Agree Realty Corporation
Reviewed Financial Statements
and Supplemental Material
Nine Months Ended September 30, 1999 and 1998
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 1-12928
Agree Realty Corporation
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(Exact name of registrant as specified in its charter)
Maryland 38-3148187
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31850 Northwestern Highway, Farmington Hills, Michigan 48334
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, included area code: (248) 737-4190
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes No
|X| |_|
4,364,867 Shares of Common Stock, $.0001 par value, were outstanding as of
November 1, 1999
Agree Realty Corporation
Form 10-Q
Index
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Part I: Financial Information Page
Item 1. Interim Consolidated Financial Statements 3
Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998 4-5
Consolidated Statements of Operations for the
nine months ended September 30, 1999 and 1998 6
Consolidated Statements of Operations for the
three months ended September 30, 1999 and 1998 7
Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 1999 8
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 9
Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-20
Part II: Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
Agree Realty Corporation
Part I: Financial Information
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ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3
Agree Realty Corporation
Consolidated Balance Sheets (Unaudited)
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September 30, December 31,
1999 1998
------------- ------------
Real Estate Investments
Land $ 39,945,162 $ 37,005,162
Buildings 132,933,208 128,861,505
Property under development 2,061,823 1,054,335
------------- -------------
174,940,193 166,921,002
Less accumulated depreciation (25,502,738) (23,022,291)
------------- -------------
Net Real Estate Investments 149,437,455 143,898,711
Cash and Cash Equivalents 14,082 994,159
Accounts Receivable - Tenants 291,506 645,052
Investments In and Advances To
Unconsolidated Entities 619,434 1,135,409
Unamortized Deferred Expenses
Financing 1,677,586 1,533,440
Leasing costs 270,637 302,694
Other Assets 608,978 761,066
------------- -------------
$ 152,919,678 $ 149,270,531
============= =============
See accompanying notes to consolidated financial statements
4
Agree Realty Corporation
Consolidated Balance Sheets (Unaudited)
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September 30, December 31,
1999 1998
------------- ------------
Liabilities and Stockholders' Equity
Mortgage Payable $ 53,251,879 $ 41,299,294
Construction Loans 13,726,102 8,874,326
Notes Payable 24,108,232 35,158,232
Dividends and Distributions Payable 2,317,670 2,309,136
Accrued Interest Payable 263,261 318,362
Accounts Payable
Operating 301,085 721,485
Capital expenditures 705,225 1,444,517
Tenant Deposits 52,073 48,606
------------- -------------
Total Liabilities 94,725,527 90,173,958
------------- -------------
Minority Interest 5,905,656 6,047,843
------------- -------------
Stockholders' Equity
Common stock, $.0001 par value;
20,000,000 shares authorized;
4,364,867 and 4,346,313 shares
issued and outstanding 436 435
Additional paid-in capital 63,217,235 62,873,987
Deficit (10,369,885) (9,448,351)
------------- -------------
52,847,786 53,426,071
Less: unearned compensation -
restricted stock (559,291) (377,341)
------------- -------------
Total Stockholders' Equity 52,288,495 53,048,730
------------- -------------
$ 152,919,678 $ 149,270,531
============= =============
See accompanying notes to consolidated financial statements.
5
Agree Realty Corporation
Consolidated Statements of Income (Unaudited)
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Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Revenues
Rental income $ 14,425,946 $ 12,791,131
Operating cost reimbursements 1,787,645 1,553,175
Management fees and other 32,430 65,912
------------ ------------
Total Revenues 16,246,021 14,410,218
------------ ------------
Operating Expenses
Real estate taxes 1,268,606 1,108,647
Property operating expenses 891,491 717,187
Land lease payments 408,578 408,279
General and administrative 1,044,816 836,644
Depreciation and amortization 2,566,930 2,239,264
------------ ------------
Total Operating Expenses 6,180,421 5,310,021
------------ ------------
Income From Operations 10,065,600 9,100,197
------------ ------------
Other Income (Expense)
Interest expense, net (4,237,986) (3,796,523)
Development fee income 40,873 175,520
Equity in net income (loss)
of unconsolidated entities 20,804 (6,281)
------------ ------------
Total Other Expense (4,176,309) (3,627,284)
------------ ------------
Income Before Minority Interest 5,889,291 5,472,913
Minority Interest (787,309) (705,883)
------------ ------------
Net Income $ 5,101,982 $ 4,767,030
------------ ------------
Earnings Per Share $ 1.17 $ 1.10
------------ ------------
Weighted Average Number of
Common Shares Outstanding 4,364,867 4,363,313
============ ============
See accompanying notes to consolidated financial statements.
