-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OGniV01tKwdVYB7mt6CDlMaLmuKu37hAoUzpTFgUDwPw9KWU0ZFb7tJRPd6/ZB1u zAhirQTvCHrHBj+RDEduoA== 0000889697-99-000043.txt : 19990323 0000889697-99-000043.hdr.sgml : 19990323 ACCESSION NUMBER: 0000889697-99-000043 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGREE REALTY CORP CENTRAL INDEX KEY: 0000917251 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 383148187 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12928 FILM NUMBER: 99569923 BUSINESS ADDRESS: STREET 1: 31850 NORTHWESTERN HGWY CITY: FARMINGTON HILLS STATE: MI ZIP: 48334 BUSINESS PHONE: 8107374190 MAIL ADDRESS: STREET 1: 31850 NORTHWESTERN HIGHWAY CITY: FARMINGTON HILLS STATE: MI ZIP: 48334 10-K 1 ============================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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, (248) 737-4190 Farmington Hills, Michigan 48334 (Registrant's telephone number, (Address of principal executive offices) including area code:) --------- Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, $.0001 par value New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None (Title of Class) --------- 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 __X__ No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __X__ Shares of common stock outstanding as of March 12, 1999: 4,364,867. The aggregate market value of the Registrant's shares of common stock held by non-affiliates on such date was approximately $79,931,627. DOCUMENTS INCORPORATED BY REFERENCE Document Incoroprated into Form 10-K -------- --------------------------- Portions of the Registrant's Proxy Statement Part III for its Annual Meeting of Shareholders Items 10-13 to be held on May 10, 1999 ============================================================================= TABLE OF CONTENTS Part I Page Numbers ------- Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 16 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A Quantitative and Qualitative Disclosures About Market Risk 24 Item 8. Financial Statements and Supplementary Data 24 Item 9. Changes and Disagreements With Accountants on Accounting and Financial Disclosure 24 Part III Item 10. Directors and Executive Officers of the Registrant 25 Item 11. Executive Compensation 25 Item 12. Security Ownership of Certain Beneficial Owners and Management 25 Item 13. Certain Relationships and Related Transactions 25 Part IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 26 Signatures 29 -2- PART 1 This Form 10-K, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. 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, as well as other risks listed herein under Item 1. Business and from time to time in the Company's reports filed with the Securities and Exchange Commission or otherwise publicly disseminated by the Company. References herein to the "Company" include Agree Realty Corporation, together with its wholly-owned subsidiaries and its majority owned partnership, Agree Limited Partnership (the "Operating Partnership"), unless the context otherwise requires. Item 1. BUSINESS General The Company is a self-administered, self-managed real estate investment trust (a "REIT") which develops, acquires, owns and operates properties which are primarily leased to major national and regional retail companies under net leases. As of December 31, 1998, the Company owned, either directly or through interests in joint ventures, a portfolio of 39 properties (the "Properties") located in 12 states and containing an aggregate of approximately 3.4 million square feet of gross leasable area. The Properties consist of 14 neighborhood and community shopping centers and 25 free-standing properties. The Company independently owns 18 of the free-standing properties and owns the other 7 through joint ventures (the "Joint Venture Properties"). As of December 31, 1998, approximately 98% of gross leasable area in the Portfolio was leased, and approximately 94% of the Company's base rental income was attributable to national and regional retailers. Such retailers include Kmart Corporation ("Kmart"), Borders, Inc. ("Borders"), Roundy's Inc. ("Roundy's") and Walgreen Co. ("Walgreen") which, as of December 31, 1998, collectively represented approximately 69% of current base rental income. See "Major Tenants." The Company was the developer of all 14 of the shopping centers and 20 of the 25 free-standing properties. The Company was formed in December 1993 to continue and expand the retail property business founded in 1971 by its current Chairman of the Board of Directors and President, Richard Agree. Since 1971, the Company and its predecessors have specialized in building properties to -3- suit for national and regional retailers who have signed long-term net leases prior to commencement of construction. The Company believes that this strategy provides it with a predictable source of income from primarily national and regional retail tenants in its existing properties and also provides opportunities for development of additional properties at attractive returns on investment, without the lease-up risks inherent in speculative development. The Company's headquarters are located at 31850 Northwestern Highway, Farmington Hills, MI 48334 and its telephone number is (248) 737-4190. Description of Business Objectives The Company's primary objectives are (i) to realize steady and predictable cash flows through the ownership of high quality properties leased primarily to national and regional retailers, and (ii) to maximize stockholder returns through the development or acquisition of additional properties. The Company intends to achieve these objectives by implementing the growth, operating and financial strategies outlined below. o Developing or acquiring each property with the objective of holding it for long-term investment value. o Developing or acquiring properties in what the Company considers to be attractive long-term locations. Such locations typically have (i) convenient access to transportation arteries with traffic count that is higher than average for the local market; (ii) concentrations of other retail properties; and (iii) demographic characteristics which are attractive to the retail tenant which will lease the property. o Generally, purchasing land and beginning development of a property only upon the execution of a lease with a national or regional retailer on terms that provide a return on estimated cost which is attractive relative to the Company's cost of capital. o Directing all aspects of development, including construction, design, leasing and management. Property management and the majority of the leasing activities are handled directly by Company personnel. The Company believes that this approach to development and management enhances the ability of the Company to develop and maintain assets of high construction quality which are designed, leased and maintained to maximize long-term value and enables it to operate efficiently. The Company believes that the relationships established by its principals with national and regional retailers as well as the financing relationships its principals have developed with lenders provide it with opportunities not generally available to its competitors, thereby providing the Company with an advantage in achieving its objectives. Recent Developments During 1998 the Company completed the development of four (4) free-standing properties which added 66,496 square feet of gross leasable area to the Company's operating portfolio and cost -4- approximately $12.7 million. Three (3) of the properties are leased to Walgreen and one (1) property is leased to Borders. On August 18, 1998 the Company acquired the Mt Pleasant Shopping Center, a community shopping center, located in Mt Pleasant, Michigan. The shopping center is anchored by national tenants, contains 241,458 square feet of gross leasable area and is 100% leased and occupied. The purchase price of $9,076,000 was established by an independent appraisal. Payment consisted of $8,385,000 in debt assumption, with the balance paid through the issuance of 35,588 Operating Partnership units. The sellers were Richard Agree, President and Chairman of the Company's Board of Directors and Edward