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, 1998 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| |_| 4,346,313 Shares of Common Stock, $.0001 par value, were outstanding as of November 3, 1998.
Agree Realty Corporation Form 10-Q Index - ----------------------------------------------------------------------------- Part I: Financial Information Page Item 1. Interim Consolidated Financial Statements 3 Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997. 4-5 Consolidated Statements of Operations for the nine months ended September 30, 1998 and 1997. 6 Consolidated Statements of Operations for the three months ended September 30, 1998 and 1997. 7 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1998. 8 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997. 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 - ----------------------------------------------------------------------------- ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS 3
Agree Realty Corporation Consolidated Balance Sheets (Unaudited) - ----------------------------------------------------------------------------- <TABLE> <CAPTION> September 30, December 31, 1998 1997 - ----------------------------------------------------------------------------- <S> <C> <C> Assets Real Estate Investments Land $ 34,955,162 $ 29,952,532 Buildings 126,602,399 112,307,266 Property under development 926,722 488,651 ------------- ------------- 162,484,283 142,748,449 Less accumulated depreciation (22,216,629) (20,043,235) ------------- ------------- Net Real Estate Investments 140,267,654 122,705,214 Cash and Cash Equivalents 666,331 1,785,968 Accounts Receivable - Tenants 337,866 473,918 Restricted Asset - Cash Held in Escrow 326,848 276,564 Investments In and Advances To Unconsolidated Entities 1,306,109 1,810,241 Unamortized Deferred Expenses Financing costs 1,815,959 2,133,426 Leasing costs 265,865 236,151 Other Assets 1,246,405 1,070,022 ------------- ------------- $ 146,233,037 $ 130,491,504 ============= ============= </FN> See accompanying notes to consolidated financial statements. </TABLE> 4
Agree Realty Corporation Consolidated Balance Sheets (Unaudited) - ----------------------------------------------------------------------------- <TABLE> <CAPTION> September 30, December 31, 1998 1997 - ---------------------------------------------------------------------------------- <S> <C> <C> Liabilities and Stockholders' Equity Mortgages Payable $ 50,682,527 $ 50,954,026 Construction Loans 8,643,862 5,575,091 Note Payable 22,823,944 8,641,016 Dividends and Distributions Payable 2,309,136 2,284,792 Accrued Interest Payable 308,575 248,742 Accounts Payable Operating 228,510 602,862 Capital expenditures 925,519 1,516,379 Tenant Deposits 53,740 51,240 ------------- ------------- Total Liabilities 85,975,813 69,874,148 ------------- ------------- Minority Interest 6,151,595 5,651,347 ------------- ------------- Stockholders' Equity Common stock, $.0001 par value, 20,000,000 shares authorized, 4,346,313 and 4,328,980 shares issued and outstanding 435 433 Additional paid-in capital 62,873,987 62,503,487 Deficit (8,768,793) (7,537,911) ------------- ------------- Total Stockholders' Equity 54,105,629 54,966,009 ------------- ------------- $ 146,233,037 $ 130,491,504 ============= ============= <FN> See accompanying notes to consolidated financial statements. </TABLE> 5
Agree Realty Corporation Consolidated Statements of Operations (Unaudited) - ----------------------------------------------------------------------------- <TABLE> <CAPTION> Nine Months Ended Nine Months Ended September 30, 1998 September 30, 1997 - ------------------------------------------------------------------------------------------------- <S> <C> <C> Revenues Rental income $12,791,131 $12,057,757 Operating cost reimbursement 1,553,175 1,409,491 Management fees and other 65,912 65,710 ---------- ---------- Total Revenues 14,410,218 13,532,958 ---------- ---------- Operating Expenses Real estate taxes 1,108,647 959,230 Property operating expenses 717,187 728,549 Land lease payments 408,279 337,533 General and administrative 836,644 881,098 Depreciation and amortization 2,239,264 2,082,347 ---------- ---------- Total Operating Expenses 5,310,021 4,988,757 ---------- ---------- Income From Operations 9,100,197 8,544,201 ---------- ---------- Other Income (Expense) Interest expense, net (3,796,523) (4,385,104) Development fee income 175,520 22,369 Equity in net income (loss) of unconsolidated entities (6,281) 4,109 Gain on land sales - 103,270 ---------- ---------- Total Other Expense (3,627,284) (4,255,356) ---------- ---------- Income Before Minority Interest 5,472,913 4,288,845 Minority Interest (705,883) (680,439) ---------- ---------- Net Income $4,767,030 $3,608,406 ========== ========== Earnings Per Share $ 1.10 $ 1.04 ========== ========== Weighted Average Number of Common Shares Outstanding 4,346,313 3,481,193 ========== ========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 6