6
Agree Realty Corporation
Consolidated Statements of Income (Unaudited)
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Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Revenues
Rental income $ 4,911,205 $ 4,443,275
Operating cost reimbursements 564,898 512,271
Management fees and other 13,470 18,850
----------- -----------
Total Revenues 5,489,573 4,974,396
----------- -----------
Operating Expenses
Real estate taxes 424,824 384,800
Property operating expenses 229,098 192,576
Land lease payments 134,748 136,915
General and administrative 374,003 289,265
Depreciation and amortization 856,101 773,318
----------- -----------
Total Operating Expenses 2,018,774 1,776,874
----------- -----------
Income From Operations 3,470,799 3,197,522
----------- -----------
Other Income (Expense)
Interest expense, net (1,457,799) (1,357,798)
Equity in net income (loss) of
unconsolidated entities 6,935 (1,640)
Development fee income -- 116,489
----------- -----------
Total Other Expense (1,450,864) (1,242,949)
----------- -----------
Income Before Minority Interest 2,019,935 1,954,573
Minority Interest (270,035) (255,806)
----------- -----------
Net Income $ 1,749,900 $ 1,698,767
----------- -----------
Earnings Per Share $ .40 $ .39
----------- -----------
Weighted Average Number of
Common Shares Outstanding 4,364,867 4,346,313
=========== ===========
See accompanying notes to consolidated financial statements.
7
Agree Realty Corporation
Consolidated Statement of Stockholders' Equity (Unaudited)
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Unearned
Common Stock Additional Compensation-
------------------ Paid-In Restricted
Shares Amount Capital Deficit Stock
--------- ------ ------------ ------------ -------------
Balance, January 1, 1999 4,346,313 $ 435 $ 62,873,987 $ (9,448,351) $(377,341)
Issuance of shares under
Stock Incentive Plan 18,554 1 343,248 -- (327,450)
Vesting of restricted stock -- -- -- -- 145,500
Dividends declared for
the period January 1,
1999 to September 30, 1999 -- -- -- (6,023,516) --
Net income for the period
January 1, 1999 to
September 30, 1999 -- -- -- 5,101,982 --
--------- ----- ------------ ------------ ---------
Balance, September 30, 1999 4,364,867 $ 436 $ 63,217,235 $(10,369,885) $(559,291)
========= ===== ============ ============ =========
<FN>
See accompanying notes to consolidated financial statements.
8
Agree Realty Corporation
Notes to Consolidated Financial Statements
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Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Cash Flows From Operating Activities
Net income $ 5,101,982 $ 4,767,030
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation 2,503,007 2,176,576
Amortization 482,423 387,580
Equity in net (income) loss
of unconsolidated entities (20,804) 6,281
Minority interests 787,309 705,883
Decrease in accounts receivable 353,546 136,052
Decrease (increase) in other assets 124,096 (20,803)
Decrease in accounts payable (420,400) (374,352)
Increase (decrease) in accrued interest (55,101) 59,833
Increase in tenant deposits 3,467 1,667
------------ ------------
Net Cash Provided By Operating Activities 8,859,525 7,845,757
------------ ------------
Cash Flows From Investing Activities
Acquisition of real estate investments
(including capitalized interest of
$343,000 in 1999 and $340,671 in 1998) (8,019,191) (10,696,266)
Investments in and advances to
unconsolidated entities 528,345 489,417
------------ ------------
Net Cash Used In Investing Activities (7,490,846) (10,206,849)
------------ ------------
Cash Flows From Financing Activities
Mortgage proceeds 12,390,135 --
Line-of-credit net borrowings (payments) (11,050,000) 14,182,928
Dividends and limited partners'
distributions paid (6,944,478) (6,870,322)
Construction loan proceeds 4,851,776 3,068,771
Net increase in (repayment of) capital
expenditure payables (723,493) (412,880)
Payments of mortgages payable (437,550) (6,447,710)
Payments for financing costs (417,146) (8,000)
Payment of leasing costs (18,000) (28,635)
Payment of related party payables -- (1,757,359)
Payment of note payable -- (450,000)
------------ ------------
Net Cash Provided By (Used In) Financing Activities (2,348,756) 1,241,465
------------ ------------
Net Decrease In Cash and Cash Equivalents (980,077) (1,119,637)
Cash and Cash Equivalents, beginning of period 994,159 1,785,968
------------ ------------
Cash and Cash Equivalents, end of period $ 14,082 $ 666,331
------------ ------------
Supplemental Disclosure of Cash flow Information
Cash paid for interest (net of amounts capitalized) $ 4,029,030 $ 3,457,367
------------ ------------
Supplemental Disclosure of Non-Cash Transactions
Dividends and limited partners' distributions
declared and unpaid $ 2,317,670 $ 2,309,136
Shares issued under Stock Incentive Plan $ 343,249 $ 405,830
Operating partnership units issued for
purchase of real estate
-- $ 691,119
============ ============
<FN>
See accompanying notes to consolidated financial statements.
