F-9
Schedule III - Real Estate and Accumulated Depreciation F-20
F - 1
[ Letterhead of BDO Seidman, LLP ]
Report of Independent Certified Public Accountants
To the Board of Directors and Owners of
Agree Realty Corporation
Farmington Hills, Michigan
We have audited the accompanying consolidated balance sheets of Agree Realty
Corporation (the "Company") as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. We have also
audited the schedule listed in the accompanying index. These financial
statements and the schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and the schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and the
schedule. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Agree
Realty Corporation at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting
principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
February 11, 1998
F - 2
Agree Realty Corporation
Consolidated Balance Sheets
- -----------------------------------------------------------------------------
December 31, 1997 1996
- ----------------------------------------------------------------------------
Assets
Real Estate Investments (Notes 3, 4 and 5)
Land $ 29,952,532 $ 25,183,667
Buildings 112,307,266 107,204,583
Property under development 488,651 85,993
------------- -------------
142,748,449 132,474,243
Less accumulated depreciation (20,043,235) (17,339,353)
------------- -------------
Net Real Estate Investments 122,705,214 115,134,890
Cash and Cash Equivalents 1,785,968 294,389
Accounts Receivable - Tenants 473,918 638,735
Restricted Asset - Cash Held in Escrow 276,564 266,771
Investments In and Advances To
Unconsolidated Entities 1,810,241 1,820,605
Unamortized Deferred Expenses
Financing costs 2,133,426 2,398,377
Leasing costs 236,151 141,757
Other Assets 1,070,022 686,346
------------- -------------
$ 130,491,504 $ 121,381,870
============= =============
<FN>
See accompanying notes to consolidated financial statements.
F - 3
Agree Realty Corporation
Consolidated Balance Sheets
- -----------------------------------------------------------------------------
December 31, 1997 1996
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Mortgages Payable (Note 3) $ 50,954,026 $ 53,663,999
Construction Loans (Note 4) 5,575,091 10,616,936
Notes Payable (Note 5) 8,641,016 23,616,382
Dividends and Distributions Payable (Note 6) 2,284,792 1,479,345
Accrued Interest Payable 248,742 354,988
Accounts Payable
Operating 602,862 691,981
Capital expenditures 1,516,379 596,794
Tenant Deposits 51,240 50,394
------------- -------------
Total Liabilities 69,874,148 91,070,819
------------- -------------
Minority Interest (Note 7) 5,651,347 5,869,014
------------- -------------
Stockholders' Equity (Notes 6 and 8)
Common stock, $.0001 par value; 20,000,000
shares authorized; 4,328,980 and 2,649,475
shares issued and outstanding 433 265
Additional paid-in capital 62,503,487 30,060,908
Deficit (7,537,911) (5,619,136)
------------- -------------
Total Stockholders' Equity 54,966,009 24,442,037
------------- -------------
$ 130,491,504 $ 121,381,870
============= =============
<FN>
See accompanying notes to consolidated financial statements.