Rosenberg, a Director of the Company. Mr. Agree and Mr. Rosenberg are limited partners in the Operating Partnership. The Company had managed this property since April 1994, the date of its initial public offering. Major Tenants As of December 31, 1998, approximately 60% of the Company's gross leasable area, including the Joint Venture Properties, was leased to Kmart and Borders and approximately 52% of total annualized base rents was attributable to these tenants. At December 31, 1998, Kmart occupied approximately 40% of the Company's gross leasable area, including the Joint Venture Properties, and accounted for approximately 28% of the annualized base rent. At December 31, 1998 Borders occupied approximately 20% of the Company's gross leasable area, including the Joint Venture Properties, and accounted for approximately 24% of the annualized base rent. No other tenants account for more than 10% of gross leasable area or annualized base rent in 1998. The loss of any of these anchor tenants or the inability of any of them to pay rent could have an adverse effect on the Company's business. Financing Strategy As of December 31, 1998, the Company's ratio of indebtedness to market capitalization was 52%. The Company intends to maintain a ratio of total debt (including construction and acquisition financing) to market capitalization of 65% or less. The Company plans to begin construction of additional pre-leased developments and may acquire additional properties that will initially be financed by its Credit Facility and Line of Credit (each as hereinafter defined). 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 that are in excess of 50% for extended periods of time prior to such refinancing. The Company may from time to time re-evaluate its borrowing policies in light of then current economic conditions, relative costs of debt and equity capital, market value of properties, growth and acquisition opportunities and other factors. However, there is no contractual limit on the Company's ratio of debt to total market capitalization and, accordingly, the Company may modify its borrowing policy and may increase or decrease its ratio of debt to market capitalization without shareholder approval. -5- Tax Status The Company has operated and intends to operate in a manner to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). In order to maintain qualification as a REIT, the Company must, among other things, distribute at least 95% of its real estate investment trust income and meet certain other asset and income tests. Additionally, ownership of the Company, directly or constructively, by any single person is limited to 9.8% of the total number of outstanding shares, subject to certain exceptions. As a REIT, the Company is not subject to federal income tax with respect to that portion of its income that meets certain criteria and is distributed annually to the stockholders. Competition The Company faces competition in seeking properties for acquisition and tenants who will lease space in these properties from insurance companies, credit companies, pension funds, private individuals, investment companies and other REITs, many of which have greater financial and other resources than the Company. There can be no assurance that the Company will be able to successfully compete with such entities in its development, acquisition and leasing activities in the future. Potential Environmental Risks Investments in real property create a potential for environmental liability on the part of the owner or operator of such real property. If hazardous substances are discovered on or emanating from a property, the owner or operator of the property (including the Company) may be held strictly liable for all costs and liabilities relating to such hazardous substances. The Company has had a Phase I environmental study (which involves inspection without soil sampling or ground water analysis) conducted on each Property by independent environmental consultants. Furthermore, the Company has adopted a policy of conducting a Phase I environmental study on each property it acquires. The Phase I environmental studies conducted by the Company have not revealed the existence of any hazardous substance or environmental liability on the Properties. In addition, the Company has no knowledge of any hazardous substances existing on the Properties in violation of any applicable laws; however, no assurance can be given that such substances are not located on any of the Properties. The Company carries no insurance coverage for the types of environmental risks described above. The Company believes that it is in compliance, in all material respects, with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. The Company has not been notified by any governmental authority of any noncompliance, liability or other claim in connection with any of the Properties. Employees As of March 15, 1999, the Company employed eight persons. Employee responsibilities include accounting, construction, leasing, property coordination and administrative functions for the Properties. The -6- Company's employees are not covered by a collective bargaining agreement and the Company considers its employee relations to be satisfactory. Financial Information About Industry Segments The Company is in the business of development, acquisition and management of shopping centers and free-standing properties. The Company considers its activities to consist of a single industry segment. See the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report on Form 10-K for certain information required in Item 1. Item 2. PROPERTIES The Properties consist of 14 neighborhood and community shopping centers and 25 free-standing properties. As of December 31, 1998, approximately 98% of GLA in the Portfolio was leased, and approximately 94% of the Company's base rental income was attributable to, national and regional retailers. Such retailers include Kmart, Borders, Roundy's and Walgreen which, at December 31, 1998, collectively represented approximately 69% of current base rental income. A substantial portion of the Company's income consists of rent received under net leases. Most of the leases provide for the payment of fixed base rentals monthly in advance and for the payment by tenants of a pro rata share of the real estate taxes, insurance, utilities and common area maintenance of the shopping center as well as payment to the Company of a percentage of such tenant's sales. However the payments of percentage rents to the Company historically have not been material and the Company does not anticipate that they will become material in the future. Although a majority of the leases require the Company to make roof and structural repairs, as needed, a number of leases place that responsibility on the tenant. The Company's management places a strong emphasis on sound construction and maintenance on its properties. Location of Properties in the Portfolio Total Gross Percent of Number of Leasable Area GLA Leased on State Properties (Sq. feet) December 31, 1998 ----- ---------- ------------- ----------------- California 1 38,015 100% Florida 5 (1) 487,269 93 Indiana 1 (1) 15,844 100 Illinois 1 20,000 100 Kansas 2 45,000 100 Kentucky 1 135,009 95 Michigan 16 (1) 1,846,617 99 Nebraska 2 (1) 55,000 100 Ohio 2 108,543 100 Oklahoma 4 (1) 99,282 100 Pennsylvania 1 37,004 100 Wisconsin 3 523,036 99 -- --------- --- Total/Average 39 3,410,619 98% -- --------- --- (1) Includes Joint Venture Properties in which the Company owns interests ranging from 8% to 20%. -7- Community Shopping Centers Fourteen of the Company's properties are community shopping centers ranging in size from 20,000 to 241,458 square feet of gross leasable area. The centers are located in 5 states as follows: Florida (2), Illinois (1), Kentucky (1), Michigan (7) and Wisconsin (3). The location, general character and primary occupancy information with respect to the community shopping centers at December 31, 1998 are set forth below: Summary of Community Shopping Centers at December 31, 1998
