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, 1996 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| |_| 2,649,475 Shares of Common Stock, $.0001 par value, were outstanding as of November 1, 1996
<TABLE> <CAPTION> Agree Realty Corporation Form 10-Q Index - ------------------------------------------------------------------------------ Part I: Financial Information Page <S> <C> Item 1. Interim Consolidated Financial Statements 3 Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995. 4-5 Consolidated Statements of Operations for the nine months ended September 30, 1996 and 1995. 6 Consolidated Statements of Operations for the three months ended September 30, 1996 and 1995. 7 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1996. 8 Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995. 9-10 Notes to Consolidated Financial Statements 11-13 <CAPTION> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14-20 <CAPTION> Part II: Other Information <CAPTION> <S> <C> 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 </TABLE> 2
Agree Realty Corporation Part I: Financial Information - ------------------------------------------------------------------------------ ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS 3
Agree Realty Corporation Consolidated Balance Sheets - ------------------------------------------------------------------------------ <TABLE> <CAPTION> September 30, December 31, 1996 1995 ------------- ------------ (Unaudited) (Audited) Assets <S> <C> <C> Real Estate Investments Land $ 25,241,168 $ 23,224,377 Buildings 102,775,695 94,955,086 Property under development 1,759,436 180,805 ------------- ------------- 129,776,299 118,360,268 Less accumulated depreciation (16,692,703) (14,792,193) ------------- ------------- Net Real Estate Investments 113,083,596 103,568,075 Cash and Cash Equivalents 31,487 1,283,672 Accounts Receivable - Tenants 292,529 626,280 Restricted Asset - Cash Held in Escrow 305,591 259,204 Investments In and Advances To Unconsolidated Entities 2,031,758 -- Unamortized Deferred Expenses Financing costs 2,495,577 2,513,665 Leasing costs 153,225 140,026 Other Assets 727,486 537,487 ------------- ------------- $ 119,121,249 $ 108,928,409 ============= ============= <FN> See accompanying notes to consolidated financial statements. </TABLE> 4
Agree Realty Corporation Consolidated Balance Sheets - ------------------------------------------------------------------------------ <TABLE> <CAPTION> September 30, December 31, 1996 1995 ------------- ------------ (Unaudited) (Audited) Liabilities and Stockholders' Equity <S> <C> <C> Mortgages Payable $ 53,743,198 $ 53,970,525 Construction Loans 9,838,752 17,603,785 Notes Payable 23,215,297 1,977,808 Dividends and Distributions Payable 1,479,345 1,474,265 Accrued Interest Payable 344,598 189,256 Accounts Payable Operating 197,534 596,913 Capital expenditures 165,852 1,637,861 Tenant Deposits 61,020 53,477 ------------- ------------- Total Liabilities 89,045,596 77,503,890 ------------- ------------- Minority Interest 5,823,263 6,118,017 ------------- ------------- Stockholders' Equity Common stock, $.0001 par value, 20,000,000 shares authorized, 2,649,475 and 2,638,185 shares issued and outstanding 265 264 Additional paid-in capital 30,060,908 29,890,292 Deficit (5,808,783) (4,584,054) ------------- ------------- Total Stockholders' Equity 24,252,390 25,306,502 ------------- ------------- $ 119,121,249 $ 108,928,409 ============= ============= <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, 1996 September 30, 1995 ------------------ ------------------ Revenues <S> <C> <C> Rental income $ 10,575,838 $ 8,808,499 Operating cost reimbursement 1,273,309 1,223,199 Management fees and other 60,634 55,588 ------------ ------------ Total Revenues 11,909,781 10,087,286 ------------ ------------ Operating Expenses Real estate taxes 886,643 843,395 Property operating expenses 698,130 584,072 Land lease payments 224,583 42,000 General and administrative 779,177 700,367 Depreciation and amortization 1,954,065 1,720,157 ------------ ------------ Total Operating Expenses 4,542,598 3,889,991 ------------ ------------ Income From Operations 7,367,183 6,197,295 ------------ ------------ Other Income (Expense) Interest expense, net (4,510,656) (3,202,621) Equity in net income of unconsolidated entities 62,025 -- ------------ ------------ Total Other Expense (4,448,631) (3,202,621) ------------ ------------ Income Before Minority Interest 2,918,552 2,994,674 Minority Interest (566,491) (583,063) ------------ ------------ Net Income $ 2,352,061 $ 2,411,611 ============ ============ Earnings Per Share $ .89 $ .91 ============ ============ Weighted Average Number of Common Shares Outstanding 2,649,475 2,638,185 ============ ============ <FN> See accompanying notes to consolidated financial statements. 6 </TABLE>