Agree Realty Corporation Consolidated Statements of Operations (Unaudited) - ----------------------------------------------------------------------------- <TABLE> <CAPTION> Three Months Ended Three Months Ended September 30, 1998 September 30, 1997 - ---------------------------------------------------------------------------------------------- <S> <C> <C> Revenues Rental income $ 4,443,275 $ 4,029,933 Operating cost reimbursement 512,271 452,646 Management fees and other 18,850 19,631 ----------- ----------- Total Revenues 4,974,396 4,502,210 ----------- ----------- Operating Expenses Real estate taxes 384,800 328,397 Property operating expenses 192,576 199,234 Land lease payments 136,915 114,533 General and administrative 289,265 288,450 Depreciation and amortization 773,318 695,892 ----------- ----------- Total Operating Expenses 1,776,874 1,626,506 ----------- ----------- Income From Operations 3,197,522 2,875,704 ----------- ----------- Other Income (Expense) Interest expense, net (1,357,798) (1,206,300) Development fee income (expense) 116,489 (906) Equity in net income (loss) of unconsolidated entities (1,640) 3,325 ----------- ----------- Total Other Expense (1,242,949) (1,203,881) ----------- ----------- Income Before Minority Interest 1,954,573 1,671,823 Minority Interest (255,806) (214,580) ----------- ----------- Net Income $ 1,698,767 $ 1,457,243 =========== =========== Earnings Per Share $ .39 $ .34 =========== =========== Weighted Average Number of Common Shares Outstanding 4,346,313 4,332,280 =========== =========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 7
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, 1998 4,328,980 $ 433 $62,503,487 $(7,537,911) Issuance of shares under the Stock Incentive Plan 19,033 2 405,828 -- Shares redeemed under the Stock Incentive Plan (1,700) -- (35,328) -- Dividends declared for the period January 1, 1998 to September 30, 1998 -- -- -- (5,997,912) Net income for the period January 1, 1998 to September 30, 1998 -- -- -- 4,767,030 --------- ----- ----------- ----------- Balance, September 30, 1998 4,346,313 $ 435 $62,873,987 $(8,768,793) --------- ----- ----------- ----------- <FN> See accompanying notes to consolidated financial statements. 8
Agree Realty Corporation Consolidated Statements of Cash Flows (Unaudited) - ----------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> Nine Months Ended Nine Months Ended September 30, 1998 September 30, 1997 - ---------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows From Operating Activities Net income $ 4,767,030 $ 3,608,406 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 2,176,576 2,027,901 Amortization 387,580 359,784 Equity in net (income) loss of unconsolidated entities 6,281 (4,109) Minority interests 705,883 680,439 Gain on land sales -- (103,270) Decrease in accounts receivable 136,052 400,324 Decrease (increase) in other assets 29,481 (83,535) Decrease in accounts payable (374,352) (467,260) Increase (decrease) in accrued interest 59,833 (112,251) Increase in tenant deposits 1,667 7,963 ------------ ------------ Net Cash Provided By Operating Activities 7,896,031 6,314,392 ------------ ------------ Cash Flows From Investing Activities Acquisition of real estate investments (including capitalized interest of $340,671 in 1998 and $46,221 in 1997) (10,696,266) (3,461,445) Investments in and advances to unconsolidated entities 489,417 121,447 Proceeds from sale of land -- 148,270 ------------ ------------ Cash Flows Used In Investing Activities (10,206,849) (3,191,728) ------------ ------------ Cash Flows From Financing Activities Line-of-credit proceeds 14,182,928 14,499,452 Dividends and limited partners' distributions paid (6,870,322) (5,208,328) Payments of mortgages payable (6,447,710) (2,623,421) Construction loan proceeds 3,068,771 -- Payment of related party payables (1,757,359) -- Payment of note payble (450,000) -- Net repayment of capital expenditure payables (412,880) (413,421) Increase in escrow deposits (50,284) (46,752) Redemption of restricted stock (35,328) -- Payments of leasing costs (28,635) (29,793) Payments for financing costs (8,000) (19,555) Proceeds from issuance of common stock -- 31,897,641 Payment on line-of-credit -- (31,250,375) Payment of construction loans -- (8,915,530) ------------ ------------ Net Cash Provided By (Used In) Financing Activities 1,191,181 (2,110,082) ============ ============ </TABLE> 9
