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, 2001 OR | | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ---------- ---------- Commission File Number 1-12928 AGREE REALTY CORPORATION -------------------------------------------------------------------------------- (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| | | 4,416,869 Shares of Common Stock, $.0001 par value, were outstanding as of November 6, 2001
AGREE REALTY CORPORATION FORM 10-Q INDEX <TABLE> <CAPTION> PART I: FINANCIAL INFORMATION PAGE <S> <C> <C> Item 1. Interim Consolidated Financial Statements 3 Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 4-5 Consolidated Statements of Operations for the nine months ended September 30, 2001 and 2000 6 Consolidated Statements of Operations for the three months ended September 30, 2001 and 2000 7 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2001 8 Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 9 Notes to Consolidated Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and 11-19 Results of Operations PART II: OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5 Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 </TABLE> 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, 2001 2000 --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS REAL ESTATE INVESTMENTS Land $ 46,803,530 $ 45,028,679 Buildings 147,921,533 143,474,205 Property under development 543,834 2,545,018 --------------------------------------------------------------------------------------------------------------------- 195,268,897 191,047,902 Less accumulated depreciation (32,696,753) (29,907,682) --------------------------------------------------------------------------------------------------------------------- NET REAL ESTATE INVESTMENTS 162,572,144 161,140,220 CASH AND CASH EQUIVALENTS 100,879 1,119,072 ACCOUNTS RECEIVABLE - TENANTS 169,615 741,565 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES 258,015 266,449 UNAMORTIZED DEFERRED EXPENSES Financing 1,193,600 1,476,100 Leasing costs 330,031 310,424 OTHER ASSETS 781,836 998,260 --------------------------------------------------------------------------------------------------------------------- $ 165,406,120 $ 166,052,090 ===================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. 4
AGREE REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> SEPTEMBER 30, December 31, 2001 2000 --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY MORTGAGE PAYABLE $ 51,071,080 $ 52,119,770 CONSTRUCTION LOANS 16,573,652 16,614,002 NOTES PAYABLE 36,158,232 35,358,232 DIVIDENDS AND DISTRIBUTIONS PAYABLE 2,341,591 2,331,379 ACCRUED INTEREST PAYABLE 271,045 314,607 ACCOUNTS PAYABLE Operating 507,564 1,017,493 Capital expenditures 1,225,029 1,110,673 TENANT DEPOSITS 50,020 51,240 --------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 108,198,213 108,917,396 --------------------------------------------------------------------------------------------------------------------- MINORITY INTEREST 5,690,605 5,707,608 --------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $.0001 par value; 20,000,000 shares authorized, 4,416,869 and 4,394,669 shares issued and outstanding 442 440 Additional paid-in capital 63,937,682 63,632,433 Deficit (11,774,231) (11,663,446) --------------------------------------------------------------------------------------------------------------------- 52,163,893 51,969,427 Less: unearned compensation - restricted stock (646,591) (542,341) --------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 51,517,302 51,427,086 --------------------------------------------------------------------------------------------------------------------- $ 165,406,120 $ 166,052,090 ===================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. 5
AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended Nine Months Ended September 30, 2001 September 30,2000 ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> REVENUES Minimum rents $ 16,266,919 $ 15,595,738 Percentage rents 265,456 187,970 Operating cost reimbursements 1,832,947 1,798,722 Management fees and other 32,859 32,770 ---------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 18,398,181 17,615,200 ---------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Real estate taxes 1,282,484 1,309,120 Property operating expenses 1,021,823 889,013 Land lease payments 554,220 500,353 General and administrative 1,319,502 1,207,356 Depreciation and amortization 2,876,944 2,760,492 ---------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 7,054,973 6,666,334 ---------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 11,343,208 10,948,866 ---------------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense, net (5,185,504) (5,250,526) Equity in net income of unconsolidated entities 520,739 348,759 Gain on sale of assets 218,543 - ---------------------------------------------------------------------------------------------------------------------- TOTAL OTHER EXPENSE (4,446,222) (4,901,767) ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST 6,896,986 6,047,099 MINORITY INTEREST (912,492) (803,702) ---------------------------------------------------------------------------------------------------------------------- NET INCOME $ 5,984,494 $ 5,243,397 ---------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE $ 1.35 $ 1.19 ---------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,416,869 4,396,187 ====================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. 6
AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Three Months Ended September 30, 2001 September 30, 2000 ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> REVENUES Minimum rents $ 5,428,064 $ 5,311,418 Percentage rents 134,096 84,939 Operating cost reimbursements 523,970 591,513 Management fees and other 11,024 10,278 ------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 6,097,154 5,998,148 ------------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES Real estate taxes 418,657 435,790 Property operating expenses 271,229 243,235 Land lease payments 184,740 184,740 General and administrative 460,277 395,765 Depreciation and amortization 969,962 923,508 ------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING EXPENSES 2,304,865 2,183,038 ------------------------------------------------------------------------------------------------------------------------ INCOME FROM OPERATIONS 3,792,289 3,815,110 ------------------------------------------------------------------------------------------------------------------------ OTHER INCOME (EXPENSE) Interest expense, net (1,588,216) (1,833,747) Equity in net income of unconsolidated entities 173,579 173,580 Gain on sale of assets 80,000 - ------------------------------------------------------------------------------------------------------------------------ TOTAL OTHER EXPENSE (1,334,637) (1,660,167) INCOME BEFORE MINORITY INTEREST 2,457,652 2,154,943 MINORITY INTEREST (325,152) (286,809) ------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 2,132,500 $ 1,868,134 ======================================================================================================================== EARNINGS PER SHARE $ .48 $ .43 ======================================================================================================================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,416,869 4,394,669 ======================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. 7
AGREE REALTY CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Unearned Common Stock Additional Compensation - ------------------------------- Paid-In Restricted Shares Amount Capital Deficit Stock --------------------------------------------- ---------------- -------------- ---------------- ---------------- ------------------ <S> <C> <C> <C> <C> <C> BALANCE, January 1, 2001 4,394,669 $ 440 $ 63,632,433 $ (11,663,446) $ (542,341) Issuance of shares under Stock Incentive Plan 27,291 2 375,249 - (305,250) Shares redeemed under the stock Incentive Plan (5,091) - (70,000) - - Vesting of restricted stock - - - - 201,000 Dividends declared for the period January 1, 2001 to September 30, 2001 - - - (6,095,279) - Net income for the period January 1, 2001 to September 30, 2001 - - - 5,984,494 - --------------------------------------------- ---------------- -------------- ---------------- ---------------- ------------------ BALANCE, September 30, 2001 4,416,869 $ 442 $ 63,937,682 $ (11,774,231) $ (646,591) --------------------------------------------- ---------------- -------------- ---------------- ---------------- ------------------ </TABLE> See accompanying notes to consolidated financial statements. 8
AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended Nine Months Ended September 30, 2001 September 30, 2000 --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,984,494 $ 5,243,397 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 2,819,093 2,696,336 Amortization 340,850 338,156 Stock-based compensation 201,000 177,000 Gain on sale of assets (218,543) - Equity in net income of unconsolidated entities (520,739) (348,759) Minority interests 912,492 803,702 Decrease in accounts receivable 571,950 335,619 Decrease (increase) in other assets 126,599 (193,398) Decrease in accounts payable (509,929) (557,138) Decrease in accrued interest (43,562) (3,429) Increase (decrease) in tenant deposits (1,220) 1,453 --------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 9,662,485 8,492,939 --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of real estate investments (including capitalized interest of $137,800 in 2001 and $232,400 in 2000) (2,995,966) (6,426,617) Distributions from unconsolidated entities 520,739 520,629 Proceeds from sale of assets 280,000 - --------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (2,195,227) (5,905,988) --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends and limited partners' distributions paid (7,014,561) (6,982,268) Payments of mortgages payable (1,048,690) (979,073) Repayments of capital expenditure payables (1,040,673) (1,112,044) Line-of-credit net borrowings 800,000 5,000,000 Payment of leasing costs (70,677) (58,825) Redemption of restricted stock (70,000) (56,000) Payment on construction loan (40,350) - Payments for financing costs (500) (252,112) Construction loan proceeds - 994,284 --------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (8,485,451) (3,446,038) --------------------------------------------------------------------------------------------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,018,193) (859,087) CASH AND CASH EQUIVALENTS, beginning of period 1,119,072 1,064,241 --------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of period $ 100,879 $ 205,154 ================================================================================================================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest (net of amounts capitalized) $ 4,950,278 $ 4,988,239 ================================================================================================================================= SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Dividends and limited partners' distributions declared and unpaid $ 2,341,591 $ 2,331,379 Real estate investments financed with accounts payable $ 1,225,029 $ 510,230 Shares issued under Stock Incentive Plan $ 375,251 $ 471,202 ================================================================================================================================= </TABLE> See accompanying notes to consolidated financial statements. 9