Agree Realty Corporation Consolidated Statements of Operations (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Three Months Ended Three Months Ended September 30, 1996 September 30, 1995 ------------------ ------------------ Revenues <S> <C> <C> Rental income $ 3,618,303 $ 2,931,027 Operating cost reimbursement 377,313 411,103 Management fees and other 21,054 17,908 ----------- ----------- Total Revenues 4,016,670 3,360,038 ----------- ----------- Operating Expenses Real estate taxes 300,938 279,145 Property operating expenses 191,099 178,614 Land lease payments 111,500 14,000 General and administrative 237,305 238,064 Depreciation and amortization 667,215 574,523 ----------- ----------- Total Operating Expenses 1,508,057 1,284,346 ----------- ----------- Income From Operations 2,508,613 2,075,692 ----------- ----------- Other Expense Interest expense, net (1,575,053) (1,071,293) Equity in net loss of unconsolidated entities (89,023) -- ----------- ----------- Total Other Expense (1,664,076) (1,071,293) ----------- ----------- Income Before Minority Interest 844,537 1,004,399 Minority Interest (163,925) (195,556) ----------- ----------- Net Income $ 680,612 $ 808,843 =========== =========== Earnings Per Share $ .26 $ .31 =========== =========== Weighted Average Number of Common Shares Outstanding 2,649,475 2,638,185 =========== =========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 7
Agree Realty Corporation Consolidated Statement of Stockholders' Equity (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Additional Common Stock Paid-In ------------------- Capital Deficit Shares Amount ----------- ------------ -------- ------ <S> <C> <C> <C> <C> Balance, January 1, 1996 2,638,185 $ 264 $29,890,292 $(4,584,054) Stock awards 11,290 1 170,616 -- Dividends declared for the period January 1, 1996 to September 30, 1996, $1.35 per share -- -- -- (3,576,790) Net income for the period January 1, 1996 to September 30, 1996 -- -- -- 2,352,061 --------- ----- ----------- ----------- Balance, September 30, 1996 2,649,475 $ 265 $30,060,908 $(5,808,783) ========= ===== =========== =========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 8
Agree Realty Corporation Consolidated Statements of Cash Flows (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Nine Months Ended Nine Months Ended September 30, 1996 September 30, 1995 ------------------ ------------------ <S> <C> <C> Cash Flows From Operating Activities Net income $ 2,352,061 $ 2,411,611 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,882,695 1,645,745 Amortization 376,996 247,866 Equity in net income of unconsolidated entities (62,025) -- Minority interests 566,491 583,063 Decrease in accounts receivable 333,751 359,750 Increase in other assets (33,913) (252,786) Decrease in accounts payable (399,379) (206,310) Increase in accrued interest 155,342 5,620 Increase in tenant deposits 7,543 3,533 ------------ ------------ Net Cash Provided By Operating Activities 5,179,562 4,798,092 ------------ ------------ Cash Flows Used In Investing Activities Acquisition of real estate investments (including capitalized interest of $64,109 in 1996 and $59,752 in 1995) (11,416,031) (14,125,645) Investment in and advances to unconsolidated entities (1,969,733) -- Proceeds from sale of marketable securities -- 300,188 ------------ ------------ Net Cash Used In Investing Activities (13,385,764) (13,825,457) ------------ ------------ Cash Flows From Financing Activities Line-of-credit proceeds 21,237,489 2,577,808 Payment of construction loans (7,765,033) -- Dividends and limited partners' distributions paid (4,432,954) (4,422,793) Repayment of payables - capital expenditures (1,472,009) -- Payments for financing costs (287,538) (1,250) Payments of mortgages payable (227,327) (208,044) Payments of leasing costs (52,224) -- Increase in escrow deposits (46,387) (55,440) Increase in payables - capital expenditures -- 11,145,252 ------------ ------------ Net Cash Provided By Financing Activities 6,954,017 9,035,533 ------------ ------------ Net Increase (Decrease) In Cash and Cash Equivalents (1,252,185) 8,168 Cash and Cash Equivalents, beginning of period 1,283,672 1,659,406 ------------ ------------ Cash and Cash Equivalent, end of period $ 31,487 $ 1,667,574 ============ ============ <FN> See accompanying notes to consolidated financial statements. </TABLE> 9
Agree Realty Corporation Consolidated Statements of Cash Flows (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Nine Months Ended Nine Months Ended September 30, 1996 September 30, 1995 ------------------ ------------------ <S> <C> <C> Supplemental Disclosure of Cash Flow Information Cash paid for interest $4,129,436 $3,160,786 ========== ========== Supplemental Disclosure of Non-Cash Transactions Dividends and limited partners' distributions declared and unpaid $1,479,345 $1,474,265 Shares issued under Restricted Stock Plan $ 170,616 $ -- ========== ========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 10
