UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2000 OR |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 1-12928 Agree Realty Corporation - ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 38-3148187 - ----------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 31850 Northwestern Highway, Farmington Hills, Michigan 48334 - ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, included area code: (248) 737-4190 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No |X| |_| 4,394,669 Shares of Common Stock, $.0001 par value, were outstanding as of May 4, 2000 Agree Realty Corporation Form 10-Q Index - ----------------------------------------------------------------------------- Page Part I: Financial Information Item 1. Interim Consolidated Financial Statements 3 Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 4-5 Consolidated Statements of Income for the three months ended March 31, 2000 and 1999 6 Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2000 7 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 8 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Part II: Other Information Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5 Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 2 Agree Realty Corporation Part I: Financial Information ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS 3 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Balance Sheets (Unaudited) March 31, December 31, 2000 1999 - ----------------------------------------------------------------------------- <S> <C> <C> Assets Real Estate Investments Land $ 40,274,374 $ 40,270,367 Buildings 137,846,136 135,709,128 Property under development 2,565,532 3,878,611 ------------- ------------- 180,686,042 179,858,106 Less accumulated depreciation (27,212,478) (26,342,296) ------------- ------------- Net Real Estate Investments 153,473,564 153,515,810 Cash and Cash Equivalents 257,755 1,064,241 Accounts Receivable - Tenants 398,685 565,133 Investments In and Advances To Unconsolidated Entities 274,885 449,676 Unamortized Deferred Expenses Financing 1,499,397 1,587,397 Leasing costs 278,572 282,629 Other Assets 849,937 730,651 ------------- ------------- $ 157,032,795 $ 158,195,537 ============= ============= <FN> See accompanying notes to consolidated financial statements. </TABLE> 4 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Balance Sheets (Unaudited) March 31, December 31, 2000 1999 - ------------------------------------------------------------------------------ <S> <C> <C> Liabilities and Stockholders' Equity Mortgage Payable $ 52,615,801 $ 52,936,571 Construction Loans 15,810,637 15,322,071 Notes Payable 27,158,232 27,158,232 Dividends and Distributions Payable 2,333,219 2,317,670 Accrued Interest Payable 346,317 344,875 Accounts Payable Operating 456,848 855,886 Capital expenditures 569,935 1,315,597 Tenant Deposits 52,177 52,073 ------------ ------------ Total Liabilities 99,343,166 100,302,975 ------------ ------------ Minority Interest 5,797,222 5,859,012 ------------ ------------ Stockholders' Equity Common stock, $.0001 par value; 20,000,000 shares authorized, 4,398,669 and 4,364,867 shares issued and outstanding 440 436 Additional paid-in capital 63,688,433 63,217,235 Deficit (11,076,999) (10,673,302) ------------ ------------ 52,611,874 52,544,369 Less: unearned compensation - restricted stock (719,467) (510,819) ------------ ------------ Total Stockholders' Equity 51,892,407 52,033,550 ------------ ------------ $157,032,795 $158,195,537 ============ ============ <FN> See accompanying notes to consolidated financial statements. </TABLE> 5 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Statements of Income (Unaudited) Three Months Ended Three Months Ended March 31, 2000 March 31, 1999 - ----------------------------------------------------------------------------- <S> <C> <C> Revenues Rental income $ 5,152,382 $ 4,716,423 Operating cost reimbursement 648,524 656,532 Management fees and other 11,982 9,263 ----------- ----------- Total Revenues 5,812,888 5,382,218 ----------- ----------- Operating Expenses Real estate taxes 445,620 422,412 Property operating expenses 410,413 446,303 Land lease payments 140,665 136,915 General and administrative 391,895 316,045 Depreciation and amortization 899,642 848,896 ----------- ----------- Total Operating Expenses 2,288,235 2,170,571 ----------- ----------- Income From Operations 3,524,653 3,211,647 ----------- ----------- Other Income (Expense) Interest expense, net (1,658,520) (1,386,685) Equity in net income of unconsolidated entities 1,600 6,934 ----------- ----------- Total Other Expense (1,656,920) (1,379,751) ----------- ----------- Income Before Minority Interest 1,867,733 1,831,896 Minority Interest 248,042 244,897 ----------- ----------- Net Income $ 1,619,691 $ 1,586,999 ============ =========== Earnings Per Share $ .37 $ .36 ============ =========== Weighted Average Number of Common Shares Outstanding 4,398,669 4,364,867 ============ =========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 6 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Statement of Stockholders' Equity (Unaudited) - ----------------------------------------------------------------------------- Unearned Common Stock Additional Compensation- ---------------------- Paid-In Restricted Shares Amount Capital Deficit Stock --------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance, January 1, 2000 4,364,867 $ 436 $63,217,235 $(10,673,302) $ (510,819) Issuance of shares under Stock Incentive Plan 33,802 4 471,198 -- (267,648) Vesting of restricted stock -- -- -- -- 59,000 Dividends declared for the period January 1, 2000 to March 31, 2000 -- -- -- (2,023,388) -- Net income for the period January 1, 2000 to March 31, 2000 -- -- -- 1,619,691 -- --------- ---------- ----------- ------------ ------------ Balance, March 31, 2000 4,398,669 $ 440 $63,688,433 $(11,076,999) $ (719,467) ========= ========== =========== ============ ============ <FN> See accompanying notes to consolidated financial statements. </TABLE> 7 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Statements of Cash Flows (Unaudited) Three Months Ended Three Months Ended March 31, 2000 March 31, 1999 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> Cash Flows From Operating Activities Net income $ 1,619,691 $ 1,586,999 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 879,268 827,588 Amortization 108,374 111,308 Stock-based compensation 59,000 48,500 Equity in net income of unconsolidated entities (1,600) (6,934) Minority interests 248,042 244,897 Decrease in accounts receivable 166,448 323,158 Increase in other assets (128,842) (101,755) Decrease in accounts payable (399,038) (274,135) Increase in accrued interest 1,442 37,953 Increase (decrease) in tenant deposits 104 (2,333) ------------- ------------- Net Cash Provided By Operating Activities 2,552,889 2,795,246 ------------- ------------- Cash Flows From Investing Activities Acquisition of real estate investments (including capitalized interest of $59,000 in 2000 and $147,000 in 1999) (258,001) (519,953) Investments in and advances to unconsolidated entities - net 173,580 124,150 ------------- ------------- Net Cash Used In Investing Activities (84,421) (395,803) ------------- ------------- Cash Flows From Financing Activities Dividends and limited partners' distributions paid (2,317,670) (2,309,136) Payments of payables for capital expenditures (1,112,044) (1,429,019) Construction loan proceeds 488,566 40,707 Payments of mortgages payable (320,770) (26,398) Payment of leasing costs (13,036) (18,000) Line-of-credit proceeds - 900,000 Payment of financing costs - (297,950) ------------- ------------- Net Cash Used In Financing Activities (3,274,954) (3,139,796) ------------- ------------- Net Decrease In Cash and Cash Equivalents (806,486) (740,353) Cash and Cash Equivalents, beginning of period 1,064,241 994,159 ------------- ------------- Cash and Cash Equivalents, end of period $ 257,755 $ 253,806 ============= ============= Supplemental Disclosure of Cash flow Information Cash paid for interest (net of amounts capitalized) $ 1,573,989 $ 1,263,185 ============= ============= Supplemental Disclosure of Non-Cash Transactions Dividends and limited partners' distributions declared and unpaid $ 2,333,219 $ 2,317,670 Real estate investments financed with accounts payable $ 569,935 $ 340,695 Shares issued under Stock Incentive Plan $ 471,202 $ 343,249 ============= ============= <FN> See accompanying notes to consolidated financial statements. </TABLE> 8 Agree Realty Corporation Notes to Consolidated Financial Statements 1. Basis of The accompanying unaudited 2000 consolidated Presentation financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 1999 has been derived from the audited consolidated financial statements at that date. Operating results for the three months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000, or for any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report for the year ended December 31, 1999. 2. Earnings Per Share Earnings per share has been computed by dividing the income by the weighted average number of common shares outstanding. The per share amounts reflected in the consolidated statements of income are presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share"; the amounts of the Company's "basic" and "diluted" earnings per share (as defined in SFAS No. 128) are the same. 3. Reclassifications Certain amounts in the 1999 financial statements have been reclassified to conform with the 2000 presentation. 