9
Agree Realty Corporation
Notes to Financial Statements
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1. Basis of
Presentation The accompanying unaudited 1999 consolidated financial
statements have been prepared in accordance with
generally accepted accounting principles for interim
financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. In the opinion of
management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair
presentation have been included. The consolidated
balance sheet at December 31, 1998 has been derived from
the audited consolidated financial statements at that
date. Operating results for the nine months ended
September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending
December 31, 1999, or for any other interim period. For
further information, refer to the consolidated financial
statements and footnotes thereto included in the
Company's Annual Report for the year ended December 31,
1998.
2. Earnings Per
Share Earnings per share has been computed by dividing the
income by the weighted average number of common shares
outstanding. The per share amounts reflected in the
consolidated statements of income are presented in
accordance with Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings per Share"; the
amounts of the Company's "basic" and "diluted" earnings
per share (as defined in SFAS No. 128) are the same.
3. Reclassifications Certain reclassifications were made to prior years'
financial statements to conform with the current years'
presentation.
10
Agree Realty Corporation
Part I
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OEPRATIONS
Overview
The Company was established to continue to operate and expand the retail
property business of its Predecessors. The Company commenced its operations
on April 22, 1994 with the sale of 2,500,000 shares of common stock in an
initial public offering. The net cash proceeds to the Company from the
completion of this offering were approximately $45.4 million, which were used
primarily to reduce outstanding indebtedness, pay stock issuance costs and
establish a working capital reserve. On May 21, 1997, the Company completed
an offering of 1,625,000 shares of common stock at $20.625 per share; on June
18, 1997 the underwriters exercised their overallotment option for an
additional 28,850 shares at the same per share price (collectively, "the 1997
Offering"). The net proceeds from the 1997 Offering of approximately $31.9
million were used to repay amounts outstanding under the Company's Credit
Facility.
The assets of the Company are held by, and all operations are conducted
through, Agree Limited Partnership (the "Operating Partnership"), of which
the Company is the sole general partner and held an 86.63% interest as of
September 30, 1999. The Company is operating so as to qualify as a real
estate investment trust ("REIT") for federal income tax purposes.
The following should be read in conjunction with the Consolidated Financial
Statements of Agree Realty Corporation, including the respective notes
thereto, which are included in this Form 10-Q.
Comparison of Nine Months Ended September 30, 1999 to
Nine Months Ended September 30, 1998
Rental income increased $1,635,000, or 13%, to $14,426,000 in 1999, compared
to $12,791,000 in 1998. The increase is primarily the result of the
development of five properties in 1998 and one property in 1999.
Operating cost reimbursements, which represent additional rent required by
substantially all of the Company's leases to cover the tenants' proportionate
share of the property's operating expenses, increased $235,000, or 15%, to
$1,788,000 in 1999, compared to $1,553,000 in 1998. Operating cost
reimbursements increased due to the increase in real estate taxes and
property operating expenses from 1998 to 1999 as explained below.