(4) Gross (1) Year Land Leasable Annualized Completed/ Area Area Base Property Location Expanded (acres) (Sq. Ft.) Rent - ----------------------------------------------------------------------------------------------- Capital Plaza 1978/ 11.58 135,009 $375,568 Frankfort, KY 1991 Charleviox Commons 1991 14.79 137,375 657,495 Charlevoix, MI Chippewa Commons 1991 16.37 168,311 897,783 Chippewa Falls, WI Iron Mountain Plaza 1991 21.20 176,352 850,223 Iron Mountain, MI Ironwood Commons 1991 23.92 185,535 951,234 Ironwood, MI Marshall Plaza 1990 10.74 119,279 641,055 Marshall, MI (2) (3) Average Percent Percent Base Leased at Occupied Anchor Tenants Rent per at Dec 31, at Dec 31, (Lease expiration/ Property Location Sq. Ft. 1998 1998 Option expiration) - ------------------------------------------------------------------------------------------------ Capital Plaza $ 2.94 95% 95% Kmart (2003/2053) Frankfort, KY Winn Dixie (2010/2035) Fashion Bug (2004/2024) Charleviox Commons 4.97 96% 70% Kmart (2015/2065) Charlevoix, MI Roundy's (2011/2031) Chippewa Commons 5.33 100% 100% Kmart (2014/2064) Chippewa Falls, WI Roundy's (2011/2031) Fashion Bug (2001/2021) Iron Mountain Plaza 4.93 98% 78% Kmart (2015/2065) Iron Mountain, MI Roundy's (2011/2031) Fashion Bug (2002/2022) Ironwood Commons 5.13 100% 100% Kmart (2015/2065) Ironwood, MI Super Value (2011/2036) J.C. Penney Co. (2006/2026) Fashion Bug (2002/2022) Marshall Plaza 5.37 100% 100% Kmart (2015/2065) Marshall, MI Fashion Bug (2002/2022)
-8- Summary of Community Shopping Centers at December 31, 1998 (continued)
(4) Gross (1) Year Land Leasable Annualized Completed/ Area Area Base Property Location Expanded (acres) (Sq. Ft.) Rent - ----------------------------------------------------------------------------------------------- Mt Pleasant Shopping 1973/ 24.51 241,458 $1,051,625 Center 1997 Mt. Pleasant, MI North Lakeland Plaza 1987 16.67 171,334 1,319,496 Lakeland, FL Petoskey Town Center 1990 22.08 174,870 920,128 Petoskey, MI Plymouth Commons 1990 16.30 162,031 867,369 Plymouth, WI Rapids Associates 1990 16.84 173,557 988,177 Big Rapids, MI Shawano Plaza 1990 17.91 192,694 1,012,448 Shawano, WI West Frankfort Plaza 1982 1.45 20,000 109,500 West Frankfort, IL (2) (3) Average Percent Percent Base Leased at Occupied Anchor Tenants Rent per at Dec 31, at Dec 31, (Lease expiration/ Property Location Sq. Ft. 1998 1998 Option expiration) - --------------------------------------------------------------------------------------------------- Mt Pleasant Shopping $ 4.36 100% 100% Kmart (2008/2048) Center J.C. Penney Co. (2000/2020) Mt. Pleasant, MI Staples, Inc. (2005/2025) Fashion Bug (2006/2026) North Lakeland Plaza 7.70 100% 100% Kmart (2011/2061) Lakeland, FL Best Buy (2013/2028) Petoskey Town Center 5.59 94% 94% Kmart (2015/2065) Petoskey, MI Roundy's (2010/2030) Fashion Bug (2002/2022) Plymouth Commons 5.47 98% 98% Kmart (2015/2065) Plymouth, WI Roundy's (2010/2030) Fashion Bug (2001/2021) Rapids Associates 5.69 100% 100% Kmart (2015/2065) Big Rapids, MI Roundy's (2010/2030) Fashion Bug (2001/2021) Shawano Plaza 5.25 100% 100% Kmart (2014/2064) Shawano, WI Roundy's (2010/2030) J.C. Penney Co. (2005/2025) Fashion Bug (2001/2021) West Frankfort Plaza 5.48 100% 100% Fashion Bug (2002/2007) West Frankfort, IL
-9- Summary of Community Shopping Centers at December 31, 1998 (continued)
(4) Gross (1) Year Land Leasable Annualized Completed/ Area Area Base Property Location Expanded (acres) (Sq. Ft.) Rent - ----------------------------------------------------------------------------------------------------- Winter Garden Plaza 1988 22.34 228,476 $ 1,114,098 Winter Garden, FL ------ --------- ----------- Total/Average 236.70 2,286,281 $11,756,199 ====== ========= =========== (2) (3) Average Percent Percent Base Leased at Occupied Anchor Tenants Rent per at Dec 31, at Dec 31, (Lease expiration/ Property Location Sq. Ft. 1998 1998 Option expiration) - ------------------------------------------------------------------------------------------------------------- Winter Garden Plaza $ 5.67 86% 58% Kmart (2013/2063) Winter Garden, FL Food Lion (2009/2029) Sears Roebuck & Co. (2000/2010) ------ --- --- Total/Average $ 5.26 97% 91% ====== === === (1) Total annualized base rents of the Company as of December 31, 1998 (2) Calculated as total annualized base rents, divided by gross leasable area actually leased as of December 31, 1998 (3) Roundy's does not currently occupy the space it leases at Iron Mountain Plaza (35,285 square feet, rented at a rate of $5.87 per square foot) and Charlevoix Commons (35,896 square feet, rented at a rate of $5.97 per square foot). Both of these leases expire in 2011 (assuming they are not extended by Roundy's). Sears, Roebuck & Co. leases but does not currently occupy, the 50,000 square feet it lease at Winter Garden Plaza. This lease expires in 2000 (assuming that it is not extended by Sears) and is rented at a rate of $5.00 per square foot. Walgreen does not currently occupy the space it leases at Winter Garden Plaza. This lease expires in 2000 (assuming it is not extended by Walgreen) and is rented at a rate of $8.50 per square foot. (4) All community shopping centers except Capital Plaza (which is subject to a long-term ground lease expiring in 2053 from a third party) are wholly-owned by the Company.
-10- Annualized Base Rent of the Company's Properties The following is a breakdown of base rents in place at December 31, 1998 for each type of retail tenant: Percent of Annualized Annualized Type of Tenant Base Rent (1) Base Rent -------------- ------------- ---------- National (2) $16,637,471 84% Regional (3) 1,974,313 10 Local 1,234,107 6 ----------- --- Total $19,845,891 100% ----------- --- - -------------------- (1) Includes the Company's share of annualized base rent for each of the Joint Venture Properties. (2) Includes the following national tenants: Kmart, Borders, Walgreen, Fashion Bug, Winn Dixie, Rite Aid, JC Penney, Avco Financial, GNC Group, Radio Shack, On Cue, Super Value, Maurices, Payless Shoes, Food Lion, Blockbuster Video, H&R Block, Sally Beauty, Jo Ann Fabrics, Staples, Best Buy, Dollar Tree, Sears, A&P, TGI Friday's and Circuit City. (3) Includes the following regional tenants: Roundy's, Dunham's Sports, Brauns Fashions and Hollywood Video. Free-Standing Properties Twenty-five (25) of the Properties are free-standing properties net leased to A&P (1), Borders (16), Circuit City Stores (1), Kmart (3) and Walgreen (4), which Properties contain, in the aggregate, approximately 1,124,000 square feet of gross leasable area. The free-standing properties range in size from 13,686 to 226,000 square feet of gross leasable area and are located in the following states: California (1), Florida (3), Indiana (1), Kansas (2), Michigan (9), Nebraska (2), Ohio (2), Oklahoma (4) and Pennsylvania (1). Included in the Company's 25 retail properties are seven Joint Venture Properties in which the Company owns interests ranging from 8% to 20% and 18 wholly-owned Properties. The Company's eighteen (18) wholly owned free-standing Properties provide $7,395,373 of annualized base rent at an average base rent per square foot of $10.99 during the 12 months ended December 31, 1998. The Company (or the joint ventures in which the Company has an interest) own each of the twenty-five (25) free-standing properties in fee, except as indicated below. The location, general character and primary occupancy information with respect to the wholly-owned free-standing properties are set forth in the following table: -11- Wholly-Owned Free Standing Properties Year Lease expiration Tenant/Location Completed Total GLA (Option expiration) - --------------- --------- --------- ------------------- A&P, Roseville, MI 1977 104,000 May 21, 2002 (2022) Borders, (1) Aventura, FL 1996 30,000 Jan 31, 2016 (2036) Borders, Columbus, OH 1996 21,000 Jan 23, 2016 (2036) Borders, Monroeville, PA 1996 37,004 Nov 8, 2016 (2036) Borders, Norman, OK 1996 24,641 Sep 20, 2016 (2036) Borders, Omaha, NE 1995 30,000 Nov 3, 2015 (2035) Borders, Santa Barbara, CA 1995 38,015 Nov 17, 2015 (2035) Borders, Wichita, KS 1995 25,000 Nov 10, 2015 (2035) Borders, (1) Lawrence, KS 1997 20,000 Nov 21, 2020 (2040) Borders, Tulsa, OK 1998 25,000 Nov 21, 2020 (2040) Circuit City Stores Boynton Beach, FL 1996 32,459 Dec 15, 2016 (2036) Kmart, Grayling, MI 1984 52,320 Sep 30, 2009 (2059) Kmart, Oscoda, MI 1984 90,470 Sep 30, 2009 (2059) Kmart, (1) Perysburg, OH 