F - 4
Agree Realty Corporation
Consolidated Statements of Income
- -----------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------
Revenues
Rental income $ 16,152,240 $ 14,450,035 $ 11,935,523
Operating cost reimbursement 1,997,087 1,760,681 1,671,359
Management fees and other (Note 9) 84,840 80,752 91,714
------------ ------------ ------------
Total Revenues 18,234,167 16,291,468 13,698,596
------------ ------------ ------------
Operating Expenses
Real estate taxes 1,398,120 1,169,308 1,120,515
Property operating expenses 934,584 979,606 871,167
Land lease payments 452,106 336,083 56,000
General and administrative 1,106,816 1,104,861 966,464
Depreciation and amortization 2,782,083 2,620,274 2,316,862
------------ ------------ ------------
Total Operating Expenses 6,673,709 6,210,132 5,331,008
------------ ------------ ------------
Income From Operations 11,560,458 10,081,336 8,367,588
------------ ------------ ------------
Other Income (Expense)
Interest expense, net (5,551,734) (6,101,106) (4,335,207)
Gain on land sales 103,270 84,688 --
Development fee income 57,089 509,673 --
Equity in net income (loss) of
unconsolidated entities (5,573) 58,704 --
------------ ------------ ------------
Total Other Expense (5,396,948) (5,448,041) (4,335,207)
------------ ------------ ------------
Income Before Minority Interest 6,163,510 4,633,295 4,032,381
Minority Interest 943,287 899,323 785,105
------------ ------------ ------------
Net Income $ 5,220,223 $ 3,733,972 $ 3,247,276
============ ============ ============
Earnings Per Share (Note 2) $ 1.41 $ 1.41 $ 1.23
============ ============ ============
Weighted Average Number of Common
Shares Outstanding 3,695,162 2,649,475 2,638,185
============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
F - 5
Agree Realty Corporation
Consolidated Statements of Stockholders' Equity
- -----------------------------------------------------------------------------
Common Stock Additional
------------------------- Paid-In
Shares Amount Capital Deficit
- ----------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 2,638,185 $ 264 $ 29,890,292 $ (3,082,597)
Dividends declared for the year ended
December 31, 1995, $1.80 per share -- -- -- (4,748,733)
Net income for the year ended December 31, 1995 -- -- -- 3,247,276
--------- ------------ ------------ ------------
Balance, December 31, 1995 2,638,185 264 29,890,292 (4,584,054)
Issuance of shares under the Stock Incentive Plan 11,290 1 170,616 --
Dividends declared for the year ended December 31, 1996,
$1.80 per share -- -- -- (4,769,054)
Net income for the year ended December 31, 1996 -- -- -- 3,733,972
--------- ------------ ------------ ------------
Balance, December 31, 1996 2,649,475 265 30,060,908 (5,619,136)
Issuance of shares under the Stock Incentive Plan 28,955 3 618,910 --
Issuance of common stock 1,653,850 165 31,888,031 --
Shares retired under the Stock Incentive Plan (3,300) -- (64,362) --
Dividends declared for the year ended December 31, 1997,
$1.82 per share -- -- -- (7,138,998)
Net income for the year ended December 31, 1997 -- -- -- 5,220,223
--------- ------------ ------------ ------------
Balance, December 31, 1997 4,328,980 $ 433 $ 62,503,487 $ (7,537,911)
========= ============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
F - 6
Agree Realty Corporation
Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 5,220,223 $ 3,733,972 $ 3,247,276
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 2,709,177 2,523,621 2,252,642
Amortization 483,267 505,089 311,415
Equity in net (income) loss of unconsolidated entities 5,573 (58,704) --
Minority interests 943,287 899,323 785,105
Gain on land sales (103,270) (84,688) --
Decrease (increase) in accounts receivable 164,817 (12,455) (64,629)
Decrease (increase) in other assets 8,042 677 (133,728)
Increase (decrease) in accounts payable (89,119) 95,068 197,406
Increase (decrease) in accrued interest (106,246) 165,732 9,592
Increase (decrease) in tenant deposits 846 (3,083) (5,484)
------------ ------------ ------------
Net Cash Provided By Operating Activities 9,236,597 7,764,552 6,599,595
------------ ------------ ------------
Cash Flows From Investing Activities
Acquisition of real estate investments
(including capitalized interest of $117,892
in 1997, $78,703 in 1996 and $59,752 in 1995) (8,677,691) (13,577,181) (19,870,270)
Proceeds from sale of land 148,270 144,688 --
Investments in and advances to
unconsolidated entities - net 4,791 (1,761,901) --
Proceeds from sale of marketable securities -- -- 300,188
------------ ------------ ------------
Net Cash Used In Investing Activities (8,524,630) (15,194,394) (19,570,082)
------------ ------------ ------------
<FN>
See accompanying notes to consolidated financial statements.