Management fees and other income decreased $34,000, or 51%, to $32,000 in
1999, compared to $66,000 in 1998. The decrease was the result of a reduction
in management fees resulting from the Company's acquisition of a property it
previously managed.
11
Real estate taxes increased $160,000, or 14%, to $1,269,000 in 1999 versus
$1,109,000 in 1998. The increase is the result of the addition of new
properties.
Property operating expenses (shopping center maintenance, insurance and
utilities) increased $174,000, or 24%, to $891,000 in 1999 versus $717,000 in
1998. The increase was the result of increased snow removal costs of
$126,000; an increase in shopping center maintenance costs of $40,000; a
increase in utility costs of $4,000 and an increase in insurance costs of
$4,000 in 1999 versus 1998.
Land lease payments remained constant at $408,000 in 1999 and 1998.
General and administrative expenses increased by $208,000, or 25%, to
$1,045,000 in 1999 versus $837,000 in 1998. The increase was primarily the
result of an increase in compensation-related expenses, property management
expenses and state and local taxes. General and administrative expenses as a
percentage of rental income increased from 6.5% for 1998 to 7.2% in 1999.
Depreciation and amortization increased $328,000, or 15%, to $2,567,000 in
1999 versus $2,239,000 in 1998. This increase was the result of the
completion of five new properties and the acquisition of one property.
Interest expense increased $441,000, or 12%, to $4,238,000 in 1999, from
$3,797,000 in 1998. The increase in interest expense was the result of the
Company's additional borrowing to finance its continued acquisition and
development of properties.
Development fee income decreased $135,000, to $41,000 in 1999, from $176,000
in 1998. 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.
Equity in net income (loss) of unconsolidated entities increased $27,000 to
$21,000 in 1999 versus ($6,000) in 1998 as a result of decreased depreciation
expense in 1999 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 $416,000 as a result
of the foregoing factors.
Comparison of Three Months Ended September 30, 1999 to
Three Months Ended September 30, 1998
Rental income increased $468,000, or 11%, to $4,911,000 in 1999, compared to
$4,443,000 in 1998. The increase is primarily the result of the development
and acquisition of four properties in 1998 and one property in 1999.
12
Operating cost reimbursements increased $53,000, or 10%, to $565,000 in 1999,
compared to $512,000 in 1998. Operating cost reimbursements increased due to
the increase in real estate taxes and property operating expenses from 1998
to 1999 as explained below.
Management fees and other income decreased $6,000, or 29%, to $13,000 in
1999, compared to $19,000 in 1998. The decrease was the result of a reduction
in management fees resulting from the Company's acquisition of a property it
previously managed.
Real estate taxes increased $40,000, or 10%, to $425,000 in 1999 versus
$385,000 in 1998. The increase is the result of the addition of new
properties.
Property operating expense (shopping center maintenance, insurance and
utilities) increased $36,000, or 19% to $229,000 in 1999 versus $193,000 in
1998. The increase was the result of increased snow removal costs of $5,000
and an increase in shopping center maintenance costs of $31,000 in 1999
versus 1998.
Land lease payments remained relatively constant at $135,000 in 1999 compared
to $137,000 in 1998.
General and administrative expenses increased $85,000, or 29%, to $374,000 in
1999 compared to $289,000 in 1998. The increase was primarily the result of
an increase in compensation-related expenses, property management expenses
and state and local taxes. General and administrative expenses as a
percentage of rental income increased from 6.5% for 1998 to 7.6% in 1999.
Depreciation and amortization increased $83,000, or 11%, to $856,000 in 1999
versus $773,000 in 1998. The increase was the result of the development and
acquisition of four properties in 1998 and one property in 1999.
Interest expense increased $100,000, or 7%, to $1,458,000 in 1999, from
$1,358,000 in 1998. The increase in interest expense was the result of the
Company's additional borrowing to finance its continued acquisition and
development of properties.
The Company received development fee income of $116,000 in 1998. This amount
was not included in the Company's calculation of Funds from Operations due to
the non-recurring nature of this type of income. There was no development fee
income in 1999.
Equity in net income (loss) of unconsolidated entities increased $9,000 to
$7,000 in 1999 compared to ($2,000) in 1998 as a result of decreased
depreciation expense in 1999 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 $65,000 as a result
of the foregoing factors.