AGREE REALTY CORPORATION NOTES TO FINANCIAL STATEMENTS 1. BASIS OF The accompanying unaudited 2001 consolidated financial PRESENTATION statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 2000 has been derived from the audited consolidated financial statements at that date. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001, or for any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report for the year ended December 31, 2000. 2. EARNINGS PER 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. 10
AGREE REALTY CORPORATION PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was established to continue to operate and expand the retail property business of its Predecessors. The Company commenced its operations on April 22, 1994. The assets of the Company are held by, and all operations are conducted through, Agree Limited Partnership (the "Operating Partnership"), of which the Company is the sole general partner and held an 86.77% interest as of September 30, 2001. The Company is operating so as to qualify as a real estate investment trust ("REIT") for federal income tax purposes. The following should be read in conjunction with the Consolidated Financial Statements of Agree Realty Corporation, including the respective notes thereto, which are included in this Form 10-Q. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Minimum rental income increased $671,000, or 4%, to $16,267,000 in 2001, compared to $15,596,000 in 2000. The increase is primarily the result of the development of two properties in 2000 and two properties in 2001. Percentage rental income increased $77,000 or 41%, to $265,000 in 2001, compared to $188,000 in 2000. The increase was the result of increased tenant sales. 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 $34,000, or 2%, to $1,833,000, compared to $1,799,000 in 2000. Operating cost reimbursements increased due to the net increase in real estate taxes and property operating expenses from 2000 to 2001 as explained below. Management fees and other income remained constant at $33,000 in 2001 and 2000. Real estate taxes decreased $27,000, or 2%, to $1,282,000 in 2001 compared to $1,309,000 in 2000. The decrease is the result of general assessment changes. Property operating expenses (snow removal, shopping center maintenance, insurance and utilities) increased $133,000, or 15%, to $1,022,000 in 2001 compared to $889,000 in 2000. The increase was the result of increased snow removal costs of $27,000; an increase in shopping center maintenance costs of $98,000; an increase in utility costs of $7,000 and an increase in insurance costs of $1,000 in 2001 versus 2000. 11
AGREE REALTY CORPORATION PART I Land lease payments increased $54,000, or 11%, to $554,000 in 2001 compared to $500,000 in 2000. The increase is the result of the Company leasing land for its completed Petoskey, Michigan development. General and administrative expenses increased by $112,000, or 9%, to $1,319,000 in 2001 compared to $1,207,000 in 2000. The increase was primarily the result of an increase in compensation related expenses and professional fees. General and administrative expenses as a percentage of total rental income increased from 7.7% for 2000 to 8.0% in 2001. Depreciation and amortization increased $117,000, or 4%, to $2,877,000 in 2001 compared to $2,760,000 in 2000. This increase was the result of the development of two properties in 2000 and two properties in 2001. Interest expense decreased $65,000, or 1%, to $5,186,000 in 2001, from $5,251,000 in 2000. The decrease in interest expense was the result of decreased interest rates on variable rate notes payable. Equity in net income of unconsolidated entities increased $172,000 to $521,000 in 2001 compared to $349,000 in 2000 as a result of depreciation expense no longer being allocated to the Company pursuant to the Joint Venture Agreements in which the Company holds interests in properties ranging from 8% to 20%. The Company recognized a gain on the sale of an asset of $219,000 in 2001. There was no such gain in 2000. The Company's income before minority interest increased $850,000 as a result of the foregoing factors. COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2001 TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Rental income increased $117,000, or 2%, to $5,428,000 in 2001, compared to $5,311,000 in 2000. The increase is primarily the result of the development of one property in 2000 and two properties in 2001. Percentage rental income increased $49,000, or 58%, to $134,000 in 2001, compared to $85,000 in 2000. The increase was the result of increased tenant sales. Operating cost reimbursements decreased $68,000, or 11%, to $524,000 in 2001, compared to $592,000 in 2000. Management fees and other income remained relatively constant at $11,000 in 2001 compared to $10,000 in 2000. 12