Agree Realty Corporation Consolidated Statements of Cash Flows (Unaudited) - ----------------------------------------------------------------------------- <TABLE> <CAPTION> Nine Months Ended Nine Months Ended September 30, 1998 September 30, 1997 - ---------------------------------------------------------------------------------------------- <S> <C> <C> Net Increase (Decrease) In Cash and Cash Equivalents (1,119,637) 1,012,582 Cash and Cash Equivalents, beginning of period 1,785,968 294,389 ----------- ----------- Cash and Cash Equivalents, end of period $ 666,331 $ 1,306,971 =========== =========== Supplemental Disclosure of Cash Flow Information Cash paid for interest (net of amounts capitalized) $ 3,457,367 $ 4,235,205 =========== =========== Supplemental Disclosure of Non-Cash Transactions Dividends and limited partners' distributions declared and unpaid $ 2,309,136 $ 2,286,310 Operating partnership units issued for purchase of real estate $ 691,119 -- Shares issued under Stock Incentive Plan $ 405,830 $ 618,913 =========== =========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 10
Agree Realty Corporation Notes to Consolidated Financial Statements (Unaudited) - ----------------------------------------------------------------------------- 1. Basis of Presentation The accompanying unaudited 1998 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, 1997 has been derived from the audited consolidated financial statements at that date. Operating results for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998, 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, 1997. 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. Comprehensive Income The amounts of the Company's net and comprehensive income (as defined in SFAS No. 130, "Reporting Comprehensive Income") are the same. 11
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 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 86.58% interest as of September 30, 1998. 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, 1998 to Nine Months Ended September 30, 1997 Rental income increased $733,000, or 6%, to $12,791,000 in 1998, compared to $12,058,000 in 1997. The increase is primarily the result of the development of four properties and the acquisition of one property in 1997 and 1998. 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 $144,000, or 10%, to $1,553,000 in 1998, compared to $1,409,000 in 1997. Operating cost reimbursements increased due to the increase in real estate taxes and property operating expenses from 1997 to 1998 as explained below. 12
Agree Realty Corporation Part I - ----------------------------------------------------------------------------- Management fees and other income remained constant at $66,000 in both 1998 and 1997. Real estate taxes increased $150,000, or 16%, to $1,109,000 in 1998 versus $959,000 in 1997. The increase is the result of the addition of new properties. Property operating expenses (shopping center maintenance, insurance and utilities) decreased $12,000, or 2%, to $717,000 in 1998 versus $729,000 in 1997. The decrease was the result of decreased snow removal costs of $35,000; an increase in shopping center maintenance costs of $34,000; a increase in utility costs of $28,000 and a decrease in insurance costs of $39,000 in 1998 versus 1997. Land lease payments increased $70,000 to $408,000 in 1998 versus $338,000 in 1997 as a result of the acquisition of a ground lease for the free standing Property in Lawrence, Kansas. General and administrative expenses decreased by $44,000, or 5%, to $837,000 in 1998 versus $881,000 in 1997. The decrease was primarily the result of decreased directors' and officers' liability insurance of $13,000 and decreased expenses in connection with the management of the Company's properties of $31,000. General and administrative expenses as a percentage of rental income decreased from 7.3% for 1997 to 6.5% for 1998. Depreciation and amortization increased $157,000, or 8%, to $2,239,000 in 1998 versus $2,082,000 in 1997. This increase was the result of the completion of four new properties and the acquisition of one property. Interest expense decreased $588,000, or 13%, to $3,797,000 in 1998, from $4,385,000 in 1997. The decrease in interest expense was the result of the Company using the proceeds of the 1997 Offering to reduce the Company's indebtedness. The Company recognized income of $103,000 on the sale of a parcel of land in 1997. There were no land sale gains in 1998. Development fee income increased $153,000, to $175,000 in 1998, from $22,000 in 1997. 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. 13