F - 7
Agree Realty Corporation
Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net proceeds from the issuance of common stock 31,888,196 -- --
Payment on line-of-credit (31,250,375) -- --
Line-of-credit proceeds 16,275,009 21,638,574 1,977,808
Payment of construction loans (9,140,888) (11,861,006) --
Dividends and limited partners' distributions paid (7,494,505) (5,912,300) (5,897,059)
Proceeds from construction loans 4,099,043 4,874,157 17,603,785
Payments of mortgages payable (2,709,973) (306,526) (280,522)
Payments of payables for capital expenditures (596,794) (1,637,861) --
Payments for financing costs (145,410) (293,148) (765,535)
Payments of leasing costs (134,898) (53,764) (27,524)
Increase in escrow deposits (9,793) (7,567) (16,200)
------------ ------------ ------------
Net Cash Provided By Financing Activities 779,612 6,440,559 12,594,753
------------ ------------ ------------
Net Increase (Decrease) In Cash
and Cash Equivalents 1,491,579 (989,283) (375,734)
Cash and Cash Equivalents, beginning of year 294,389 1,283,672 1,659,406
------------ ------------ ------------
Cash and Cash Equivalents, end of year $ 1,785,968 $ 294,389 $ 1,283,672
============ ============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 5,313,000 $ 5,551,000 $ 4,117,000
============ ============ ============
Supplemental Disclosure of Non-Cash Transactions
Dividends and limited partners' distributions
declared and unpaid $ 2,284,792 $ 1,479,345 $ 1,474,265
Real estate investments financed with accounts
payable $ 1,516,379 $ 596,794 $ 1,637,861
Shares issued under Stock Incentive Plan $ 618,913 $ 170,617 $ --
Shares retired under Stock Incentive Plan $ 64,362 $ -- $ --
============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
F - 8
Agree Realty Corporation
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
1. The Company
Agree Realty Corporation (the "Company") is a self-administered, self-managed
real estate investment trust which develops, acquires, owns and operates
properties which are primarily leased to national and regional retail
companies under net leases. At December 31, 1997, the Company's properties
are comprised of thirteen shopping centers and fourteen single tenant retail
facilities located in eleven states. In addition, the Company owns joint
venture interests ranging from 8% to 20% in seven free-standing retail
properties. During the year ended December 31, 1997, approximately 93% of the
Company's base rental revenues were received from national and regional
tenants under long-term leases, including approximately 31% from Kmart
Corporation and 26% from Borders, Inc.
2. Summary of
Significant
Accounting
Policies
Principles of Consolidation
The consolidated financial statements of Agree Realty Corporation include the
accounts of the Company, its majority-owned partnership, Agree Limited
Partnership (the "Operating Partnership"), and its wholly-owned subsidiaries.
The Company controlled, as the sole general partner, 87.16% and 80.59% of the
Operating Partnership as of December 31, 1997 and 1996, respectively. All
material intercompany accounts and transactions are eliminated.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect (1) the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of the
financial statements, and (2) revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F - 9
Fair Values of Financial Instruments
The carrying amounts of the Company's financial instruments, which consist of
cash, cash equivalents, receivables, notes payable, accounts payable and
long-term debt, approximate their fair values.
Valuation of Long-Lived Assets
Long-lived assets such as real estate investments are evaluated for
impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. No
impairment loss recognition has been required through December 31, 1997.
Real Estate Investments
Real estate assets are stated at cost less accumulated depreciation. All
costs related to planning, development and construction of buildings prior to
the date they become operational, including interest and real estate taxes
during the construction period, are capitalized for financial reporting
purposes.
Subsequent to completion of construction, expenditures for property
maintenance are charged to operations as incurred, while significant
renovations are capitalized. Depreciation of the buildings is recorded on the
straight-line method using an estimated useful life of forty years.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market accounts.
Accounts Receivable - Tenants
Accounts receivable from tenants reflect primarily reimbursement of specified
common area maintenance costs. No allowance for uncollectible accounts has
been provided based on past collection results.
F - 10
Restricted Assets
These amounts represent funds on deposit restricted by certain lenders
pursuant to agreements entered into by the Company. The funds held in escrow
are used to pay capital-related costs and are released to the Company upon
inspection and leasing of related property to tenants and are used to pay
real estate taxes for one shopping center in Florida.