AGREE REALTY CORPORATION PART I Real estate taxes decreased $17,000, or 4%, to $419,000 in 2001 to $436,000 in 2000. The decrease is the result of general assessment changes. Property operating expense (snow removal, shopping center maintenance, insurance and utilities) increased $28,000, or 12% to $271,000 in 2001 to $243,000 in 2000. The increase was the result of decreased snow removal costs of $(12,000); an increase in shopping center maintenance costs of $47,000; a decrease in insurance costs of $(2,000) and a decrease in utilities of $(5,000) in 2001 versus 2000. Land lease payments remained constant at $185,000 for 2001 and 2000. General and administrative expenses increased $64,000, or 16%, to $460,000 in 2001 compared to $396,000 in 2000. The increase was primarily the result of an increase in compensation related expenses and professional fees. General and administrative expenses as a percentage of total rental income increased from 7.3% for 2000 to 8.3% in 2001. Depreciation and amortization increased $46,000, or 5%, to $970,000 in 2001 compared to $924,000 in 2000. The increase was the result of the development of one property in 2000 and two properties in 2001. Interest expense decreased $246,000, or 13%, to $1,588,000 in 2001, from $1,834,000 in 2000. The decrease in interest expense was the result of decreased interest rates on variable rate notes payable. Equity in net income of unconsolidated entities remained constant at $174,000 in 2001 and 2000. The Company recognized a gain on the sale of an asset of $80,000 in 2001. There was no such gain in 2000. The Company's income before minority interest increased $303,000 as a result of the foregoing factors. 13
AGREE REALTY CORPORATION PART I FUNDS FROM OPERATIONS Management considers Funds from Operations ("FFO") to be a supplemental measure of the Company's operating performance. FFO is defined by the National Association of Real Estate Investments Trusts, Inc. ("NAREIT") to mean net income computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization, and after adjustments for unconsolidated entities in which the REIT holds an interest. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as the primary indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. 14
AGREE REALTY CORPORATION PART I The following tables illustrate the calculation of FFO for the nine months and three months ended September 30, 2001 and 2000: <TABLE> <CAPTION> Nine Months Ended September 30, 2001 2000 --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Net income before minority interest $ 6,896,986 $ 6,047,099 Depreciation of real estate assets 2,804,286 2,686,632 Amortization of leasing costs 51,070 54,313 Amortization of stock awards 201,000 177,000 Depreciation of real estate assets held in unconsolidated entities -- 171,980 Gain on sale of assets (218,543) -- --------------------------------------------------------------------------------------------------------------------------- FUNDS FROM OPERATIONS $ 9,734,799 $ 9,137,024 =========================================================================================================================== WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING 5,090,416 5,069,734 =========================================================================================================================== </TABLE> <TABLE> <CAPTION> Three Months Ended September 30, 2001 2000 --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Net income before minority interest $ 2,457,652 $ 2,154,943 Depreciation of real estate assets 942,001 897,708 Amortization of leasing costs 17,800 19,228 Amortization of stock awards 67,000 59,000 Gain on sale of assets (80,000) -- ---------------------------------------------------------------------------------------------------------------------------- FUNDS FROM OPERATIONS $ 3,404,453 $ 3,130,879 ============================================================================================================================ WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING 5,090,416 5,068,216 ============================================================================================================================ </TABLE> 15
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, 2001, the Company declared a quarterly dividend of $.46 per share. The dividend was paid on October 11, 2001, to holders of record on September 28, 2001. As of September 30, 2001, the Company had total mortgage indebtedness of $51,071,080 with a weighted average interest rate of 6.95%. Future scheduled annual maturities of mortgages payable for the years ending September 30 are as follows: 2002 - $1,463,385; 2003 - $1,589,041; 2004 - $1,702,042; 2005 - $1,823,086; and 2006 - $2,452,741. This mortgage debt is all fixed rate debt. In addition, the Operating Partnership has in place a $50 million line of Credit Facility (the "Credit Facility") which is guaranteed by the Company. The loan matures in August 2003 and can be extended by the Company for an additional three years. Advances under the Credit Facility bear interest within a range of one-month to six-month LIBOR plus 150 basis points to 213 basis points or the bank's prime rate, at the option of the Company, based on certain factors such as debt to property value and debt service coverage. The Credit Facility is used to fund property acquisitions and development activities and is secured by most of the Company's Properties which are not otherwise encumbered and properties to be acquired or developed. As of September 30, 2001, $35,158,232 was outstanding under the Credit Facility. 16