Agree Realty Corporation Part I - ----------------------------------------------------------------------------- Equity in net income (loss) of unconsolidated entities decreased $10,000 to a loss of ($6,000) in 1998 versus income of $4,000 in 1997 as a result of additional expenses 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 $1,184,000 as a result of the foregoing factors. Comparison of Three Months Ended September 30, 1998 to Three Months Ended September 30, 1997 Rental income increased $413,000, or 10%, to $4,443,000 in 1998, compared to $4,030,000 in 1997. The increase is primarily the result of the development of four properties and the acquisition of one property in 1997 and 1998. Operating cost reimbursements increased $59,000, or 13%, to $512,000 in 1998, compared to $453,000 in 1997. Operating cost reimbursements increased due to the increase in real estate taxes and property operating expenses from 1997 to 1998 as explained below. Management fees and other income remained relatively constant at $19,000 in 1998 and $20,000 in 1997. Real estate taxes increased $57,000, or 17%, to $385,000 in 1998 versus $328,000 in 1997. The increase is the result of the addition of new properties. Property operating expense (shopping center maintenance, insurance and utilities) decreased $6,000, or 3% to $193,000 in 1998 versus $199,000 in 1997. The decrease was the result of decreased snow removal costs of $1,000; a decrease in shopping center maintenance costs of $11,000; an increase in utility costs of $15,000 and a decrease in insurance costs of $9,000 in 1998 versus 1997. Land lease payments increased $22,000 to $137,000 in 1998 versus $115,000 in 1997 as a result of the acquisition of a ground lease for the free standing Property in Lawrence, Kansas. General and administrative expenses remained relatively constant at $289,000 in 1998 versus $288,000 in 1997. General and administrative expenses as a percentage of rental income decreased from 7.2% for 1997 to 6.5% for 1998. 14
Agree Realty Corporation Part I - ----------------------------------------------------------------------------- Depreciation and amortization increased $77,000, or 11%, to $773,000 in 1998 versus $696,000 in 1997. This increase was the result of the completion of four new properties and the acquisition of one property in 1997 and 1998. Interest expense increased $152,000, or 13%, to $1,358,000 in 1998, from $1,206,000 in 1997. This increase was the result of the completion of four new properties and the acquisition of one property in 1997 and 1998. Development fee income increased $117,000, to $116,000 in 1998, from an expense of $1,000 in 1997. 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 decreased $5,000 to a loss of ($2,000) in 1998 versus income of $3,000 in 1997 as a result of additional expenses 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 $283,000 as a result of the foregoing factors. 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 net income as the primary indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. 15
Agree Realty Corporation Part I - ----------------------------------------------------------------------------- The following tables illustrate the calculation of FFO for the nine months and three months ended September 30, 1998 and 1997: <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 - ----------------------------------------------------------------------------- <S> <C> <C> Net income before minority interest $ 5,472,913 $ 4,288,845 Depreciation of real estate assets 2,171,229 2,008,722 Amortization of leasing costs 54,253 62,881 Amortization of stock awards 117,000 97,425 Depreciation of real estate assets held in unconsolidated entities 525,660 515,765 Gain on sale of assets -- (103,270) Development fee income (175,520) (22,369) ----------- ----------- Funds from Operations $ 8,165,535 $ 6,847,999 =========== =========== Funds from Operations Per Share $ 1.64 $ 1.66 =========== =========== Weighted Average Shares and OP Units Outstanding 4,989,877 4,119,152 =========== =========== </TABLE> FFO increased $1,318,000, or 19%, to $8,166,000. The increase in FFO is primarily the result of the reduction in interest expense as a result of the 1997 Offering and the development of four properties and the acquisition of one property. <TABLE> <CAPTION> Three Months Ended September 30, 1998 1997 - ----------------------------------------------------------------------------- <S> <C> <C> Net income before minority interest $ 1,954,573 $ 1,671,823 Depreciation of real estate assets 752,345 670,273 Amortization of leasing costs 16,968 21,656 Amortization of stock awards 39,000 32,475 Depreciation of real estate assets held in unconsolidated entities 175,220 171,922 Development fee (income) expense (116,489) 906 ----------- ----------- Funds from Operations $ 2,821,617 $ 2,569,055 =========== =========== Funds from Operations Per Share $ .56 $ .52 =========== =========== Weighted Average Shares and OP Units Outstanding 5,000,906 4,970,239 =========== =========== </TABLE> FFO increased $253,000, or 10%, to $2,822,000. The increase in FFO is primarily the result of the development of four properties and the acquisition of one property. 16
