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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2001
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] [ ]
4,416,869 Shares of Common Stock, $.0001 par value, were outstanding as of May
1, 2001
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AGREE REALTY CORPORATION
FORM 10-Q
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1. Interim Consolidated Financial Statements 3
Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 4-5
Consolidated Statements of Income for the three months ended 6
March 31, 2001 and 2000
Consolidated Statement of Stockholders' Equity for the three months ended 7
March 31, 2001
Consolidated Statements of Cash Flows for the three months ended 8
March 31, 2001 and 2000
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and 10-15
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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AGREE REALTY CORPORATION
PART I: FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, December 31,
2001 2000
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ASSETS
REAL ESTATE INVESTMENTS
Land $ 45,028,679 $ 45,028,679
Buildings 145,664,491 143,474,205
Property under development 1,000,628 2,545,018
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191,693,798 191,047,902
Less accumulated depreciation (30,833,666) (29,907,682)
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NET REAL ESTATE INVESTMENTS 160,860,132 161,140,220
CASH AND CASH EQUIVALENTS 169,613 1,119,072
ACCOUNTS RECEIVABLE - TENANTS 444,200 741,565
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES 263,638 266,449
UNAMORTIZED DEFERRED EXPENSES
Financing 1,382,100 1,476,100
Leasing costs 302,030 310,424
OTHER ASSETS 951,073 998,260
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$ 164,372,786 $ 166,052,090
=====================================================================================================================
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, December 31,
2001 2000
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LIABILITIES AND STOCKHOLDERS' EQUITY
MORTGAGE PAYABLE $ 51,776,192 $ 52,119,770
CONSTRUCTION LOANS 16,600,552 16,614,002
NOTES PAYABLE 35,458,232 35,358,232
DIVIDENDS AND DISTRIBUTIONS PAYABLE 2,341,591 2,331,379
ACCRUED INTEREST PAYABLE 288,373 314,607
ACCOUNTS PAYABLE
Operating 491,732 1,017,493
Capital expenditures 386,355 1,110,673
TENANT DEPOSITS 51,240 51,240
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TOTAL LIABILITIES 107,394,267 108,917,396
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MINORITY INTEREST 5,678,050 5,707,608
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STOCKHOLDERS' EQUITY
Common stock, $.0001 par value; 20,000,000 shares authorized,
4,416,869 and 4,394,669 shares issued and outstanding 442 440
Additional paid-in capital 63,937,682 63,632,433
Deficit (11,857,064) (11,663,446)
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52,081,060 51,969,427
Less: unearned compensation - restricted stock (780,591) (542,341)
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TOTAL STOCKHOLDERS' EQUITY 51,300,469 51,427,086
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$ 164,372,786 $ 166,052,090
=====================================================================================================================
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED Three Months Ended
MARCH 31, 2001 March 31, 2000
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REVENUES
Minimum rents $ 5,379,997 $ 5,061,100
Percentage rents 124,529 91,282
Operating cost reimbursement 666,228 648,524
Management fees and other 11,413 11,982
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TOTAL REVENUES 6,182,167 5,812,888
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OPERATING EXPENSES
Real estate taxes 431,596 445,620
Property operating expenses 436,803 410,413
Land lease payments 184,740 140,665
General and administrative 382,055 391,895
Depreciation and amortization 952,175 899,642
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TOTAL OPERATING EXPENSES 2,387,369 2,288,235
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INCOME FROM OPERATIONS 3,794,798 3,524,653
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OTHER INCOME (EXPENSE)
Interest expense, net (1,849,962) (1,658,520)
Equity in net income of unconsolidated entities 173,580 1,600
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TOTAL OTHER EXPENSE (1,676,382) (1,656,920)
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INCOME BEFORE MINORITY INTEREST 2,118,416 1,867,733
MINORITY INTEREST 280,274 248,042
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NET INCOME $ 1,838,142 $ 1,619,691
========================================================================================================================
EARNINGS PER SHARE $ .42 $ .37
========================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,416,869 4,398,669
========================================================================================================================
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Unearned
Common Stock Additional Compensation -
------------------------------- Paid-In Restricted
Shares Amount Capital Deficit Stock
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BALANCE, January 1, 2001 4,394,669 $ 440 $ 63,632,433 $ (11,663,446) $ (542,341)
Issuance of shares under
Stock Incentive Plan 27,291 2 375,249 - (305,250)
Shares redeemed under the
stock Incentive Plan (5,091) - (70,000) - -
Vesting of restricted stock - - - - 67,000
Dividends declared for the period
January 1, 2001 to March 31, 2001 - - - (2,031,760) -
Net income for the period