9 Agree Realty Corporation Part I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OEPRATIONS - ----------------------------------------------------------------------------- Overview The Company was established to continue to operate and expand the retail property business of its Predecessors. The Company commenced its operations on April 22, 1994 with the sale of 2,500,000 shares of common stock in an initial public offering. The net cash proceeds to the Company from the completion of this offering were approximately $45.4 million, which were used primarily to reduce outstanding indebtedness, pay stock issuance costs and establish a working capital reserve. On May 21, 1997, the Company completed an offering of 1,625,000 shares of common stock at $20.625 per share; on June 18, 1997 the underwriters exercised their overallotment option for an additional 28,850 shares at the same per share price (collectively, "the 1997 Offering"). The net proceeds from the 1997 Offering of approximately $31.9 million were used to repay amounts outstanding under the Company's Credit Facility. The assets of the Company are held by, and all operations are conducted through, Agree Limited Partnership (the "Operating Partnership"), of which the Company is the sole general partner and held an 86.72% interest as of March 31, 2000. The Company is operating so as to qualify as a real estate investment trust ("REIT") for federal income tax purposes. The following should be read in conjunction with the Consolidated Financial Statements of Agree Realty Corporation, including the respective notes thereto, which are included in this Form 10-Q. Comparison of Three Months Ended March 31, 2000 to Three Months Ended March 31, 1999 Rental income increased $436,000, or 9%, to $5,152,000 in 2000, compared to $4,716,000 in 1999. The increase was the result of the development of four properties in 1999 and one property in 2000. Operating cost reimbursement, which represents additional rent required by substantially all of the Company's leases to cover the tenants' proportionate share of real estate taxes and property operating expenses, decreased $8,000, or 1%, to $648,000 in 2000, compared to $656,000 in 1999. Operating cost reimbursement decreased due to the net decrease in real estate taxes and property operating expenses. Management fees and other income remained relatively constant at $12,000 in 2000 compared to $9,000 in 1999. Real estate taxes increased 24,000, or 5%, to $446,000 in 2000 compared to $422,000 in 1999. The increase is the result of general assessment increases on the Company's properties. Property operating expenses (shopping center maintenance, insurance and utilities) decreased $36,000, or 8%, to $410,000 in 2000 compared $446,000 in 1999. The decrease was the result of decreased snow removal costs of $55,000; an increase in shopping center maintenance costs of $18,000 and an increase in insurance cost of $1,000. 10 Land lease payments remained relatively constant at $141,000 in 2000 compared to $137,000 in 1999. General and administrative expenses increased $76,000, or 24%, to $392,000 in 2000 compared to $316,000 in 1999. The increase was primarily the result of an increase in compensation-related expenses as a result of the addition of an employee. General and administrative expenses as a percentage of rental income increased from 6.7% for 1999 to 7.6% for 2000. Depreciation and amortization increased $51,000, or 6%, to $900,000 in 2000 compared to $849,000 in 1999. The increase was the result of the development and acquisition of four properties in 1999 and one property in 2000. Interest expense increased $272,000, or 20%, to $1,659,000 in 2000, from $1,387,000 in 1999. The increase in interest expense was the result of the Company's additional borrowing to finance its development projects. Equity in net income of unconsolidated entities decreased $5,000 to $2,000 in 2000 compared to $7,000 in 1999 as a result of increased depreciation expense in 2000 related to certain of the Joint Venture Properties in which the Company holds interests ranging from 8% to 20%. The Company's income before minority interest increased $36,000 as a result of the foregoing factors. 11 Funds from Operations Management considers Funds from Operations ("FFO") to be a supplemental measure of the Company's operating performance. FFO is defined by the National Association of Real Estate Investments Trusts, Inc. ("NAREIT") to mean net income computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization, and after adjustments for unconsolidated entities in which the REIT holds an interest. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as the primary indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. The following tables illustrate the calculation of FFO for the three months ended March 31, 2000 and 1999: Three Months Ended March 31, 2000 1999 - ---------------------------------------------------------------------------- Net income before minority interest $1,867,733 $1,831,896 Depreciation of real estate assets 876,274 827,525 Amortization of leasing costs 17,093 16,686 Amortization of stock awards 59,000 48,500 Depreciation of real estate assets held in unconsolidated entities 171,980 166,645 ---------- ---------- Funds from Operations $2,992,080 $2,891,252 ========== ========== Weighted Average Shares and OP Units Outstanding 5,072,216 5,038,414 ========== ========== FFO increased $101,000, or 3%, for the three months ended March 31, 2000, to $2,992,000. The increase in FFO is primarily the result of the development of four properties in 1999 and one property in 2000. 12 Forward-Looking Statements Management has included herein certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. When used, statements which are not historical in nature including the words "anticipate," "estimate," "should," "expect," "believe," "intend" and similar expressions are intended to identify forward-looking statements. Such statements are, by their nature, subject to certain risks and uncertainties. Risks and other factors that might cause such a difference include, but are not limited to, the effect of economic and market conditions; risks that the Company's acquisition and development projects will fail to perform as expected; financing risks, such as the inability to obtain debt or equity financing on favorable terms; the level and volatility of interest rates; loss or bankruptcy of one or more of the Company's major retail tenants; and failure of the Company's properties to generate additional income to offset increases in operating expenses. Liquidity and Capital Resources The Company's principal demands for liquidity are distributions to its stockholders, debt repayment, development of new properties and future property acquisitions. During the quarter ended March 31, 2000, the Company declared a quarterly dividend of $.46 per share. The dividend was paid on April 13, 2000, to holders of record on March 31, 2000. As of March 31, 2000, the Company had total mortgage indebtedness of $52,615,801 with a weighted average interest rate of 6.92%. Future scheduled annual maturities of mortgages payable for the years ending March 31 are as follows: 2001 - $1,320,140; 2002 - $1,433,456; 2003 - $1,535,387; 2004 - $1,644,572; and 2005 - $1,761,523. This mortgage debt is all fixed rate debt. In addition, the Operating Partnership has in place a $50 million line of Credit Facility (the "Credit Facility") which is guaranteed by the Company. The loan matures in August 2000 and can be extended by the Company for an additional three years. Advances under the Credit Facility bear interest within a range of one-month to six-month LIBOR plus 150 basis points to 213 basis points or the bank's prime rate less 50 basis points to plus 13 basis points, at the option of the Company, based on certain factors such as debt to property value and debt service coverage. The Credit Facility is used to fund property acquisitions and development activities and is secured by most of the Company's Properties which are not otherwise encumbered and properties to be acquired or developed. As of March 31, 2000, $27,158,232 was outstanding under the Credit Facility. 13 The Company also has in place a $5 million line of credit (the "Line of Credit"), which matures on December 19, 2000, and which the Company expects to renew for an additional 12-month period. The Line of Credit bears interest at the bank's prime rate less 50 basis points or 175 basis points in excess of the one-month LIBOR rate, at the option of the Company. The purpose of the Line of Credit is to provide working capital to the Company and fund land options and start-up costs associated with new projects. As of March 31, 2000, there were no outstanding borrowings under the Line of Credit. The Company's wholly-owned subsidiaries have obtained construction financing of approximately $16,100,000 to fund the development of four retail properties. The notes require quarterly interest payments, based on a weighted average interest rate based on LIBOR, computed by the lender. The notes mature on October 16, 2002 and are secured by the underlying land and buildings. As of March 31, 2000, $14,080,147 was outstanding under these notes. The Company has received funding from an unaffiliated third party for the construction of certain of its Properties. Advances under this agreement bear no interest and are required to be repaid within sixty (60) days after the date construction has been completed. The advances are secured by the specific land and buildings being developed. As of March 31, 2000, $1,730,490 was outstanding under this arrangement. The Company has one development project under construction that will add an additional 14,000 square