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, 1997 OR |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________ Commission File Number 1-12928 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: (810) 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| |_| 2,678,430 Shares of Common Stock, $.0001 par value, were outstanding as of May 12, 1997
<TABLE> <CAPTION> Agree Realty Corporation Form 10-Q Index - ------------------------------------------------------------------------------ Part I: Financial Information Page <S> <C> <C> Item 1. Interim Consolidated Financial Statements 3 Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996. 4-5 Consolidated Statements of Operations for the three months ended March 31, 1997 and 1996. 6 Consolidated Statement of Stockholders' Equity for the three months ended March 31, 1997. 7 Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996. 8 Notes to Consolidated Financial Statements 9 <CAPTION> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 10-14 <S> <C> <C> Part II: Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 </TABLE> 2
- ------------------------------------------------------------------------------ Agree Realty Corporation Part I: Financial Information ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS ----------------------------------------- 3
Agree Realty Corporation Consolidated Balance Sheets - ------------------------------------------------------------------------------ <TABLE> <CAPTION> March 31, December 31, 1997 1996 --------- ------------ (Unaudited) (Audited) <S> <C> <C> Assets Real Estate Investments Land $ 25,183,667 $ 25,183,667 Buildings 107,493,837 107,204,583 Property under development 117,011 85,993 ------------- ------------- 132,794,515 132,474,243 Less accumulated depreciation (18,013,592) (17,339,353) ------------- ------------- Net Real Estate Investments 114,780,923 115,134,890 Cash and Cash Equivalents 353,300 294,389 Accounts Receivable - Tenants 626,944 638,735 Restricted Asset - Cash Held in Escrow 282,355 266,771 Investments In and Advances To Unconsolidated Entities 2,084,212 1,820,605 Unamortized Deferred Expenses Financing costs 2,313,581 2,398,377 Leasing costs 139,566 141,757 Other Assets 1,204,825 686,346 ------------- ------------- $ 121,785,706 $ 121,381,870 ============= ============= <FN> See accompanying notes to consolidated financial statements. </TABLE> 4
Agree Realty Corporation Consolidated Balance Sheets - ------------------------------------------------------------------------------ <TABLE> <CAPTION> March 31, December 31, 1997 1996 --------- ------------ (Unaudited) (Audited) <S> <C> <C> Liabilities and Stockholders' Equity Mortgages Payable $ 53,583,023 $ 53,663,999 Construction Loans 1,701,406 10,616,936 Note Payable 33,485,835 23,616,382 Dividends and Distributions Payable 1,492,375 1,479,345 Accrued Interest Payable 416,549 354,988 Accounts Payable Operating 302,646 691,981 Capital expenditures 165,852 596,794 Tenant Deposits 62,727 50,394 ------------- ------------- Total Liabilities 91,210,413 91,070,819 ------------- ------------- Minority Interest 5,800,787 5,869,014 ------------- ------------- Stockholders' Equity Common stock, $.0001 par value, 20,000,000 shares authorized, 2,678,430 and 2,649,475 shares issued and outstanding 268 265 Additional paid-in capital 30,679,818 30,060,908 Deficit (5,905,580) (5,619,136) ------------- ------------- Total Stockholders' Equity 24,774,506 24,442,037 ------------- ------------- $ 121,785,706 $ 121,381,870 ============= ============= <FN> See accompanying notes to consolidated financial statements. </TABLE> 5
Agree Realty Corporation Consolidated Statements of Operations (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Three Months Ended Three Months Ended March 31, 1997 March 31, 1996 ------------------ ------------------ <S> <C> <C> Revenues Rental income $ 4,029,153 $ 3,371,031 Operating cost reimbursement 499,347 476,673 Management fees and other 26,150 19,860 ----------- ----------- Total Revenues 4,554,650 3,867,564 ----------- ----------- Operating Expenses Real estate taxes 308,630 292,114 Property operating expenses 337,544 313,482 Land lease payments 111,500 14,000 General and administrative 295,742 268,841 Depreciation and amortization 693,406 632,629 ----------- ----------- Total Operating Expenses 1,746,822 1,521,066 ----------- ----------- Income From Operations 2,807,828 2,346,498 ----------- ----------- Other Income (Expense) Interest expense, net (1,676,937) (1,400,214) Equity in net income of unconsolidated entities 6,813 63,797 ----------- ----------- Total Other Expense (1,670,124) (1,336,417) ----------- ----------- Income Before Minority Interest 1,137,704 1,010,081 Minority Interest (218,855) (196,057) ----------- ----------- Net Income $ 918,849 $ 814,024 =========== =========== Earnings Per Share $ .34 $ .31 =========== =========== Weighted Average Number of Common Shares Outstanding 2,678,430 2,649,475 =========== =========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 6
Agree Realty Corporation Consolidated Statement of Stockholders' Equity (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Common Stock Additional ------------ Paid-In Shares Amount Capital Deficit --------- ------ ----------- ------------- <S> <C> <C> <C> <C> Balance, January 1, 1997 2,649,475 $ 265 $30,060,908 $(5,619,136) Issuance of shares under the Stock Incentive Plan 28,955 3 618,910 -- Dividends declared for the period January 1, 1997 to March 31, 1997, $0.45 per share -- -- -- (1,205,293) Net income for the period January 1, 1997 to March 31, 1997 -- -- -- 918,849 --------- ----- ----------- ----------- Balance, March 31, 1997 2,678,430 $ 268 $30,679,818 $(5,905,580) ========= ===== =========== =========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 7