1. Basis of The accompanying unaudited 1996 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, 1995 has been derived from the audited consolidated financial statements at that date. Operating results for the nine month period ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996 or 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, 1995. 2. Summary of Investments in Unconsolidated Entities Significant The Company uses the equity method of accounting Accounting for investments in non- majority owned entities Policies where the Company has the ability to exercise significant influence over operating and financial policies. Earnings Per Share The earnings per share amounts for 1996 and 1995 have been computed by dividing net income by the weighted average number of common shares outstanding. 3. Investments in During 1996, the Company acquired economic and Advances interests, generally approximating 8-15%, in seven to limited liability companies formed for the purpose Unconsolidated of acquiring, developing and operating properties Entities located in Ann Arbor, Michigan; Boynton Beach. Florida; Tulsa, Oklahoma; Oklahoma City, Oklahoma; Omaha, Nebraska; and Indianapolis, Indiana. The Company accounts for these investments using the equity method of accounting, whereby its initial investment is recorded at cost, and the carrying amount of the investment is (a) increased by the Company's share of the investees' 11
Agree Realty Corporation Notes to Consolidated Financial Statements (Unaudited) - ------------------------------------------------------------------------------ earnings (as defined in the limited liability company agreements), and (b) reduced by distributions paid from the investees to the Company. Combined summarized balance sheet and income statement information for these seven unconsolidated entities is as follows: <TABLE> <CAPTION> September 30, 1996 ------------------------------------------------------- <S> <C> Assets Operating property $23,312,112 Property under development 8,022,477 ----------- Total Real Estate 31,334,589 Other Assets 1,865,095 ----------- $33,199,684 =========== Liabilities and Equity Liabilities $ 181,590 Equity 33,018,094 ----------- $33,199,684 =========== <CAPTION> Nine Months Ended September 30, 1996 ------------------ <S> <C> Rental revenues $ 821,260 Expenses 199,683 --------- Net Income $ 621,577 ========= </TABLE> 12
Agree Realty Corporation Notes to Consolidated Financial Statements (Unaudited) - ------------------------------------------------------------------------------ 4. Lease Commitments The Company has entered into certain land lease agreements for three of its properties. As of September 30, 1996, approximate future annual lease commitments under these agreements are as follows: <TABLE> <CAPTION> Year Ended September 30, ---------------------------------------------------------------------- <S> <C> 1997 $ 446,000 1998 446,000 1999 446,000 2000 472,000 2001 485,000 Thereafter 6,737,417 ========== </TABLE> 13
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following should be read in conjunction with the Unaudited Consolidated Financial Statements of Agree Realty Corporation (the "Company") including the respective notes thereto, all of which are included in this Form 10-Q. Formation of the Company and Initial Public Offering Agree Realty Corporation was established to continue the business of the Agree Predecessors in operating and expanding the community shopping center business. The Company effectively commenced its operations on April 22, 1994 with the sale of 2,500,000 shares of common stock at a price of $19.50 per share. The net cash proceeds to the Company from the completion of this initial public offering was approximately $45.4 million which was 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 conducted through the Operating Partnership. The Company is operating as a real estate investment trust ("REIT") for federal income tax purposes. Comparison of Nine Months Ended September 30, 1996 to Nine Months Ended September 30, 1995 Rental income increased $1,768,000 or 20% to $10,576,000 in 1996, compared to $8,808,000 in 1995. The increase was the result of development and acquisition of seven properties. 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 $50,000 or 4% to $1,273,000 in 1996, compared to $1,223,000 in 1995. Operating cost reimbursements increased due to the increase in real estate taxes and property operating expenses from 1996 to 1995 as explained below. 14