Investments in Unconsolidated Entities
The Company uses the equity method of accounting for investments in non-
majority owned entities where the Company has the ability to exercise
significant influence over operating and financial policies.
The Company's initial investment is recorded at cost, and the carrying amount
of the investment is (a) increased by the Company's share of the investees'
earnings (as defined in the limited liability company agreements), and (b)
reduced by distributions paid from the investees to the Company.
Unamortized Deferred Expenses
Deferred expenses are stated net of total accumulated amortization. The
nature and treatment of these capitalized costs are as follows: (1) financing
costs, consisting of expenditures incurred to obtain long-term financing, are
being amortized using the interest method over the term of the related loan,
and (2) leasing costs, which are amortized on a straight-line basis over the
term of the related lease.
F - 11
Accounts Payable - Capital Expenditures
Included in accounts payable are amounts related to the construction of
buildings. Due to the nature of these expenditures, they are reflected in the
statements of cash flows as a financing activity.
Minority Interest
This amount represents the limited partners' interest ("OP Units") of 12.84%
and 19.41% in the Operating Partnership as of December 31, 1997 and 1996,
respectively, which is convertible into 637,959 shares of the Company's
common stock.
Revenue Recognition
Base rental income attributable to leases is recorded when due from tenants.
Certain leases provide for additional rents based on tenants' sales volume.
These percentage rents are reflected based on the tenants' fiscal year;
however, such amounts earned by the Company historically have not been
material. In addition, leases for certain tenants contain rent escalations
and/or free rent during the first several months of the lease term; however,
such amounts are not material.
The Company acts as the construction developer on certain properties. Related
development fee income is recognized upon completion of construction.
Operating Cost Reimbursement
Substantially all of the Company's leases contain provisions requiring
tenants to pay as additional rent a proportionate share of operating expenses
such as real estate taxes, repairs and maintenance, insurance, etc. The
related revenue from tenant billings is recognized in the same period the
expense is recorded.
F - 12
Income Taxes
The Company has elected to be taxed as a real estate investment trust
("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986,
as amended. A REIT generally will not be subject to federal income taxation
on that portion of its income that qualifies as REIT taxable income to the
extent that it distributes at least 95 percent of its taxable income to its
stockholders and complies with certain other requirements. Accordingly, no
provision has been made for federal income taxes for the Company in the
accompanying consolidated financial statements.
The aggregate federal income tax basis of Real Estate Investments is
approximately $11.3 million less than the financial statement basis.
Earnings Per Share
Earnings per share has been computed by dividing 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"; the amounts of the Company's "basic" and "diluted" earnings per share
(as defined in SFAS No. 128) are the same.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." These statements are
effective for financial periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated. Management has not
determined the impact, if any, these statements may have on future financial
statement disclosures.
F - 13
3. Mortgages
Payable
Mortgages payable consisted of the following:
December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Note payable in monthly installments of interest only at 6.875% per annum
until May 1999, at which time the Company can elect to either pay the
amount in full or accept the then prevailing interest rate and continue
making principal and interest payments based on a 22-year amortization
schedule, with the remaining unpaid principal and accrued unpaid
interest then due November 2005, collateralized by related real estate
and tenants'
leases $ 33,600,000 $ 33,600,000
Note payable in monthly installments of $98,477 including interest at 9.75%
per annum, collater- alized by related real estate and tenants'
leases, final balloon installment due July 2010 9,503,286 9,698,073
Note payable in monthly installments of $62,881 including interest at 7.75%
per annum, collater- alized by related real estate and tenants' leases,
final balloon installment due March 1999 7,850,740 7,990,926
Other, repaid during 1997 -- 2,375,000
------------ ------------
Total $ 50,954,026 $ 53,663,999
============ ============
Future scheduled annual maturities of mortgages payable for years ending
December 31, are as follows: 1998 - $353,024; 1999 - $8,395,468; 2000 -
$969,964; 2001 - $1,046,875; 2002 - $1,130,071 and $39,058,624 thereafter.
(These maturities assume that the $33,600,000 mortgage will be extended
beyond May 1999.)