January 1, 2001 to March 31, 2001 - - - 1,838,142 -
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BALANCE, March 31, 2001 4,416,869 $ 442 $ 63,937,682 $ (11,857,064) $ (780,591)
==================================================================================================================================
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED Three Months Ended
MARCH 31, 2001 March 31, 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,838,142 $ 1,619,691
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation 934,483 879,268
Amortization 112,191 108,374
Stock-based compensation 67,000 59,000
Equity in net income of unconsolidated entities (173,580) (1,600)
Minority interests 280,274 248,042
Decrease in accounts receivable 297,365 166,448
(Decrease) increase in other assets 39,239 (128,842)
Decrease in accounts payable (525,761) (399,038)
Increase (decrease) in accrued interest (26,234) 1,442
Increase in tenant deposits - 104
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,843,119 2,552,889
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of real estate investments (including capitalized interest of
$61,000 in 2001 and $59,000 in 2000) (259,541) (258,001)
Distributions from unconsolidated entities 173,580 173,580
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NET CASH USED IN INVESTING ACTIVITIES (85,961) (84,421)
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CASH FLOWS FROM FINANCING ACTIVITIES
Dividends and limited partners' distributions paid (2,331,379) (2,317,670)
Payments of payables for capital expenditures (1,040,673) (1,112,044)
Payments of mortgages payable (343,578) (320,770)
Line-of-credit proceeds 100,000 -
Redemption of restricted stock (70,000) -
Payment of construction loan (13,450) -
Payment of leasing costs (7,037) (13,036)
Payments for financing costs (500) -
Construction loan proceeds - 488,566
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NET CASH USED IN FINANCING ACTIVITIES (3,706,617) (3,274,954)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (949,459) (806,486)
CASH AND CASH EQUIVALENTS, beginning of period 1,119,072 1,064,241
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CASH AND CASH EQUIVALENTS, end of period $ 169,613 $ 257,755
==============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest (net of amounts capitalized) $ 1,782,754 $ 1,573,989
==============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Dividends and limited partners' distributions declared and unpaid $ 2,341,591 $ 2,333,219
Real estate investments financed with accounts payable $ 386,355 $ 569,935
Shares issued under Stock Incentive Plan $ 375,251 $ 471,202
==============================================================================================================================
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF The accompanying unaudited 2001 consolidated
PRESENTATION financial statements have been prepared in
accordance with generally accepted accounting
principles for interim financial information and
with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not
include all of the information and footnotes
required by generally accepted accounting
principles for complete financial statements. In
the opinion of management, all adjustments
(consisting of normal recurring accruals)
considered necessary for a fair presentation have
been included. The consolidated balance sheet at
December 31, 2000 has been derived from the
audited consolidated financial statements at that
date. Operating results for the three months ended
March 31, 2001 are not necessarily indicative of
the results that may be expected for the year
ending December 31, 2001, 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, 2000.
2. EARNINGS PER Earnings per share has been computed by dividing
common shares outstanding. The per share amounts
reflected in the consolidated statements of income
are presented in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128
"Earnings per Share"; the amounts of the Company's
"basic" and "diluted" earnings per share (as
defined in SFAS No. 128) are the same.
3. RECLASSIFICATIONS Certain amounts in the 2000 financial statements
have been reclassified to conform with the 2001
presentation.
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AGREE REALTY CORPORATION
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 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. 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 86.77% interest as of
March 31, 2001. The Company is operating so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes.
The following should be read in conjunction with the Consolidated Financial
Statements of Agree Realty Corporation, including the respective notes thereto,
which are included in this Form 10-Q.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 TO THREE MONTHS ENDED MARCH 31,
2000
Minimum rental income increased $319,000, or 6%, to $5,380,000 in 2001, compared
to $5,061,000 in 2000. The increase was the result of the development of three
properties in 2000 and one property in 2001.
Percentage rental income increased $34,000, or 36%, to $125,000 in 2001,
compared to $91,000 in 2000. The increase was the result of increased tenant
sales.
Operating cost reimbursement, which represents additional rent required by
substantially all of the Company's leases to cover the tenants' proportionate
share of real estate taxes and property operating expenses, increased $18,000,
or 3%, to $666,000 in 2001, compared to $648,000 in 2001. Operating cost
reimbursement increased due to the net increase in real estate taxes and
property operating expenses.
Management fees and other income remained relatively constant at $11,000 in 2001
compared to $12,000 in 2000.