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ Management fees and other income remained relatively constant at $61,000 in 1996 versus $56,000 in 1995. Real estate taxes increased $43,000, or 5% to $887,000 in 1996 versus $844,000 in 1995. The increase is the result of general assessment increases relating to the shopping center properties and the addition of several new properties. Property operating expenses (shopping center maintenance, insurance and utilities) increased $114,000, or 20% to $698,000 in 1996 versus $584,000 in 1995. The increase was the result of increased snow removal costs ($42,000) as a result of heavy snows in northern Michigan and Wisconsin, shopping center maintenance increased $85,000, insurance decreased $18,000 and utilities increased $5,000 in 1996 versus 1995. Land lease payments increased $183,000 to $225,000 in 1996 versus $42,000 in 1995 as a result of the acquisition of a single tenant property in Aventura, Florida. General and administrative expenses increased $79,000, or 11% to $779,000 in 1996 versus $700,000 in 1995. The increase was primarily the result of compensation related expenses ($15,000) and other general increases ($64,000). General and administrative expenses as a percentage of rental income, decreased from 8.0% for 1995 and 7.4% for 1996. Depreciation and amortization increased $234,000 or 14% to $1,954,000 in 1996 versus $1,720,000 in 1995. The increase is the result of the completion of seven new properties in late 1995 and early 1996. Interest expense increased $1,308,000 or 41%, to $4,511,000 in 1996, from $3,203,000 in 1995. The increase in interest expense was the result of the Company financing the development and acquisition of seven new properties completed in late 1995 and early 1996. Equity in net income of unconsolidated entities represents the Company's share of the net income ($62,000) of seven joint ventures formed for the purpose of acquiring and developing single tenant properties. These entities were not in existence for the period ended September 30, 1995. The Company's income before minority interest decreased $76,000 as a result of the foregoing factors. 15
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ Comparison of Three Months Ended September 30, 1996 to Three Months Ended September 30, 1995 Rental income increased $687,000 or 23% to $3,618,000 in 1996, compared to $2,931,000 in 1995. The increase was the result of $668,000 resulting from the development and acquisition of seven new properties in 1996 and an increase of $19,000 as a result of increased occupancy of the Company's shopping centers properties. Operating cost reimbursements decreased $34,000 or 8% to $377,000 in 1996, compared to $411,000 in 1995. The decrease was primarily due to expenses for shopping center parking lot repairs, that were incurred during the quarter, and not reimbursed by certain tenants. Management fees and other income remained relatively constant at $21,000 in 1996 versus $18,000 in 1995. Real estate taxes increased $22,000, or 8% to $301,000 in 1996 versus $279,000 in 1995. The increase is the result of general assessment increases relating to the shopping center properties and the addition of several new properties. Property operating expense increased $12,000, or 7% to $191,000 in 1996 versus $179,000 in 1995. The increase was the result of an increase in shopping center maintenance ($18,000) and a decrease in insurance costs ($6,000). Land lease payments increased $97,000 to $111,000 in 1996, versus $14,000 in 1995, as a result of the acquisition of a single tenant property in Aventura, Florida. General and administrative expenses remained relatively constant at $237,000 in 1996 versus $238,000 in 1995. General and administrative expenses, as a percentage of rental income, decreased from 8.1% for 1995 and 6.6% for 1996. Depreciation and amortization increased $93,000, or 16% to $667,000 in 1996 versus $574,000 in 1995. The increase is the result of the completion of seven new properties in late 1995 and early 1996. Interest expense increased $504,000, or 47% to $1,575,000 in 1996, from $1,071,000 in 1995. The increase was the result of the Company financing the development and acquisition of seven new properties completed in late 1995 and early 1996. 16
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ Equity in net loss of unconsolidated entities represents the Company's share of the net loss ($89,000) of seven joint ventures formed for the purpose of acquiring and developing seven new properties. These entities were not in existence for the period ended September 30, 1995. The Company's income before minority interest decreased $160,000 as a result of the foregoing factors. Funds from Operations "Funds from operations" is defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") to mean net income, computed in accordance with generally accepted accounting principles, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. On March 3, 1995, NAREIT adopted the NAREIT White Paper on Funds From Operations (the "NAREIT White Paper") which provided additional guidance on the calculation of funds from operations. As a result, the Company has presented below the revised calculation of funds from operations ("New FFO") and the calculation previously used ("Old FFO"): <TABLE> <CAPTION> Three Months Ended September 30, 1996 1995 - ------------------------------------------------------------------------------- <S> <C> <C> Net income before minority interest $ 844,537 $ 1,004,399 Depreciation of real estate assets 639,568 546,343 Amortization 45,294 38,114 Depreciation of real estate assets held in unconsolidated entities 199,683 -- ----------- ----------- New FFO 1,729,082 1,588,856 Amortization of deferred loan costs 109,718 57,974 Other depreciation and amortization 3,071 2,253 ----------- ----------- Old FFO $ 1,841,871 $ 1,649,083 =========== =========== New FFO per share $ .53 $ .48 =========== =========== Old FFO per share $ .56 $ .50 =========== =========== Weighted average shares outstanding 3,287,434 3,276,144 =========== =========== </TABLE> 17