F - 14
4. Construction
Loans
During 1997, the Company's wholly-owned subsidiaries obtained construction
financing totalling approximately $6,850,000, which is available to fund the
development of two retail properties. Quarterly interest payments are based
on a weighted average interest rate based on LIBOR. The notes mature on
October 16, 2002 and are secured by the related land and buildings. As of
December 31, 1997, the Company owed $3,844,601 for these construction loans.
The Company has received funding from an unaffiliated third party for certain
of its single tenant retail properties. Borrowings under this arrangement
bear no interest and are required to be repaid within sixty (60) days after
the date the construction has been completed. The advances are secured by the
specific land and buildings being developed. As of December 31, 1997 and
1996, $1,730,490 and $10,616,936 was outstanding under this agreement,
respectively.
5. Notes Payable
The Operating Partnership has entered into a $50 million line-of-credit
agreement which is guaranteed by the Company. The agreement expires on August
7, 2000 and can be extended, at the option of the Company, for an additional
three years. Advances under this credit facility bear interest within a range
of 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 specific properties. At December
31, 1997 and 1996, $6,865,459 and $20,746,937 was outstanding under this
facility, respectively.
In addition, the Company maintains a $5,000,000 line-of-credit agreement with
a bank which expires on September 21, 1998. Payments of interest only, at the
bank's prime rate, or 200 basis points in excess of the one-month LIBOR rate,
at the option of the Company, are required monthly. At December 31, 1997 and
1996, $1,775,557 and $2,869,445 was outstanding under this agreement,
respectively.
F - 15
6. Dividends and
Distributions
Payable
On December 8, 1997, the Company declared a dividend of $.46 per share for
the quarter ended December 31, 1997; approximately 34 percent of the dividend
represented a return of capital. The holders of OP Units were entitled to an
equal distribution per OP Unit held as of December 31, 1997. The dividends
and distributions payable are recorded as liabilities in the Company's
balance sheet at December 31, 1997. The dividend has been reflected as a
reduction of stockholders' equity and the distribution has been reflected as
a reduction of the limited partners' minority interest. These amounts were
paid on January 6, 1998.
7. Minority
Interest
The following summarizes the changes in minority interest since January 1,
1996:
Minority interest at January 1, 1996 $ 6,118,017
Minority interests' share of income for
the year ended December 31, 1996 899,323
Distributions for the year ended December 31, 1996 (1,148,326)
-----------
Minority Interest at December 31, 1996 5,869,014
Minority interests' share of income for the year
ended December 31, 1997 943,287
Distributions for the year ended December 31, 1997 (1,160,954)
-----------
Minority Interest at December 31, 1997 $ 5,651,347
===========
8. Issuance of
Common Stock
During May and June 1997, the Company sold 1,653,850 shares of common stock.
The cash proceeds (net of underwriting fees and related issuance costs) to
the Company from the stock issuance sales were approximately $31.9 million,
which was used to reduce outstanding indebtedness.
9. Related Party
Transactions
The Company currently manages certain additional properties which are owned
by certain officers and directors of the Company, but are not included in the
consolidated financial statements. Income related to these activities is
reflected as "Management fees and other" in the accompanying consolidated
statements of income.
F - 16
10. Stock Incentive
Plan
The Company has established a stock incentive plan (the "Plan") under which
29,400 options were granted in April 1994. The options, which have an
exercise price equal to the initial public offering price ($19.50/share), can
be exercised in increments of 25% on each anniversary of the date of the
grant. A total of 22,050 and 14,700 of the options were exercisable at
December 31, 1997 and 1996, respectively. No options were exercised during
either 1997 or 1996.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." However, since no compensation
cost would have been recognized pursuant to SFAS No. 123 under the Plan in
either 1997 or 1996, there is no effect on the Company's net income for these
years.