Agree Realty Corporation Consolidated Statements of Cash Flows (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Three Months Ended Three Months Ended March 31, 1997 March 31, 1996 ------------------ ------------------ <S> <C> <C> Cash Flows From Operating Activities Net income $ 918,849 $ 814,024 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 673,013 618,479 Amortization 122,113 110,439 Equity in net income of unconsolidated entities (6,813) (63,797) Minority interests 218,855 196,057 Decrease in accounts receivable 11,791 283,808 Increase in other assets (290,229) (240,662) Decrease in accounts payable (389,335) (227,675) Increase in accrued interest 61,561 131,061 Increase (decrease) in tenant deposits 12,333 (1,333) ------------ ------------ Net Cash Provided By Operating Activities 1,332,138 1,620,401 ------------ ------------ Cash Flows From Investing Activities Acquisition of real estate investments (including capitalized interest of $17,164 in 1996) (195,136) (3,463,741) Investments in and advances to unconsolidated entities (954) (1,199,057) ------------ ------------ Cash Flows Used In Investing Activities (196,090) (4,662,798) ------------ ------------ Cash Flows From Financing Activities Line-of-credit proceeds 9,869,453 17,442,218 Payment of construction loans (8,915,530) (11,861,006) Dividends and limited partners' distributions paid (1,479,345) (1,474,265) Repayment of payables - capital expenditures (430,942) (1,468,227) Payments for financing costs (16,924) (153,470) Payments of mortgages payable (80,976) (74,102) Payments of leasing costs (7,289) (15,624) Increase in escrow deposits (15,584) (15,463) ------------ ------------ Net Cash Provided By (Used In) Financing Activities (1,077,137) 2,380,061 ------------ ------------ Net Decrease In Cash and Cash Equivalents 58,911 (662,336) Cash and Cash Equivalents, beginning of period 294,389 1,283,672 ------------ ------------ Cash and Cash Equivalents, end of period $ 353,300 $ 621,336 ============ ============ Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 1,519,602 $ 1,197,499 ============ ============ Supplemental Disclosure of Non-Cash Transactions Dividends and limited partners' distributions declared and unpaid $ 1,492,375 $ 1,479,345 Shares issued under Stock Incentive Plan $ 618,913 $ 170,616 ============ ============ <FN> See accompanying notes to consolidated financial statements. </TABLE> 8
Agree Realty Corporation Notes to Consolidated Financial Statements (Unaudited) - ------------------------------------------------------------------------------ 1. Basis of Presentation The accompanying unaudited 1997 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, 1996 has been derived from the audited consolidated financial statements at that date. Operating results for the three-month period ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997, 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, 1996. 2. Earnings Per Share Earnings per share has been computed by dividing the income by the weighted average number of common shares and dilutive common equivalent shares outstanding. 9
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 with the sale of 2,500,000 shares of common stock. The net cash proceeds to the Company from the completion of the initial public offering were approximately $45.4 million which were used primarily to reduce outstanding indebtedness, pay stock issuance costs and establish a working capital reserve. The assets of the Company are held by, and all operations are conducted through, Agree Limited Partnership (the "Operating Partnership"), in which the Company held an 80.76% interest as of March 31, 1997 as the sole general partner. The Company is operating so as to qualify as a real estate investment trust for federal income tax purposes. The following should be read in conjunction with the Unaudited Consolidated Financial Statements of Agree Realty Corporation including the respective notes thereto, all of which are included in this Form 10-Q. Comparison of Three Months Ended March 31, 1997 to Three Months Ended March 31, 1996 Rental income for the three months ended March 31, 1997 ("1997") increased $658,000, or 20%, to $4,029,000, compared to $3,371,000 for the three months ended March 31, 1996 ("1996"). The increase is primarily the result of the development and acquisition of five properties in fiscal 1996. 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 $23,000, or 5% to $499,000 in 1997, compared to $476,000 in 1996. Operating cost reimbursements increased due to the increase in real estate taxes and property operating expenses in 1997 as compared to 1996 as explained below. Management fees and other income remained relatively constant at $26,000 in 1997 versus $20,000 in 1996. 10
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ Real estate taxes increased $16,000, or 6%, to $308,000 in 1997 versus $292,000 in 1996. The increase is the result of the addition of new properties. Property operating expenses (property maintenance, insurance and utilities) increased $24,000, or 8%, to $337,000 in 1997 versus $313,000 in 1996. The increase was the result of increased snow removal costs of $12,000, an increase in shopping center maintenance costs of $19,000, a decrease in utility costs of $6,000 and a decrease in insurance costs of $1,000 in 1997 versus 1996. Land lease payments increased $97,000 to $111,000 in 1997 versus $14,000 in 1996 as a result of the acquisition of a ground lease of a single tenant property in Aventura, Florida. General and administrative expenses increased $27,000, or 10%, to $296,000 in 1997 versus $269,000 in 1996. The increase was primarily the result of increases in compensation-related expenses of $9,000, increases in state franchise and income taxes of $11,000 and increased expenses in connection with the management