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 September 30, 1998, the Company declared a quarterly dividend of $.46 per share. The dividend was paid on October 15, 1998 to holders of record on September 30, 1998. As of September 30, 1998, the Company had total mortgage indebtedness of $50,682,527 with a weighted average interest rate of 7.54%. Future scheduled annual maturities of mortgages payable for the years ending September 30 are as follows: 1999 - $8,245,831; 2000 - $951,659; 2001 - $1,027,078; 2002 - $1,108,655; 2003 - $1,196,906. 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, 1998, $22,073,944 was outstanding under the Credit Facility. 17
Agree Realty Corporation Part I - ----------------------------------------------------------------------------- The Company also has in place a $5 million line of credit (the "Line of Credit"), which matures October 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, 1998, $750,000 was outstanding under the Line of Credit. The Company's two wholly-owned subsidiaries have obtained construction financing of approximately $6,850,000 to fund the development of two retail properties. The notes require quarterly interest payments, based on a weighted average interest rate based on LIBOR, computed by the lender. The notes mature on October 16, 2002 and are secured by the underlying land and buildings. As of September 30, 1998, $6,913,372 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, 1998, $1,730,490 was outstanding under this arrangement. During the quarter ended September 30, 1998, the Company completed the development of two properties that added 39,000 square feet to the portfolio. One property is located in Tulsa, Oklahoma and contains 25,000 square feet. The other property is located in Pontiac, Michigan and contains 14,000 square feet. On August 18, 1998, the Company purchased, through its operating partnership, the Mt. Pleasant Shopping Center located in Mt. Pleasant, Michigan. This property is anchored by national tenants and contains 241,458 square feet of gross leasable area and is 100% leased and occupied. An independent appraisal determined the purchase price of $9,076,000. Payment consisted of $8,385,000 in debt assumption, with the balance paid through the issuance of 35,588 Operating Partnership units. The sellers are members of the Agree organization and are existing limited partners in the operating partnership. The Company has managed this property since April 1994, the date of its initial public offering. 18
Agree Realty Corporation Part I - ----------------------------------------------------------------------------- The Company has two development projects under construction that will add an additional 28,000 square feet of retail space to the Company's portfolio. The projects are expected to be completed during the first quarter of 1999. Additional Company funding required for this project is estimated to be $3,200,000 and will come from the Credit Facility. 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 tenants, vendors, banks and others with whom it does business to determine if their failure to be Year 2000 compliant would have a material adverse effect upon the Company. To date, nothing has come to the attention of management that leads it to conclude that the likelihood of such adverse effect reasonably exists. The Company believes its information systems are fully compliant, however it will obtain verification of Year 2000 compliance. Verification will be obtained through an independent Year 2000 review of the Company's information system. The cost for this review is expected to be less than $5,000. 19
Agree Realty Corporation Part I - ----------------------------------------------------------------------------- In the event that any of the Company's significant tenants or suppliers do not successfully and timely achieve year 2000 compliance, the Company's operations may be affected. The Company does not anticipate any material impact on its results from operations or its financial condition as a result of any Year 2000 compliance issures. 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. 20
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 Second amendment to amended and restated $5 million business loan agreement dated October 19, 1998 between Agree Limited Partnership and Michigan National Bank. 27.1 Financial Data Schedule (b) Reports on Form 8-K None 21
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: November 3, 1998 22