11. Restricted Stock
As part of the Company's stock incentive plan, 12,500 restricted common
shares were granted to certain employees in April 1994; an additional 11,290
shares were granted during 1996 and 28,955 shares were granted and 3,300
shares were forfeited during 1997. The restricted shares vest in increments
of 20% per year for five years. The Company recorded related compensation
expense of $113,380, $82,873 and $48,750 in 1997, 1996 and 1995,
respectively. Plan participants are entitled to receive the quarterly
dividends on their respective restricted shares.
12. Profit-Sharing
Plan
The Company has a discretionary profit-sharing plan whereby it contributes to
the plan such amounts as the Board of Directors of the Company determines.
The participants in the plan cannot make any contributions to the plan.
Contributions to the plan are allocated to the employees based on their
percentage of compensation to the total compensation of all employees for the
plan year. Participants in the plan become fully vested after six years of
service. No contributions were made to the plan in 1997, 1996 or 1995.
13. Rental Income
The Company leases premises in its properties to tenants pursuant to lease
agreements which provide for terms ranging generally from 5 to 25 years. The
majority of leases provide for additional rents based on tenants' sales
volume; however, such amounts earned by Agree historically have not been
material.
F - 17
As of December 31, 1997, the future minimum revenues for the next five years
from rental property under the terms of all noncancellable tenant leases,
assuming no new or renegotiated leases are executed for such premises, are as
follows (in thousands):
1998 $ 16,503
1999 16,254
2000 15,776
2001 14,541
2002 13,611
Thereafter 142,972
--------
Total $219,657
========
Of the future minimum rentals, approximately 38% of the above total is
attributable to Kmart Corporation and approximately 31% is attributable to
Borders, Inc. Kmart's principal business is general merchandise retailing
through a chain of discount department stores, and Borders is a major
operator of book superstores in the United States.
14. Lease
Commitments
The Company has entered into certain land lease agreements for four of its
properties. As of December 31, 1997, approximate future annual lease
commitments under these agreements are as follows:
Year Ended December 31,
- ---------------------------------------
1998 $ 547,860
1999 547,860
2000 583,610
2001 586,860
2002 589,649
Thereafter 7,758,988
=========
F - 18
Agree Realty Corporation
Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------------
15. Interim Results
(Unaudited)
The following summary represents the unaudited results of operations of the
Company, expressed in thousands except per share amounts, for the periods
from January 1, 1996 through December 31, 1997:
Three Months Ended
- -----------------------------------------------------------------------------------
1997 March 31, June 30, September 30, December 31,
- -----------------------------------------------------------------------------------
Revenues $4,555 $4,476 $4,502 $4,701
====== ====== ====== ======
Income before
minority interest $1,138 $1,479 $1,672 $1,874
Minority interest 219 247 215 262
------ ------ ------ ------
Net Income $ 919 $1,232 $1,457 $1,612
====== ====== ====== ======
Net Income Per Share $ .34 $ .36 $ .34 $ .37
====== ====== ====== ======
Three Months Ended
- -----------------------------------------------------------------------------------
1996 March 31, June 30, September 30, December 31,
- -----------------------------------------------------------------------------------
Revenues $3,866 $4,026 $4,017 $4,382
====== ====== ====== ======
Income before
minority interest $1,010 $1,064 $ 845 $1,714
Minority interest 196 207 164 332