13
Funds From Operations
Management considers Funds from Operations ("FFO") to be a supplemental
measure of the Company's operating performance. FFO is defined by the
National Association of Real Estate Investments Trusts, Inc. ("NAREIT") to
mean net income computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from debt restructuring and
sales of property, plus real estate related depreciation and amortization,
and after adjustments for unconsolidated entities in which the REIT holds an
interest. FFO does not represent cash generated from operating activities in
accordance with GAAP and is not necessarily indicative of cash available to
fund cash needs. FFO should not be considered as an alternative to net income
as the primary indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity.
14
The following table illustrates the calculation of FFO for the nine months
and three months ended September 30, 1999 and 1998:
Nine Months Ended September 30, 1999 1998
- ------------------------------- ---- ----
Net income before minority interest $ 5,889,291 $ 5,472,913
Depreciation of real estate assets 2,502,747 2,171,229
Amortization of leasing costs 50,057 54,253
Amortization of stock awards 145,500 117,000
Depreciation of real estate assets held
in unconsolidated entities 499,935 525,660
Development fee income (40,873) (175,520)
----------- -----------
Funds from Operations $ 9,046,657 $ 8,165,535
----------- -----------
Weighted Average Shares and OP Units Outstanding 5,038,414 4,989,877
=========== ===========
FFO increased $881,000, or 11%, to $9,047,000 in 1999, compared to $8,166,000
in 1998. The increase in FFO is primarily the result of the acquisition and
development of five properties in 1998 and one property in 1999.
Three Months Ended September 30, 1999 1998
- -------------------------------- ---- ----
Net income before minority interest $ 2,019,935 $ 1,954,573
Depreciation of real estate assets 834,659 752,345
Amortization of leasing costs 16,686 16,968
Amortization of stock awards 48,500 39,000
Depreciation of real estate assets
held in unconsolidated entities 166,645 175,220
Development fee income -- (116,489)
----------- -----------
Funds from Operations $ 3,086,425 $ 2,821,617
----------- -----------
Weighted Average Shares and OP Units Outstanding 5,038,414 5,000,906
=========== ===========
FFO increased $265,000 or 9%, to $3,086,000 in 1999, compared to $2,822,000
in 1998. The increase in FFO is primarily the result of the acquisition and
development of four properties in 1998 and one property in 1999.
15
Forward-Looking Statements
Management has included herein certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. When used,
statements which are not historical in nature including the words
"anticipate," "estimate," "should," "expect," "believe," "intend" and similar
expressions are intended to identify forward-looking statements. Such
statements are, by their nature, subject to certain risks and uncertainties.
Risks and other factors that might cause such a difference include, but are
not limited to, the effect of economic and market conditions; risks that the
Company's acquisition and development projects will fail to perform as
expected; financing risks, such as the inability to obtain debt or equity
financing on favorable terms; the level and volatility of interest rates;
loss or bankruptcy of one or more of the Company's major retail tenants; and
failure of the Company's properties to generate additional income to offset
increases in operating expenses.
Liquidity and Capital Resources
The Company's principal demands for liquidity are distributions to its
stockholders, debt repayment, development of new properties and future
property acquisitions.
During the quarter ended September 30, 1999, the Company declared a quarterly
dividend of $.46 per share. The dividend was paid on October 14, 1999 to
holders of record on September 30, 1999.
16
As of September 30, 1999, the Company had total mortgage indebtedness of
$53,251,879 with a weighted average interest rate of 6.91%. Future scheduled
annual maturities of mortgages payable for the years ending September 30 are
as follows: 2000 - $1,275,579; 2001 - $1,385,059-; 2002 - $1,483,546; 2003 -
$1,589,041; 2004 - $1,702,042. 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 September 30, 1999, $23,158,232 was
outstanding under the Credit Facility.
The Company also has in place a $5 million line of credit (the "Line of
Credit"), which matures December 19, 1999, and which the Company expects to
renew for an additional 12-month period. The Line of Credit bears interest at
the bank's prime rate less 50 basis points or 175 basis points in excess of
the one-month LIBOR rate, at the option of the Company. The purpose of the
Line of Credit is to provide working capital to the Company and fund land
options and start-up costs associated with new projects. As of September 30,
1999, $950,000 was outstanding under the Line of Credit.