feet of retail space to the Company's portfolio. The project is expected to be completed during the second quarter of 2000. Additional Company funding required for this project is estimated to be $200,000 and will come from the Credit Facility. Management expects the development of this project to have a positive effect on cash generated by operating activities and Funds from Operations. The Company intends to meet its short-term liquidity requirements, including capital expenditures related to the leasing and improvement of the Properties, through its cash flow provided by operations and the Line of Credit. Management believes that adequate cash flow will be available to fund the Company's operations and pay dividends in accordance with REIT requirements. The Company may obtain additional funds for future development or acquisitions through other borrowings or the issuance of additional shares of capital stock. The Company intends to incur additional debt in a manner consistent with its policy of maintaining a ratio of total debt (including construction and acquisition financing) to total market capitalization of 65% or less. 14 The Company plans to begin construction of additional pre-leased developments and may acquire additional properties, which will initially be financed by the Credit Facility and Line of Credit. Management intends to periodically refinance short-term construction and acquisition financing with long-term debt and/or equity. Upon completion of refinancing, the Company intends to lower the ratio of total debt to market capitalization to 50% or less. Nevertheless, the Company may operate with debt levels or ratios which are in excess of 50% for extended periods of time prior to such refinancing. Inflation The Company's leases generally contain provisions designed to mitigate the adverse impact of inflation on net income. These provisions include clauses enabling the Company to pass through to tenants certain operating costs, including real estate taxes, common area maintenance, utilities and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Certain of the Company's leases contain clauses enabling the Company to receive percentage rents based on tenants' gross sales, which generally increase as prices rise, and, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. In addition, expiring tenant leases permit the Company to seek increased rents upon re-lease at market rates if rents are below the then existing market rates. 15 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk primarily through its borrowing activities. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's future financing requirements. Mortgages payable - As of March 31, 2000 the Company had three mortgages outstanding. The first mortgage in the amount of $32,990,741 bears interest at 7.00%. The mortgage matures on November 15, 2005. The second mortgage in the amount of $7,488,937 bears interest at 7.00%. The mortgage matures on April 1, 2013 and is subject to a rate review after the 7th year (April 1, 2006). The third mortgage in the amount of $12,136,123 bears interest at 6.63%. The mortgage matures on February 5, 2017. Construction loans - As of March 31, 2000 the Company had Construction loans outstanding of $14,080,147. Under the terms of the construction loans the Company bears no interest rate risk. Notes Payable - As of March 31, 2000 the Company had $27,158,232 outstanding on its Lines-of Credit which were subject to interest at a variable interest rate based on LIBOR. The Company does not enter into financial instrument transactions for trading or other speculative purposes or to manage interest rate exposure. A 10% adverse change in interest rates on the portion of the Company's debt bearing interest at variable rates would result in an annual increase in interest expense of approximately $200,000. 16 Agree Realty Corporation Part II Other Information Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation and Articles of Amendment of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-11 (Registration Statement No. 33-73858, as amended ("Agree S-11")) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Agree S-11) 10.1 Employment Agreement, dated January 10, 2000, by and between the Company, and David J. Prueter 27.1 Financial Data Schedule (b) Reports on Form 8-K None 17 Agree Realty Corporation Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has fully caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Agree Realty Corporation /s/ RICHARD AGREE - ------------------------------------------- Richard Agree President and Chief Executive Officer /s/ KENNETH R. HOWE - -------------------------------------------- Kenneth R. Howe Vice-President - Finance and Secretary (Principal Financial Officer) Date: May 4, 2000 - -------------------------------------------- 18