1983 87,543 Oct 31, 2008 (2058) Walgreen, Waterford, MI 1997 13,905 Feb 28, 2018 (2058) Walgreen, Chesterfield, MI 1998 13,686 July 31, 2018 (2058) Walgreen, Pontiac, MI 1998 13,905 Oct 31, 2018 (2058) Walgreen, Grand Blanc, MI 1998 13,905 Feb 28, 2019 (2059) ------- Total 672,853 ------- (1) These properties are subject to long-term ground leases where a third party owns the underlying land and has leased the land to the Company to construct or operate three free-standing properties. The Company pays rent for the use of the land and generally is responsible for all costs and expenses associated with the building and improvements. At the end of the lease terms, as extended (Aventura, FL 2036, Lawrence, KS 2027 and Perrysburg, OH 2038), the land together with all improvements revert to the land owner. The Company has an option to purchase the Perrysburg property during its lease term. The Company has an option to purchase the Lawrence property during the period October 1, 2006 to September 30, 2016. Joint Venture Properties During 1996, the Company developed or acquired seven free-standing Properties which are leased to Borders, including Borders' current corporate headquarters, its former headquarters building and Properties operated as Borders Books and Music. Each of these Properties is owned by a separate limited liability company or a limited partnership that is owned jointly by the Company and an affiliate of Borders (the "Joint Ventures"). The Company's economic interest in the Joint Ventures ranges from 8% to 20%. The financing for the development of the Joint -12- Venture Properties was provided through a financing facility established by Borders and its affiliates (the "Borders Financing Facility"). The lease between Borders and each of the Joint Ventures has a term expiring October 16, 2002, unless the Borders Financing Facility is extended or earlier terminated. At any time during the term of the lease, Borders has the right to refinance the Property or to purchase the Property for various percentages of total project costs, provided that, prior to such refinancing or purchase, the Company may elect to provide alternative financing for the Property or purchase the Property and purchase the interest of the Borders' affiliate in the Joint Venture. In the event the Company elects to provide financing or to purchase the Property, and is subsequently unable to obtain the requisite financing, or in the event that the Company defaults in its development obligations to the Joint Venture, Borders may purchase the Property. If the Company provides refinancing or purchases the Property, the Company will be required to acquire the interest of the Borders' affiliate in the Joint Venture, and Borders and the Joint Venture will enter into a new lease providing for a term of 20 years, with four five-year extension options. Under certain circumstances, the Company may elect to allow Borders to place long-term financing on such Properties, in which case, the Company will maintain its current interest in the Joint Venture and become the sole equity member of the entity which owns such Property. In such a circumstance, the Company will own the Property subject to a first mortgage loan which could exceed 90% of the Property's estimated value, and lease payments received by the Company would be adjusted to reflect Borders' financing. The Company's investment in the seven Joint Venture properties currently yields approximately $690,000 annualized base rent. Of this amount, the Company estimates that approximately $125,000 is variable based on short-term financing. Under certain circumstances relating to refinancing of such assets, the rents paid pursuant to such leases are subject to adjustment. The following table provides additional information on the Joint Venture Properties. -13- Joint Venture Properties The Company's Tenant / Location Interest Total GLA Lease Expirations - ----------------- ------------- --------- ----------------- Borders, Inc. Ann Arbor, MI 11% 110,000 October 16, 2002 Borders, Inc. Ann Arbor, MI 8% 226,000 October 16, 2002 Borders, Inc. Boynton Beach, FL 12% 25,000 October 16, 2002 Borders, Inc. Indianapolis, IN 8% 15,844 October 16, 2002 Borders, Inc. Oklahoma City, OK 20% 24,641 October 16, 2002 Borders, Inc. Omaha, NE 18% 25,000 October 16, 2002 Borders, Inc. Tulsa, OK 15% 25,000 October 16, 2002 ------- Total 451,485 ------- Major Tenants The following table sets forth certain information with respect to the Company's major tenants: Annualized Base Percent of Total Number Rent as of Annualized Base Rent as of Leases December 31, 1998 of December 31, 1998 --------- ----------------- ----------------------- Kmart 16 $ 5,492,667 28% Borders 16 4,805,680 (1) 24 Roundy's 7 1,730,063 9 Walgreen 7 1,568,059 8 -- ----------- -- Total 46 $13,596,469 69% -- ----------- -- - -------------- (1) Includes the Company's percentage of base rent for each of the Joint Venture Properties Sixteen of the Properties are anchored by Kmart, a publicly-traded retailer with over 2,100 stores. Kmart's principal business is general merchandise retailing through a chain of department stores and it is one of the world's largest retailers based on sales volume. The Company derived approximately 28% of its base rental income for the year ended December 31, 1998 from, and approximately 33% of the Company's future minimum rentals are attributable to, Kmart. Borders Group, Inc. ("BGI"), is a leading global retailer of books, music and other information. BGI is the parent company of Borders, Inc., which operates 250 Borders superstores offering a broad selection of books and multi-media products. In addition, BGI owns Walden Book Company, Inc., which has approximately 900 Waldenbooks and Brentanos stores in malls, shopping centers and airports across the country. The Company derived approximately 24% of its base rental income for the year ended December 31, 1998 from, and approximately 31% of the Company's future minimum rentals are attributable to, Borders. -14- Roundy's and its subsidiaries are engaged principally in the wholesale distribution of food and non-food products to supermarkets and warehouse food stores. The Company derived approximately 9% of its base rental income for the year ended December 31, 1998 from, and approximately 9% of the Company's future minimum rentals are attributable to, Roundy's. Walgreen is a leader of the U.S. chain drugstore industry and operates over 2,600 stores nationwide. The Company derived approximately 8% of its base rental income for the year ended December 31, 1998 from, and approximately 11% of the Company's future minimum rentals are attributable to, Walgreen. Lease Expirations The following table shows lease expirations for the next 10 years for the Company's community shopping centers and wholly-owned free-standing properties, assuming that none of the tenants exercise renewal options. December 31, 1998 ----------------- Gross Lesable Area Annualized Base Rent ------------------ -------------------- Number Expiration of Leases Square Percent Percent Year Expiring Footage of Total Amount of Total - ---------- --------- ------- -------- ------ -------- 1999 11 55,510 1.88% $ 480,651 2.51% 2000 22 222,063 7.50 1,602,884 8.36 2001 28 112,830 3.81 907,456 4.73 2002 22 210,090 7.10 1,161,250 6.06 2003 21 171,192 5.79 848,386 4.43 2004 3 12,700 .43 82,550 .43 2005 4 56,454 1.91 286,839 1.50 2006 4 60,404 2.04 351,965 1.84 2007 1 2,000 .07 18,000 0.09 2008 2 167,942 5.67 539,935 2.81 --- --------- ----- ---------- ----- Total 118 1,071,185 36.20% $6,279,916 32.76% --- --------- ----- ---------- ----- Leases on the seven Joint Venture Properties are for an initial term through October 16, 2002. In the event a refinancing is consummated, Borders is required to enter into a twenty year net lease with a fixed lease rate. Item 3. LEGAL PROCEEDINGS The Company is not presently involved in any litigation nor, to management's knowledge, is any litigation threatened against the Company, except for routine litigation arising in the ordinary course of business which is expected to be covered by the Company's liability insurance. -15- Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 1998. Part