of the Company's properties of $7,000. General and administrative expenses as a percentage of rental income decreased from 8.0% for 1996 to 7.3% for 1997. Depreciation and amortization increased $61,000, or 10%, to $693,000 in 1997 versus $632,000 in 1996. The increase is the result of the completion of five new properties in fiscal 1996. Interest expense increased $277,000, or 20%, to $1,677,000 in 1997, from $1,400,000 in 1996. The increase in interest expense was the result of the Company financing the development and acquisition of five new properties in fiscal 1996. Equity in net income of unconsolidated entities decreased $57,000 to $7,000 in 1997 versus $64,000 in 1996 as a result of additional expenses in 1997 related to certain of the seven properties held in joint ventures, in which the Company holds interests ranging from 8% to 20%. The Company's income before minority interest increased $128,000 as a result of the foregoing factors. 11
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 Investment Trusts, Inc. ("NAREIT") to mean net income (loss) before minority interest, computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as the primary indicator of the Company's operating performance, or as an alternative to cash flow as a measure of liquidity. The following table illustrates the calculation of FFO for the three months ended March 31, 1997 and 1996: <TABLE> <CAPTION> Three Months Ended March 31, 1997 1996 - ------------------------------------------------------------------------- <S> <C> <C> Net income before minority interest $1,137,704 $1,010,081 Depreciation of real estate assets 668,872 607,256 Amortization of leasing costs 20,393 22,945 Amortization of stock awards 32,475 20,718 Depreciation of real estate assets held in unconsolidated entities 167,996 -- ---------- ---------- Funds from operations $2,027,440 $1,661,000 ---------- ---------- Funds from Operations per share $ 0.61 $ 0.51 ---------- ---------- Weighted average shares and OP Units outstanding 3,316,389 3,287,434 ========== ========== </TABLE> 12
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ FFO increased $366,000, or 22%, to $2,027,000 in 1997. The increase in FFO is primarily the result of the development and acquisition of five properties in fiscal 1996. Liquidity and Capital Resources The Company's principal demands for liquidity are distributions to its stockholders, debt repayment, development of new properties and future property acquisitions. During the quarter ended March 31, 1997 the Company declared a quarterly dividend of $.45 per share. The dividend was paid on April 16, 1997 to holders of record on March 24, 1997. As of March 31, 1997, the Company had total mortgage indebtedness of $53,583,023 with a weighted average interest rate of 7.63%. Future scheduled annual maturities of mortgages payable for the years ended March 31, are as follows: 1998 - $378,839; 1999 - $2,699,651; 2000 - $8,534,604; 2001 - $988,630; 2002 - $1,067,065. This mortgage debt is all fixed rate debt with the exception of $2,375,000 which bears interest at one half percent over prime rate. In addition, the Operating Partnership has in place a $50 million line of credit facility (the "Credit Facility") with a bank group headed by Michigan National Bank which is guaranteed by the Company. The loan matures in November 1998 and can be extended by the Company for an additional three years. Advances under the Credit Facility bear interest within a range of LIBOR plus 200 basis points to 263 basis points or the Bank's prime rate plus 37 basis points to 75 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 all of the Company's existing properties which are not otherwise encumbered and properties to be acquired or developed. As of March 31, 1997 $33,485,835 was outstanding under the Credit Facility. The Company also has in place a $5 million line of credit which matures in September 1997, and which the Company expects to renew for an additional 12-month period. The line bears interest at the bank's prime rate or 225 basis points in excess of the one-month LIBOR rate at the option of the Company. The purpose of the loan is to provide working capital to the Company and fund land options and start-up costs associated with new projects. As of March 31, 1997 no balance was outstanding under the line of credit. 13
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ The Company received funding from an unaffiliated entity to fund 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, 1997 $1,701,406 was outstanding under this arrangement. The Company filed a registration statement on Form S-11 (Registration No. 333-25313) with the Securities and Exchange Commission on April 16, 1997 relating to the proposed offering and sale by the Company of 1,500,000 shares of common stock of the Company. Should the offering be consummated, net proceeds from the offering will be used primarily to repay debt outstanding under the aforementioned Credit Facility. 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 intends to maintain a ratio of total indebtedness (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 line of credit and the Credit Facility. Management intends to periodically refinance short term construction and acquisition financing with long-term debt and equity. Upon the completion of such refinancing, the Company intends to lower its ratio of total indebtedness to Total Market Capitalization to 50% or less. Nevertheless, the Company may operate with debt levels which are in excess of 50% for extended periods of time prior to such refinancings. 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. 14
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) 27.1 Financial Data Schedule (b) Reports on Form 8-K None 15
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 12, 1997 16