------ ------ ------ ------
Net Income $ 814 $ 857 $ 681 $1,382
====== ====== ====== ======
Net Income Per Share $ .31 $ .32 $ .26 $ .52
====== ====== ====== ======
F - 19
AGREE REALTY CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
- -----------------------------------------------------------------------------
Column A Column B Column C Column D
- -------- ------------ --------------------------- -------------
Costs
Capitalized
Subsequent to
Initial Cost Acquisition
--------------------------- -------------
Building and Building and
Description Encumbrance Land Improvements Improvements
- ------------------------------------------------------------------------------------
Completed Retail Facilities
Borman Center, MI $ -- $ 550,000 $ 562,404 $ 1,066,115
Capital Plaza, KY -- 7,379 2,240,607 514,580
Charlevoix Commons, MI 3,981,600 305,000 5,152,992 26,718
Chippewa Commons, WI 5,103,840 1,197,150 6,367,560 164,783
Grayling Plaza, MI -- 200,000 1,778,657 --
Iron Mountain Plaza, MI -- 677,820 7,014,996 372,627
Ironwood Commons, MI -- 167,500 8,181,306 230,953
Marshall Plaza Two, MI 3,407,040 -- 4,662,230 10,764
North Lakeland Plaza, FL 7,850,740 1,641,879 6,364,379 342,435
Oscoda Plaza, MI -- 183,295 1,872,854 --
Perrysburg Plaza, OH -- 21,835 2,291,651 31,000
Petoskey Town Center, MI 5,577,600 875,000 8,895,289 5,985
Plymouth Commons, WI 4,811,520 535,460 5,667,504 170,476
Rapids Associates, MI 5,120,640 705,000 6,854,790 27,767
Shawano Plaza, WI 5,597,760 190,000 9,133,934 37,098
West Frankfort Plaza, IL -- 8,002 784,077 15,299
Winter Garden Plaza, FL 9,503,286 1,631,448 8,459,024 --
Omaha Store, NE 2,000,000 1,705,619 2,053,615 2,152
Wichita Store, KS 2,000,000 1,039,195 1,690,644 24,666
Santa Barbara Store, CA 1,296,459 2,355,423 3,240,557 2,650
Column A Column E Column F Column G Column H
- -------- --------------------------------------- ------------ ----------- ------------
Life
on Which
Gross Amount at Which Carried Depreciation
at Close of Period in Latest
--------------------------------------- Income
Building and Accumulated Date of Statement
Description Land Improvements Total Depreciation Construction is Computed
- -------------------------------------------------------------------------------------------------------------
Completed Retail Facilities
Borman Center, MI $ 550,000 $ 1,628,519 $ 2,178,519 $ 918,975 1977 40 Years
Capital Plaza, KY 7,379 2,755,187 2,762,566 1,134,824 1978 40 Years
Charlevoix Commons, MI 305,000 5,179,710 5,484,710 930,463 1991 40 Years
Chippewa Commons, WI 1,197,150 6,532,343 7,729,493 1,218,622 1990 40 Years
Grayling Plaza, MI 200,000 1,778,657 1,978,657 627,740 1984 40 Years
Iron Mountain Plaza, MI 677,820 7,387,623 8,065,443 1,166,402 1991 40 Years
Ironwood Commons, MI 167,500 8,412,259 8,579,759 1,366,641 1991 40 Years
Marshall Plaza Two, MI -- 4,672,994 4,672,994 794,786 1990 40 Years
North Lakeland Plaza, FL 1,641,879 6,706,814 8,348,693 1,838,390 1987 40 Years
Oscoda Plaza, MI 183,295 1,872,854 2,056,149 654,206 1984 40 Years
Perrysburg Plaza, OH 21,835 2,322,651 2,344,486 816,595 1983 40 Years
Petoskey Town Center, MI 875,000 8,901,274 9,776,274 1,550,209 1990 40 Years
Plymouth Commons, WI 535,460 5,837,980 6,373,440 1,042,759 1990 40 Years
Rapids Associates, MI 705,000 6,882,557 7,587,557 1,239,200 1990 40 Years
Shawano Plaza, WI 190,000 9,171,032 9,361,032 1,741,049 1990 40 Years
West Frankfort Plaza, IL 8,002 799,376 807,378 310,534 1982 40 Years
Winter Garden Plaza, FL 1,631,448 8,459,024 10,090,472 1,899,800 1988 40 Years
Omaha Store, NE 1,705,619 2,055,767 3,761,386 109,206 1995 40 Years
Wichita Store, KS 1,039,195 1,715,310 2,754,505 91,049 1995 40 Years
Santa Barbara Store, CA 2,355,423 3,243,207 5,598,630 172,287 1995 40 Years
F - 20
AGREE REALTY CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