II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange under the symbol "ADC". The following table sets forth the high and low sales prices of the Company's Common Stock, as reported on the New York Stock Exchange Composite Tape, and the dividends declared per share of Common Stock by the Company for each calendar quarter in the last two fiscal years. Dividends were paid in the periods immediately subsequent to the periods in which such dividends were declared. Market Information Dividends Per High Low Common Share ---- --- ------------ Quarter Ended March 31, 1997 $22.250 $19.500 $0.45 June 30, 1997 $21.125 $19.000 $0.45 September 30, 1997 $22.063 $19.813 $0.46 December 31, 1997 $21.875 $20.313 $0.46 March 31, 1998 $22.750 $20.625 $0.46 June 30, 1998 $20.875 $19.813 $0.46 September 30, 1998 $20.063 $17.688 $0.46 December 31, 1998 $19.625 $17.375 $0.46 At December 31, 1998, there were 4,346,313 shares of the Company's Common Stock issued and outstanding which were held by approximately 270 stockholders of record. The stockholders of record do not reflect persons or entities who held their shares in nominee or "street" name. The Company intends to continue to declare quarterly dividends to its stockholders. However, distributions by the Company are determined by the Board of Directors and will depend on a number of factors, including the amount of Funds from Operations, the financial and other condition of its properties, its capital requirements, the annual distribution requirements under the provisions of the Code applicable to REITs and such other factors as the Board of Directors deems relevant. During the year ended December 31, 1998, there were no sales of unregistered securities by the Company, except the grant, under the Company's 1994 Stock Incentive Plan (the "Plan"), of 19,033 shares of restricted stock to certain employees of the Company. Such shares vest in equal annual installments over a five-year period from the date of the grant, but entitle the holder thereof to receive dividends from the date of the grant. On January 1, 1998 the Company redeemed 1,700 shares of restricted stock previously issued under the Plan. -16- Item 6. SELECTED FINANCIAL DATA The following table sets forth selected financial information for the Company and its predecessors on a historical basis and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and all of the financial statements and notes thereto included elsewhere in this Form 10-K. The balance sheet data for the periods ended December 31, 1994 through December 31, 1998 and operating data for for each of the periods presented were derived from the audited financial statements of the Company and the Agree Predecessors.
(In thousands, except per share information) The Agree Agree Realty Corporation Predecessors ---------------------------------------------------------------------- Year Year Year Year April 22, January 1, Ended Ended Ended Ended Through Through Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, April 21, Operating Data 1998 1997 1996 1995 1994 1994 - ---------------------------------------------------------------------------------------------------------------- Total Revenue $ 19,674 $ 18,234 $ 16,291 $ 13,699 $ 9,280 $ 4,080 --------- --------- --------- --------- --------- --------- Expenses Property expense (1) 3,050 2,785 2,485 2,049 1,245 681 General and administrative 1,170 1,107 1,105 966 668 159 Interest 5,231 5,552 6,101 4,335 2,972 2,584 Depreciation and amortization 3,073 2,782 2,620 2,317 1,627 680 --------- --------- --------- --------- --------- --------- Total Expenses 12,524 12,226 12,311 9,667 6,512 4,104 --------- --------- --------- --------- --------- --------- Other Income (Expense) (2) 168 155 653 -- (375) 85 --------- --------- --------- --------- --------- --------- Income before extraordinary item and minority interest 7,318 6,163 4,633 4,032 2,393 61 Extraordinary Item - Early Extinguishment of Debt (319) -- -- -- (2,139) -- --------- --------- --------- --------- --------- --------- Income before Minority Interest 6,999 6,163 4,633 4,032 254 61 Minority Interest 912 943 899 785 49 -- --------- --------- --------- --------- --------- --------- Net Income $ 6,087 $ 5,220 $ 3,734 $ 3,247 $ 205 $ 61 ========= ========= ========= ========= ========= ========= Funds from Operations $ 11,055 $ 9,581 $ 7,076 $ 6,389 $ 4,544 -- ========= ========= ========= ========= ========= ========= Number of Properties 39 34 32 20 17 17 ========= ========= ========= ========= ========= ========= Number of Square Feet 3,411 3,103 3,068 2,470 2,377 2,377 ========= ========= ========= ========= ========= ========= Per Share Data Net income (3) $ 1.40 $ 1.41 $ 1.41 $ 1.23 $ 0.08 -- ========= ========= ========= ========= ========= ========= Cash dividends $ 1.84 $ 1.82 $ 1.80 $ 1.80 $ 1.25 -- ========= ========= ========= ========= ========= ========= Weighted average of common shares outstanding 4,346 3,695 2,649 2,638 2,638 -- ========= ========= ========= ========= ========= ========= Balance Sheet Data Real Estate (before accumulated depreciation) $ 166,921 $ 142,748 $ 132,474 $ 118,360 $ 96,852 Total Assets $ 149,648 $ 130,492 $ 121,382 $ 108,928 $ 89,653 Total debt, including accrued interest $ 85,650 $ 65,419 $ 88,252 $ 73,741 $ 54,431 - ----------- (1) Property expense includes real estate taxes, property maintenance, insurance, utilities and land lease expense. (2) Other income (expense) is composed of development fee income, gain on land sales, equity in net income (loss) of unconsolidated entities and reorganization costs. (3) Net income per share has been computed by dividing the net income by the weighted average number of shares of Common Stock outstanding. The per share amounts shown are presented in accordance with SFAS No. 128 "Earnings per Share". The Company's basic and diluted earnings per share are the same
-17- ITEM 7. MANAGEMENT'S DISCUSSION AND ANYALYSIS 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 its 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 a second 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 December 31, 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 elsewhere in this Form 10-K. Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997 Rental income increased $1,354,000, or 8%, to $17,506,000 in 1998, compared to $16,152,000 in 1997. The increase was the result of the development and acquisition of two Properties in 1997 and four Properties in 1998. Operating cost reimbursement, which represents additional rent required by substantially all of the Company's leases to cover the tenants' proportionate share of property operating expenses, increased $95,000, or 5%, to $2,092,000 in 1998, compared to $1,997,000 in 1997. Operating cost reimbursement 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 decreased $9,000, or 10%, to $76,000 in 1998, compared to $85,000 in 1997. The decrease was the result of a reduction in management fees due to the Company's acquisition of a property it previously managed. Real estate taxes increased $158,000, or 11%, to $1,556,000 in 1998 compared to $1,398,000 in 1997. The increase is the result of the addition of new properties. -18- Property operating expenses (shopping center maintenance, insurance and utilities) increased $13,000, or 1%, to $948,000 in 1998 compared $935,000 in 1997. The increase was the result of decreased snow removal costs of $54,000; an increase in shopping center maintenance costs of $78,000; an increase in utility costs of $38,000; and a decrease in insurance costs of $49,000 in 1998 versus 1997. Land lease payments increased $93,000 to $545,000 in 1998 compared to $452,000 in 1997 as a result of the ground lease on the free standing Property in Lawrence, Kansas developed in 1997. General and administrative expenses increased $63,000, or 6%, to $1,170,000 in 1998 compared to $1,107,000 in 1997. The increase was primarily the result of an increase in compensation related expenses. General and administrative expenses as a percentage of rental income decreased from 6.9% for 1997 to 6.7% for 1998. Depreciation and amortization increased $291,000, or 10%, to $3,073,000 in 1998 compared to $2,782,000 in 1997. The increase was the result of the development and acquisition of six new Properties in 1997 and 1998. Interest expense decreased $321,000, or 9%, to $5,231,000 in 1998, from $5,552,000 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. Development fee income increased $119,000, to $176,000 in 1998, from $57,000 in 1997. Development fee income is not included in the Company's calculation of Funds from Operations, due to the non-recurring nature of this type of income. The Company recognized income of $103,000 on the sale of a parcel of land in 1997. There were no land sales in 1998. Equity in net loss of unconsolidated entities remained relatively constant at to $8,000 in 1998 compared to $6,000 in 1997. The Company recognized an extraordinary item of $319,000 in 1998 relating to the prepayment of a mortgage on a property located in Winter Garden, Florida. The costs represent a prepayment penalty of $93,000 and the write-off of deferred finance costs of $226,000. There were no extraordinary items in 1997. The Company's income before minority interest increased $835,000 as a result of the foregoing factors. Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996 Rental income increased $1,702,000, or 12%, to $16,152,000 in 1997, compared to $14,450,000 in 1996. The increase was the result of the development and acquisition of five Properties in 1996 and two Properties in 1997. Operating cost reimbursements increased $236,000, or 13%, to $1,997,000 in 1997, compared to $1,761,000 in 1996. Operating cost reimbursement increased due to the increase in real estate taxes and property operating expenses from 1996 to 1997, as explained below. -19- Management fees and other income remained relatively constant at $85,000 in 1997 compared to $81,000 in 1996. Real estate taxes increased $229,000, or 20%, to $1,398,000 in 1997 compared to $1,169,000 in 1996. The increase is the result of the addition of new properties. Property operating expenses (shopping center maintenance, insurance and utilities) decreased $45,000, or 5%, to $935,000 in 1997 compared $980,000 in 1996. The decrease was the result of decreased snow removal costs of $56,000; an increase in shopping center maintenance costs of $25,000; a decrease in utility costs of $6,000; and a decrease in insurance costs of $8,000 in 1997 versus 1996. Land lease payments increased $116,000 to $452,000 in 1997 compared to $336,000 in 1996 as a result of the ground lease on the free standing Property in Aventura, Florida acquired in April 1996. General and administrative expenses remained relatively constant at $1,107,000 in 1997 compared to $1,105,000 in 1996. General and administrative expenses as a percentage of rental income decreased from 7.6% for 1996 to 6.9% for 1997. Depreciation and amortization increased $162,000, or 6%, to $2,782,000 in 1997 compared to $2,620,000 in 1996. The increase was the result of the development of five new Properties in 1996. Interest expense decreased $549,000, or 9%, to $5,552,000 in 1997, from $6,101,000 in 1996. The decrease in interest expense was the result of the Company using the proceeds of the 1997 Offering to reduce the Company's indebtedness. Development fee income decreased $452,000, to $57,000 in 1997, from $509,000 in 1996. The decrease in development fee income was the result of the Company substantially completing the development of four Joint Venture Properties in 1996. Development fee income is not included in the Company's calculation of Funds from Operations, due to the non-recurring nature of this type of income. The Company recognized income of $103,000 on the sale of a parcel of land in 1997 compared to the recognition of $84,000 of income on the sale of a parcel of land in 1996. Equity in net income (loss) of unconsolidated entities decreased $64,000 to ($5,000) in 1997 compared to $59,000 in 1996 as a result of additional expenses in 1997 related to certain of the Joint Venture Properties in which the Company holds interests ranging from 8% to 20%. The Company's income before minority interest increased $1,530,000 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 computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) -20- from debt restructuring and sales of property, plus real estate related depreciation and amortization, and after adjustments for unconsolidated entities in which the REIT holds an interest. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as the primary indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. The following table illustrates the calculation of FFO for the years-ended December 31, 1998, 1997 and 1996: Year ended December 31, 1998 1997 1996 - ----------------------- ---- ---- ---- Income before extraordinary item and minority interest $7,318,160 $6,163,510 $4,633,295 Depreciation of real estate assets 3,003,211 2,726,066 2,556,603 Amortization of leasing costs 52,542 40,504 52,033 Amortization of stock awards 156,106 113,380 82,873 Depreciation of real estate assets held in unconsolidated entities 700,880 698,141 345,972 Gain on sale of assets -- (103,270) (84,688) Development fee income (176,193) ( 57,089) (509,673) ----------- ---------- ---------- Funds from Operations $11,054,706 $9,581,242 $7,076,415 ----------- ---------- ---------- Weighted average shares and OP Units outstanding 4,997,435 4,333,121 3,287,434 ----------- ---------- ---------- FFO increased $1,473,000 or 15% for the year ended December 31, 1998 to $11,055,000. FFO increased $2,505,000, or 35%, for the year ended December 31, 1997, to $9,581,000. The increase in FFO is primarily the result of the reduction in interest expense as a result of the completion of the 1997 Offering and the development and acquisition of six Properties in 1997 and 1998. 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 December 31, 1998, the Company declared a quarterly dividend of $.46 per share. The dividend was paid on January 7, 1999 to holders of record on December 23, 1998. As of December 31, 1998, the Company had total mortgage indebtedness of $41,299,294 with a weighted average interest rate of 7.04%. Future scheduled annual maturities of mortgages payable for the years ending December 31 are as follows: 1999 - $8,138,507; 2000 - $698,354; 2001 - $748,838; 2002 - $802,972; 2003 - $861,019. The mortgage debt is all fixed rate debt. The Company is currently in the process of obtaining replacement financing for the mortgage on its Lakeland, Florida property, which matures on April 1, 1999. The Company anticipates that the replacement financing in the amount of approximately $7,700,000 will be on terms similar to the current mortgage. -21- 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 lender'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 December 31, 1998, $35,158,232 was outstanding under the Credit Facility. The Company also has in place a $5 million line of credit (the "Line of Credit"), which matures on October 19, 1999, and which the Company expects to renew for an additional 12-month period. The Line of Credit bears interest at the lender'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 December 31, 1998, there were no outstanding borrowings under the Line of Credit. The Company's wholly-owned subsidiaries have obtained construction financing of approximately $7,300,000 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 December 31, 1998, $7,143,836 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 arrangement 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 December 31, 1998, $1,730,490 was outstanding under this arrangement. In December 1998, the Company completed development of one property that added 13,905 square feet of gross leasable area to its portfolio. The property is located in Grand Blanc, Michigan. The development of this retail project is expected to have a positive effect on cash generated by operating activities and Funds from Operations. The Company has one development project under construction that will add an additional 14,000 square feet of retail space to the Company's portfolio. The project is expected to be completed during the second quarter of 1999. Additional Company funding required for this project is estimated to be $1,316,000 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 -22- 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 believes that these financing sources will enable the Company to generate funds sufficient to meet both its short-term and long-term capital needs. 