Real estate taxes decreased 14,000, or 3%, to $432,000 in 2001 compared to
$446,000 in 2000. The decrease is the result of general assessment changes on
the Company's properties.
Property operating expenses (shopping center maintenance, insurance and
utilities) increased $27,000, or 6%, to $437,000 in 2001 compared to $410,000 in
2000. The increase was the result of increased snow removal costs of $47,000; a
decrease in shopping center maintenance costs of ($32,000); an increase in
utility costs of $10,000 and an increase in insurance cost of $2,000.
Land lease payments increased $44,000, or 31%, to $185,000 in 2001 compared to
$141,000 in 2000 as a result of the Company leasing land for its Petoskey,
Michigan development completed in 2000.
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AGREE REALTY CORPORATION
PART I
General and administrative expenses decreased $10,000, or 3%, to $382,000 in
2001 compared to $392,000 in 2000. General and administrative expenses as a
percentage of rental income decreased from 7.6% for 2000 to 6.9% for 2001.
Depreciation and amortization increased $52,000, or 6%, to $952,000 in 2001
compared to $900,000 in 2000. The increase was the result of the development and
acquisition of three properties in 2000 and one property in 2001.
Interest expense increased $191,000, or 12%, to $1,850,000 in 2001, from
$1,659,000 in 2000. The increase in interest expense was the result of the
Company's additional borrowing to finance its development of properties and
increased rates on variable rate notes payable.
Equity in net income of unconsolidated entities increased $172,000 to $174,000
in 2001 compared to $2,000 in 2000 as a result of depreciation expense no longer
being allocated to the Company pursuant to the agreements relating to the Joint
Ventures in which the Company holds interests ranging from 8% to 20%.
The Company's income before minority interest increased $250,000, or 13%, to
$2,118,000 in 2001, from $1,868,000 in 2000 as a result of the foregoing
factors.
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AGREE REALTY CORPORATION
PART I
FUNDS FROM OPERATIONS
Management considers Funds from Operations ("FFO") to be a supplemental measure
of the Company's operating performance. FFO is defined by the National
Association of Real Estate Investments Trusts, Inc. ("NAREIT") to mean net
income computed in accordance with generally accepted accounting principles
("GAAP"), excluding gains (or losses) from sales of depreciable operating
property, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated entities in which the REIT holds an interest. FFO
does not represent cash generated from operating activities in accordance with
GAAP and is not necessarily indicative of cash available to fund cash needs. FFO
should not be considered as an alternative to net income as the primary
indicator of the Company's operating performance or as an alternative to cash
flow as a measure of liquidity.
The following tables illustrate the calculation of FFO for the three months
ended March 31, 2001 and 2000:
Three Months Ended March 31, 2001 2000
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Net income before minority interest $ 2,118,416 $ 1,867,733
Depreciation of real estate assets 931,056 876,274
Amortization of leasing costs 15,431 17,093
Amortization of stock awards 67,000 59,000
Depreciation of real estate assets held in unconsolidated entities - 171,980
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FUNDS FROM OPERATIONS $ 3,131,903 $ 2,992,080
==========================================================================================================================
WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING 5,090,416 5,072,216
==========================================================================================================================
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AGREE REALTY CORPORATION
PART I
FORWARD-LOOKING STATEMENTS
Management has included herein certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. When used,
statements which are not historical in nature including the words "anticipate,"
"estimate," "should," "expect," "believe," "intend" and similar expressions are
intended to identify forward-looking statements. Such statements are, by their
nature, subject to certain risks and uncertainties. Risks and other factors that
might cause such a difference include, but are not limited to, the effect of
economic and market conditions; risks that the Company's acquisition and
development projects will fail to perform as expected; financing risks, such as
the inability to obtain debt or equity financing on favorable terms; the level
and volatility of interest rates; loss or bankruptcy of one or more of the
Company's major retail tenants; and failure of the Company's properties to
generate additional income to offset increases in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal demands for liquidity are distributions to its
stockholders, debt repayment, development of new properties and future property
acquisitions.
During the quarter ended March 31, 2001, the Company declared a quarterly
dividend of $.46 per share. The dividend was paid on April 12, 2001, to holders
of record on March 30, 2001.
As of March 31, 2001, the Company had total mortgage indebtedness of $51,776,192
with a weighted average interest rate of 6.95%. Future scheduled annual
maturities of mortgages payable for the years ending March 31 are as follows:
2002 - $1,413,987; 2003 - $1,535,387; 2004 - $1,644,572; 2005 - $1,761,523; and
2006 - $2,386,799. 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 2003 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, at the option of the Company, based on certain factors such
as debt to property value and debt service coverage. The Credit Facility is used
to fund property acquisitions and development activities and is secured by most
of the Company's Properties which are not otherwise encumbered and properties to
be acquired or developed. As of March 31, 2001, $35,158,232 was outstanding
under the Credit Facility.