The Company's wholly-owned subsidiaries have obtained construction financing
of approximately $15,600,000 to fund the development of four retail
properties. The notes require quarterly interest payments, based on a
weighted average interest rate based on LIBOR, computed by the lender. The
notes mature on October 16, 2002 and are secured by the underlying land and
buildings. As of September 30, 1999, $11,995,612 was outstanding under these
notes.
The Company has received funding from an unaffiliated third party for the
construction of certain of its Properties. Advances under this agreement bear
no interest and are required to be repaid within sixty (60) days after the
date construction has been completed. The advances are secured by the
specific land and buildings being developed. As of September 30, 1999,
$1,730,490 was outstanding under this arrangement.
17
The Company has four development projects under construction that will add an
additional 82,000 square feet of retail space to the Company's portfolio.
These projects are expected to be completed during the fourth quarter of 1999
and the first quarter of 2000. Additional Company funding required for these
projects is estimated to be $6,000,000 and will come from the Credit Facility
and construction loans. 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 Compliance
The Company's information system consists of a three station Windows NT
network system. All accounting and property management functions are
processed via Timberline Software, a nationally recognized provider of
software to the real estate industry. The Company is currently assessing its
significant business relationships with external parties, including its major
tenants, to determine if their failure to be Year 2000 compliant would have a
material adverse effect upon the Company. In the event that any of the
Company's significant tenants, vendors, banks or others with whom it does
business do not successfully and timely achieve Year 2000 compliance, the
Company's operations may be affected. To date, nothing has come to the
attention of management that leads it to conclude that the likelihood of such
adverse effect reasonably exists. However, because the complexities involved,
management cannot provide assurance that the Year 2000 issue will not have an
impact on the Company's operations.
The Company has completed a review of its information systems and believes
its business technologies are fully compliant with any issues that may arise
as a result of Year 2000 issues.
18
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 release at market rates if rents are
below the then existing market rates.
19
Agree Realty Corporation
Part I
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its borrowing
activities. There is inherent rollover risk for borrowings as they mature and
are renewed at current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future interest
rates and the Company's future financing requirements.
Mortgages payable - As of September 30, 1999 the Company had three mortgages
outstanding. The first mortgage in the amount of $33,327,891 bears interest
at 7.00%. The mortgage matures on November 15, 2005. The second mortgage in
the amount of $7,596,310 bears interest at 7.00%. The mortgage matures on
April 1, 2013 and is subject to a rate review after the 7th year (April 1,
2006). The third mortgage in the amount of $12,327,678 bears interest at
6.63%. The mortgage matures on February 5, 2017.
Construction loans - As of September 30, 1999 the Company had Construction
loans outstanding of $13,726,102. Under the terms of the construction loans
the Company bears no interest rate risk.
Notes Payable - As of September 30, 1999 the Company had $24,108,232
outstanding on its Lines-of Credit which were subject to interest at a
variable interest rate based on LIBOR.
The Company does not enter into financial instrument transactions for
trading or other speculative purposes or to manage interest rate exposure.
A 10% adverse change in interest rates on the portion of the Company's debt
bearing interest at variable rates would result in an annual increase in
interest expense of approximately $170,000.
20
Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation and Articles of Amendment
of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement
on Form S-11 (Registration Statement No. 33-73858,
as amended ("Agree S-11"))
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.3 to Agree S-11)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
21
Agree Realty Corporation
Signatures
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Agree Realty Corporation
/s/ RICHARD AGREE
- ------------------------------------------
Richard Agree
President and Chief Executive Officer
/s/ KENNETH R. HOWE
- ------------------------------------------
Kenneth R. Howe
Vice-President - Finance and Secretary
(Principal Financial Officer)
Date: November 1, 1999
- ------------------------------------------
22
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Agree Realty Corporation
- ------------------------------------------
Richard Agree, President
and Chief Executive Officer
- ------------------------------------------
Kenneth R. Howe, Vice-President -
Finance and Secretary
(Principal Financial Officer)
Date: November 1, 1999
- ------------------------------------------