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 Costs 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 significant business relationships with external parties, including its major tenants, to determine if their failure to be Year 2000 compliant would have a material adverse effect upon the Company. In the event that any of the Company's significant tenants, vendors, banks or others with whom it does business do not successfully and timely achieve Year 2000 compliance, the Company's operations may be affected. To date, nothing has come to the attention of management that leads it to conclude that the likelihood of such adverse effect reasonably exists. However, because the complexities involved, management cannot provide assurance that the Year 2000 issue will not have an impact of the Company's operations. The Company has completed a review of its information systems and believes its business technologies are fully compliant with any issues that may arise as a result of Year 2000 issues. 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. -23- Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS NO. 133 "Accounting for Derivative Instruments and Hedging Activities." This Statement, which is effective in fiscal year 2000, is not expected to have an impact on the Company's financial statements. Item 7A QUANTITATIVE AND QUALATATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk primarily through its borrowing activities. There is inherent roll over 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 December 31, 1998 the Company had two mortgages outstanding. The first mortgage in the amount of $33,600,000 bears interest at 6.875% until April 1999 at which time the rate changes to 7.00% per annum until November 2005 when the remaining balance is due. The second mortgage in the amount of $7,699,294 bears interest at 7.75% and matures on April 1, 1999. The Company expects to refinance this mortgage at a similar interest rate for a five or seven year period. Construction loans - As of December 31, 1998 the Company had Construction loans outstanding of $8,874,326. Under the terms of the construction loans the Company bears no interest rate risk. Notes payable - As of December 31, 1998 the Company had $35,158,232 outstanding on its Secured Line-of-Credit all of which had a variable interest rate, based on LIBOR. The Company does not enter into financial instruments 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 increase in interest expense of approximately $187,000. Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are listed in the Index to Financial Statements and Financial Statement Schedules appearing on Page F-1 of this Form 10-K and are included in this Form 10-K following page F-1. Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the Company's last two fiscal years, there have been no changes in the independent accountants nor disagreements with such accountants as to accounting and financial disclosures of the type required to be disclosed in this Item 9. -24- PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference to the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to its Annual Meeting of Stockholders to be held on May 10, 1999. Item 11. EXECUTIVE COMPENSATION Incorporated herein by reference to the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to its Annual Meeting of Stockholders to be held on May 10, 1999. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its Annual Meeting of Stockholders to be held on May 10, 1999. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its Annual Meeting of Stockholders to be held on May 10, 1999. -25- PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report (1)(2) The financial statements indicated by Part II, Item 8, Financial Statements and Supplementary Data. (3) 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) 4.1 Rights Agreement by and between Agree Realty Corporation and BankBoston, N.A. as Rights Agent Dated as of December 7, 1998 (incorporated by reference to exhibit 4.1 to Form 8-K filed on December 7, 1998) 10.1 Loan Modification Agreement, dated April 22, 1994, by and among Shawano Plaza, Plymouth Commons, Chippewa Commons and Nationwide Life Insurance Company (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the 1996 "Form 10-K")) 10.2 Loan Modification Agreement, dated April 22, 1994, by and among Rapids Associates, Marshall Plaza Phase Two, Petoskey Town Center, Charlevoix Commons and Nationwide Life Insurance Company (incorporated by reference to Exhibit 10.2 to the 1996 Form 10-K 10.3 Modification Agreement, dated as of March 28, 1994, by and between North Lakeland Plaza and the Travelers Indemnity Company (incorporated by reference to Exhibit 4.2 to Agree S-11) 10.4 Loan Agreement dated March 7, 1990, and Modification of Mortgage and Security Agreement, dated July 10, 1990, by and between Winter Garden Plaza and American United Life Insurance Company (incorporated by reference to Exhibit 4.4 to Agree S-11) 10.5 First Amended and Restated Agreement of Limited Partnership of Agree Limited Partnership, dated as of April 22, 1994, by and among the Company, Richard Agree, Edward Rosenberg and Joel Weiner (incorporated by reference to Exhibit 10.6 to the 1996 Form 10-K) 10.6 Amended and Restated Registration Rights Agreement, dated July 8, 1994 by and among the Company, Richard Agree, Edward Rosenberg and Joel Weiner (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 Form 10-K")) 10.7 + 1994 Stock Incentive Plan of the Company (incorporated by reference to Exhibit 10.8 to the 1996 Form 10-K) 10.8 Management Agreement, dated April 22, 1994, by and among Mt Pleasant Shopping Center, Angola Plaza, Shiloh Plaza and the Company (incorporated by reference to Exhibit 10.9 to the 1996 Form 10-K) -26- 10.9 Contribution Agreement, dated as of April 21, 1994, by and among the Company, Richard Agree, Edward Rosenberg and the co-partnerships named therein (incorporated by reference to Exhibit 10.10 to the 1996 Form 10-K) 10.10 + Employment Agreement, dated April 22, 1994, by and between the Company and Richard Agree (incorporated by reference to Exhibit 10.11 to the 1996 Form 10-K) 10.11 + Agree Realty Corporation Profit Sharing Plan (incorporated by reference to Exhibit 10.13 to the 1996 Form 10-K) 10.12 Business Loan Agreement, dated as of September 21, 1995, by and between Agree Limited Partnership and Michigan National Bank (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 10-K")) 10.13 Line of Credit Agreement by and among Agree Limited Partnership, the Company, the lenders parties thereto, and Michigan National Bank as Agent (incorporated by reference to Exhibit 10.10 to the 1995 10-K) 10.14 First amendment to $50 million line-of-credit agreement dated August 7, 1997 among Agree Realty Corporation and Michigan National Bank, as agent (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 1997 (the September 1997 "Form 10-Q")) 10.15 First amendment to $5 million business loan agreement dated September 21, 1997 between Agree Limited Partnership and Michigan National Bank (incorporated by reference to Exhibit 10.2 to the September 1997 Form 10-Q) 10.16 Second amendment to $50 million line-of-credit agreement dated November 17, 1997 among Agree Realty Corporation and Michigan National Bank, as agent 10.17 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 - ----------------------------------------------------------------------------- * Filed herewith + Management contract or compensatory plan or arrangement (b) Reports on Form 8-K During the three months ended December 31, 1998, the Company filed the following report on Form 8-K: Form 8-K dated December 7, 1998 related to the Company's adoption of a Shareholder Rights Agreement -27- [ THIS PAGE INTENTIONALLY LEFT BLANK ] SIGNATURES PURSUANT to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AGREE REALTY CORPORATION By: /s/ Richard Agree --------------------------------- Name: Richard Agree President and Chairman of the Board of Directors Date: March 23, 1999 PURSUANT to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 23rd day