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AGREE REALTY CORPORATION
PART I
The Company also has in place a $5 million line of credit (the "Line of
Credit"), which matures on February 19, 2002, and which the Company expects to
renew for an additional 12-month period. The Line of Credit bears interest at
the bank's prime rate less 50 basis points or 175 basis points in excess of the
one-month LIBOR rate, at the option of the Company. The purpose of the Line of
Credit is to provide working capital to the Company and fund land options and
start-up costs associated with new projects. As of March 31, 2001, $300,000 was
outstanding borrowings under the Line of Credit.
The Company's wholly owned subsidiaries have obtained construction financing of
approximately $16,100,000 to fund the development of four retail properties. The
notes require quarterly interest payments, based on a weighted average interest
rate based on LIBOR, computed by the lender. The notes mature on October 16,
2002 and are secured by the underlying land and buildings. As of March 31, 2001,
$14,896,962 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 secured by the specific land and buildings being developed. As
of March 31, 2001, $1,703,590 was outstanding under this arrangement.
The Company has one development project under construction that will add an
additional 14,490 square feet of retail space to the Company's portfolio. The
project is expected to be completed during the second quarter of 2001.
Additional Company funding required for this project is estimated to be
$1,300,000 and will come from the Credit Facility. Management expects the
development of this project to have a positive effect on cash generated by
operating activities and Funds from Operations.
The Company intends to meet its short-term liquidity requirements, including
capital expenditures related to the leasing and improvement of the Properties,
through its cash flow provided by operations and the Line of Credit. Management
believes that adequate cash flow will be available to fund the Company's
operations and pay dividends in accordance with REIT requirements. The Company
may obtain additional funds for future development or acquisitions through other
borrowings or the issuance of additional shares of capital stock. The Company
intends to incur additional debt in a manner consistent with its policy of
maintaining a ratio of total debt (including construction and acquisition
financing) to total market capitalization of 65% or less.
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AGREE REALTY CORPORATION
PART I
The Company plans to begin construction of additional pre-leased developments
and may acquire additional properties, which will initially be financed by the
Credit Facility and Line of Credit. Management intends to periodically refinance
short-term construction and acquisition financing with long-term debt and/or
equity. Upon completion of refinancing, the Company intends to lower the ratio
of total debt to market capitalization to 50% or less. Nevertheless, the Company
may operate with debt levels or ratios which are in excess of 50% for extended
periods of time prior to such refinancing.
INFLATION
The Company's leases generally contain provisions designed to mitigate the
adverse impact of inflation on net income. These provisions include clauses
enabling the Company to pass through to tenants certain operating costs,
including real estate taxes, common area maintenance, utilities and insurance,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation. Certain of the Company's leases contain
clauses enabling the Company to receive percentage rents based on tenants' gross
sales, which generally increase as prices rise, and, in certain cases,
escalation clauses, which generally increase rental rates during the terms of
the leases. In addition, expiring tenant leases permit the Company to seek
increased rents upon re-lease at market rates if rents are below the then
existing market rates.
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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 March 31, 2001 the Company had four mortgages
outstanding. The first mortgage in the amount of $32,280,094 bears interest at
7.00%. The mortgage matures on November 15, 2005. The second mortgage in the
amount of $7,262,616 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 $11,733,482 bears interest at 6.63%. The
mortgage matures on February 5, 2017. The fourth mortgage in the amount of
$500,000 bears interest at 10.00%. The mortgage matures October 5, 2005.
Construction loans - As of March 31, 2001 the Company had Construction loans
outstanding of $16,600,552. Under the terms of the construction loans the
Company bears no interest rate risk.
Notes Payable - As of March 31, 2000 the Company had $35,458,232 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 $240,000.
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AGREE REALTY CORPORATION
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation and Articles of Amendment
of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement
on Form S-11 (Registration Statement No.
33-73858, as amended ("Agree S-11"))
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.3 to Agree S-11)
(b) Reports on Form 8-K
None
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AGREE REALTY CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGREE REALTY CORPORATION
/s/ RICHARD AGREE
- ---------------------------------
Richard Agree
President and Chief Executive Officer
/s/ KENNETH R. HOWE
- ----------------------------------
Kenneth R. Howe
Vice-President - Finance and Secretary
(Principal Financial Officer)
Date: May 1, 2001
- ----------------------------------
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