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Nine Months Ended September 30, 1996 1995 - ---------------------------------------------------------------------- <S> <C> <C> Net income before minority interest $2,918,552 $2,994,674 Depreciation of real estate assets 1,874,126 1,638,986 Amortization 133,524 110,973 Depreciation of real estate assets held in unconsolidated entities 199,683 -- ---------- ---------- New FFO 5,125,885 4,744,633 Amortization of deferred loan costs 305,626 173,454 Other depreciation and amortization 8,569 6,759 ---------- ---------- Old FFO $5,440,080 $4,924,846 ========== ========== New FFO per share $ 1.56 $ 1.45 ========== ========== Old FFO per share $ 1.65 $ 1.50 ========== ========== Weighted average shares outstanding 3,287,434 3,276,144 ========== ========== </TABLE> Liquidity and Capital Resources The Company's principal demands for liquidity are expected to be distributions to its stockholders, debt repayment, development of new properties, and future property acquisitions. During the quarter ended September 30, 1996, the Company declared a quarterly dividend of $.45 per share. The dividend was paid on October 17, 1996 to holders of record on September 30, 1996. As of September 30, 1996, the Company had total mortgage indebtedness of $53,743,198 with a weighted average interest rate of 7.61%. Future scheduled annual maturities of mortgages payable for the years ended September 30, are as follows: 1997 - $337,467; 1998 - $412,059; 1999 - $10,556,976; 2000 - $951,659; 2001 - $1,027,078. The debt is all fixed rate debt with the exception of $2,375,000 which bears interest at one half percent over the prime rate. 18
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ The Company has in place a $50 million line-of-credit facility (the "Credit Facility") which is guaranteed by the Company. The loan is for a three year period 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 capital value and debt service coverage. The Credit Facility will be used to fund property acquisitions and development activities and is secured by existing unencumbered properties and properties to be acquired or developed. As of September 30, 1996, $20,746,937 was outstanding under this facility. The Company also has in place a $5 million dollar line-of-credit. 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 to the Company and fund land options and start-up costs associated with new projects. As of September 30, 1996, $2,468,360 is outstanding under this line. The Company has entered into an agreement to fund the construction of certain retail 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, 1996 $9,838,752 was outstanding under this agreement. The Company has development activity under way which will add an additional 62,000 square feet of retail space to the Company's portfolio during 1996. In September 1996, the Company completed development of a 25,000 square foot property in Norman, Oklahoma. Management expects the development of these retail projects to have a positive effect on cash generated by operating activities and Funds From Operations. Additional Company funding required for these projects is estimated to be $2.5 million and will come from the 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 arrangement. Management believes that adequate cash flow will be available to fund its 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 common stock. The Company intends to incur additional debt in a manner consistent with its policy of maintaining a long-term debt to total market capitalization ratio of 50% or less, provided that during the period when temporary construction or acquisition financing is used in connection with the development or acquisition of a property, the Company intends to maintain a ratio of total debt (including construction an acquisition financing) to total market capitalization of 65% or less. 19
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ 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 10.1 Amended and Restated Business Loan Agreement 10.2 Addendum to Amended and Restated Business Loan Agreement 27 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 1, 1996 22