- -----------------------------------------------------------------------------
Column A Column B Column C Column D
- -------- -------- ------------------------ ------------
Costs
Capitalized
Subsequent to
Initial Cost Acquisition
------------------------ -----------
Building and Building and
Description Encumbrance Land Improvements Improvements
- ----------- ----------- ---- ------------ ------------
Monroeville, PA -- 6,332,158 2,249,724 --
Norman, OK -- 879,562 1,626,501 --
Columbus, OH 1,730,490 826,000 2,336,791 --
Aventura, FL -- -- 3,173,121 --
Boyton Beach, FL -- 3,103,942 2,043,122 --
Lawrence, KS 2,116,551 -- 3,000,000 --
Waterford, MI -- 971,009 1,562,869 --
----------- ---------- ----------- ----------
Sub Total 60,097,526 26,109,676 109,261,198 3,046,068
----------- ---------- ----------- ----------
Retail Facilities
Under Development
Chesterfield Township, MI -- 1,350,590 191,758 --
Grand Blanc, MI -- 298,076 46,825 --
Pontiac, MI -- 1,144,190 83,812 --
Rochester, MI -- -- 135,215 --
Tulsa, OK 1,728,050 1,050,000 31,041 --
----------- ---------- ----------- ----------
1,728,050 3,842,856 488,651 --
----------- ---------- ----------- ----------
Total $ 61,825,576 $ 29,952,532 $109,749,849 $ 3,046,068
=========== ========== =========== ==========
Column E Column F Column G Column H
- ------------------------------------------ -------- ------------- -------------
Life
on Which
Depreciation
Gross Amount at Which Carried in Latest
at Close of Period Income
- ------------------------------------------
Building and Accumulated Date of Statement
Land Improvements Total Depreciation Construction is Computed
---- ------------ ----- ------------ ------------ -----------
6,332,158 2,249,724 8,581,882 63,021 1996 40 Years
879,562 1,626,501 2,506,063 50,634 1996 40 Years
826,000 2,336,791 3,162,791 111,967 1996 40 Years
-- 3,173,121 3,173,121 135,519 1996 40 Years
3,103,942 2,043,122 5,147,064 55,147 1996 40 Years
-- 3,000,000 3,000,000 3,210 1997 40 Years
971,009 1,562,869 2,533,878 -- 1997 40 Years
- ------------ ---------- ----------- ---------- -------- ---------
26,109,676 112,307,266 138,416,942 20,043,235
----------- ---------- ----------- ----------
1,350,590 191,758 1,542,348 -- N/A N/A
298,076 46,825 344,901 -- N/A N/A
1,144,190 83,812 1,228,002 -- N/A N/A
-- 135,215 135,215 -- N/A N/A
1,050,000 31,041 1,081,041 -- N/A N/A
------------ ---------- ----------- ---------- -------- --------
3,842,856 488,651 4,331,507 --
=========== ========== =========== ==========
$ 29,952,532 $112,795,917 $142,748,449 $ 20,043,235
F-21
AGREE REALTY CORPORATION
NOTES TO SCHEDULE III
DECEMBER 31, 1997
- -----------------------------------------------------------------------------
1) Reconciliation of Real Estate Properties
The following table reconciles the Real Estate Properties from January
1, 1995 to December 31, 1997:
1997 1996 1995
---- ---- ----
Balance at January 1 $ 132,474,243 $ 118,360,268 $ 96,852,137
Construction costs 10,319,206 14,173,975 21,508,131
Sales (45,000) (60,000) --
------------- ------------- -------------
Balance at December 31 $ 142,748,449 $ 132,474,243 $ 118,360,268
============= ============= =============
2) Reconciliation of Accumulated Depreciation
The following table reconciles the accumulated depreciation from
January 1, 1995 to December 31, 1997:
1997 1996 1995
---- ---- ----
Balance at January 1 $ 17,339,353 $ 14,792,193 $ 12,548,826
Current year depreciation expense 2,703,882 2,547,160 2,243,367
------------- ------------- -------------
Balance at December 31 $ 20,043,235 $ 17,339,353 $ 14,792,193
============= ============= =============
3) Tax Basis of Buildings and Improvements
The aggregate cost of Building and Improvements for federal income tax
purposes is equal to the cost basis used for financial statement
purposes.
F - 22