AGREE REALTY CORPORATION PART I The Company also has in place a $5 million line of credit (the "Line of Credit"), which matures on February 19, 2002, and which the Company expects to renew for an additional 12-month period. The Line of Credit bears interest at the bank's prime rate less 50 basis points or 175 basis points in excess of the one-month LIBOR rate, at the option of the Company. The purpose of the Line of Credit is to provide working capital to the Company and fund land options and start-up costs associated with new projects. As of September 30, 2001, $1,000,000 was outstanding under the Line of Credit. The Company's wholly owned subsidiaries have obtained construction financing of approximately $16,100,000 to fund the development of four retail properties. The notes require quarterly interest payments, based on a weighted average interest rate based on LIBOR, computed by the lender. The notes mature on October 16, 2002 and are secured by the underlying land and buildings. As of September 30, 2001, $14,896,962 was outstanding under these notes. The Company has received funding from an unaffiliated third party for the construction of certain of its Properties. Advances under this agreement bear no interest and are secured by the specific land and buildings being developed. As of September 30, 2001, $1,676,690 was outstanding under this arrangement. The Company has one development project under construction that will add an additional 14,490 square feet of retail space to the Company's portfolio. The project is expected to be completed during the first quarter of 2002. Additional Company funding required for this project is estimated to be $1,900,000 and will come from the Credit Facility. Management expects the development of this project to have a positive effect on cash generated by operating activities and Funds from Operations. The Company intends to meet its short-term liquidity requirements, including capital expenditures related to the leasing and improvement of the Properties, through its cash flow provided by operations and the Line of Credit. Management believes that adequate cash flow will be available to fund the Company's operations and pay dividends in accordance with REIT requirements. The Company may obtain additional funds for future development or acquisitions through other borrowings or the issuance of additional shares of capital stock. The Company intends to incur additional debt in a manner consistent with its policy of maintaining a ratio of total debt (including construction and acquisition financing) to total market capitalization of 65% or less. 17
AGREE REALTY CORPORATION PART I The Company plans to begin construction of additional pre-leased developments and may acquire additional properties, which will initially be financed by the Credit Facility and Line of Credit. Management intends to periodically refinance short-term construction and acquisition financing with long-term debt and/or equity. Upon completion of refinancing, the Company intends to lower the ratio of total debt to market capitalization to 50% or less. Nevertheless, the Company may operate with debt levels or ratios which are in excess of 50% for extended periods of time prior to such refinancing. INFLATION The Company's leases generally contain provisions designed to mitigate the adverse impact of inflation on net income. These provisions include clauses enabling the Company to pass through to tenants certain operating costs, including real estate taxes, common area maintenance, utilities and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Certain of the Company's leases contain clauses enabling the Company to receive percentage rents based on tenants' gross sales, which generally increase as prices rise, and, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. In addition, expiring tenant leases permit the Company to seek increased rents upon re-lease at market rates if rents are below the then existing market rates. 18
AGREE REALTY CORPORATION PART I ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk primarily through its borrowing activities. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's future financing requirements. Mortgages payable - As of September 30, 2001 the Company had four mortgages outstanding. The first mortgage in the amount of $31,905,732 bears interest at 7.00%. The mortgage matures on November 15, 2005. The second mortgage in the amount of $7,143,392 bears interest at 7.00%. The mortgage matures on April 1, 2013 and is subject to a rate review after the 7th year (April 1, 2006). The third mortgage in the amount of $11,521,955 bears interest at 6.63%. The mortgage matures on February 5, 2017. The fourth mortgage in the amount of $500,000 bears interest at 10.00%. The mortgage matures October 5, 2005. Construction loans - As of September 30, 2001 the Company had Construction loans outstanding of $16,573,652. Under the terms of the construction loans the Company bears no interest rate risk. Notes Payable - As of September 30, 2001 the Company had $36,158,232 outstanding on its Lines-of-Credit which were subject to interest at a variable interest rate based on LIBOR. The Company does not enter into financial instrument transactions for trading or other speculative purposes or to manage interest rate exposure. A 10% adverse change in interest rates on the portion of the Company's debt bearing interest at variable rates would result in an annual increase in interest expense of approximately $195,000. 19
AGREE REALTY CORPORATION PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation and Articles of Amendment of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-11 (Registration Statement No. 33-73858, as amended ("Agree S-11")) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Agree S-11) (b) Reports on Form 8-K None 20
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 6, 2001 ------------------------------------------------ 21