of March 1999. By: /s/ Richard Agree By: /s/ Farris G. Kalil --------------------------------- --------------------------------- Richard Agree Farris G. Kalil President and Chairman of the Director Board of Directors (Principal Executive Officer) By: /s/ Michael Rotchford -------------------------------- Michael Rotchford Director By: /s/ Kenneth R. Howe By: /s/ Ellis G. Wachs ----------------------------------- -------------------------------- Kenneth R. Howe Ellis G. Wachs Vice President, Finance Director and Secretary (Principal Financial and Accounting Officer) By: /s/ Gene Silverman -------------------------------- Gene Silverman By: /s/ Edward Rosenberg Director ----------------------------------- Edward Rosenberg Director -29- Agree Realty Corporation Index - ----------------------------------------------------------------------------- Page ---- Report of Independent Certified Public Accountants F-2 Financial Statements Consolidated Balance Sheets F-3 Consolidated Statements of Income F-5 Consolidated Statements of Stockholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Financial Statements F-9 Schedule III - Real Estate and Accumulated Depreciation F-21 F - 1 [ Letterhead of BDO Seidman, LLP ] Report of Independent Certified Public Accountants To the Board of Directors and Owners of Agree Realty Corporation Farmington Hills, Michigan We have audited the accompanying consolidated balance sheets of Agree Realty Corporation (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. We have also audited the schedule listed in the accompanying index. These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and the schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and the schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Agree Realty Corporation at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. BDO SEIDMAN, LLP Troy, Michigan February 12, 1999 F - 2 Agree Realty Corporation Consolidated Balance Sheets - ----------------------------------------------------------------------------- December 31, 1998 1997 - --------------------------------------------------------------------------- Assets Real Estate Investments (Notes 3, 4 and 5) Land $ 37,005,162 $ 29,952,532 Buildings 128,861,505 112,307,266 Property under development 1,054,335 488,651 ------------- ------------- 166,921,002 142,748,449 Less accumulated depreciation (23,022,291) (20,043,235) ------------- ------------- Net Real Estate Investments 143,898,711 122,705,214 Cash and Cash Equivalents 994,159 1,785,968 Accounts Receivable - Tenants 645,052 473,918 Investments In and Advances To Unconsolidated Entities 1,135,409 1,810,241 Unamortized Deferred Expenses Financing costs 1,533,440 2,133,426 Leasing costs 302,694 236,151 Other Assets 1,138,407 1,346,586 ------------- ------------- $ 149,647,872 $ 130,491,504 ============= ============= See accompanying notes to consolidated financial statements. F - 3
Agree Realty Corporation Consolidated Balance Sheets - ----------------------------------------------------------------------------- December 31, 1998 1997 - ------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Mortgages Payable (Note 3) $ 41,299,294 $ 50,954,026 Construction Loans (Note 4) 8,874,326 5,575,091 Notes Payable (Note 5) 35,158,232 8,641,016 Dividends and Distributions Payable (Note 6) 2,309,136 2,284,792 Accrued Interest Payable 318,362 248,742 Accounts Payable Capital expenditures 1,444,517 1,516,379 Operating 721,485 602,862 Tenant Deposits 48,606 51,240 ------------- ------------- Total Liabilities 90,173,958 69,874,148 ------------- ------------- Minority Interest (Note 7) 6,047,843 5,651,347 ------------- ------------- Stockholders' Equity (Notes 6 and 8) 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 (9,448,351) (7,537,911) ------------- ------------- Total Stockholders' Equity 53,426,071 54,966,009 ------------- ------------- $ 149,647,872 $ 130,491,504 ============= ============= See accompanying notes to consolidated financial statements.
F - 4
Agree Realty Corporation Consolidated Statements of Income - ----------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------ Revenues Rental income $ 17,505,825 $ 16,152,240 $ 14,450,035 Operating cost reimbursement 2,091,633 1,997,087 1,760,681 Management fees and other (Note 9) 76,094 84,840 80,752 ------------ ------------ ------------ Total Revenues 19,673,552 18,234,167 16,291,468 ------------ ------------ ------------ Operating Expenses Real estate taxes 1,556,172 1,398,120 1,169,308 Property operating expenses 947,619 934,584 979,606 Land lease payments 545,194 452,106 336,083 General and administrative 1,170,122 1,106,816 1,104,861 Depreciation and amortization 3,073,469 2,782,083 2,620,274 ------------ ------------ ------------ Total Operating Expenses 7,292,576 6,673,709 6,210,132 ------------ ------------ ------------ Income From Operations 12,380,976 11,560,458 10,081,336 ------------ ------------ ------------ Other Income (Expense) Interest expense (5,231,088) (5,551,734) (6,101,106) Development fee income 176,193 57,089 509,673 Equity in net income (loss) of unconsolidated entities (7,921) (5,573) 58,704 Gain on land sales -- 103,270 84,688 ------------ ------------ ------------ Total Other Expense (5,062,816) (5,396,948) (5,448,041) ------------ ------------ ------------ Income Before Extraordinary Item and Minority Interest 7,318,160 6,163,510 4,633,295 Extraordinary Item - Loss on Extinguishment of Debt (Note 10) 319,422 -- -- ------------ ------------ ------------ Income Before Minority Interest 6,998,738 6,163,510 4,633,295 Minority Interest 911,962 943,287 899,323 ------------ ------------ ------------ Net Income $ 6,086,776 $ 5,220,223 $ 3,733,972 ============ ============ ============ Earnings Per Share (Note 2) Income before extraordinary item $ 1.46 $ 1.41 $ 1.41 Extraordinary item .06 -- -- ------------ ------------ ------------ Earnings Per Share $ 1.40 $ 1.41 $ 1.41 ============ ============ ============ See accompanying notes to consolidated financial statements.
F - 5
Agree Realty Corporation Consolidated Statements of Stockholders' Equity - ----------------------------------------------------------------------------- Common Stock Additional ------------------------- Paid-In Shares Amount Capital Deficit - ----------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1996 2,638,185 $ 264 $ 29,890,292 $ (4,584,054) Issuance of shares under the Stock Incentive Plan 11,290 1 170,616 -- Dividends declared for the year ended December 31, 1996, $1.80 per share -- -- -- (4,769,054) Net income for the year ended December 31, 1996 -- -- -- 3,733,972 --------- ------------ ------------ ------------ Balance, December 31, 1996 2,649,475 265 30,060,908 (5,619,136) Issuance of shares under the Stock Incentive Plan 28,955 3 618,910 -- Issuance of common stock 1,653,850 165 31,888,031 -- Shares forfeited under the Stock Incentive Plan (3,300) -- (64,362) -- Dividends declared for the year ended December 31, 1997, $1.82 per share -- -- -- (7,138,998) Net income for the year ended December 31, 1997 -- -- -- 5,220,223 --------- ------------ ------------ ------------ Balance, December 31, 1997 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 year ended December 31, 1998, $1.84 per share -- -- -- (7,997,216) Net income for the year ended December 31, 1998 -- -- -- 6,086,776 --------- ------------ ------------ ------------ Balance, December 31, 1998 4,346,313 $ 435 $ 62,873,987 $ (9,448,351) ========= ============ ============ ============ See accompanying notes to consolidated financial statements.
F - 6
Agree Realty Corporation Consolidated Statements of Cash Flows - ----------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 6,086,776 $ 5,220,223 $ 3,733,972 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 2,993,886 2,709,177 2,523,621 Amortization 511,407 483,267 505,089 Write-off of deferred finance costs 226,162 -- -- Equity in net (income) loss of unconsolidated entities 7,921 5,573 (58,704) Minority interests 911,962 943,287 899,323 Gain on land sales -- (103,270) (84,688) Decrease (increase) in accounts receivable (171,134) 164,817 (12,455) Decrease (increase) in other assets 405,404 (1,751) (6,890) Increase (decrease) in accounts payable 118,623 (89,119) 95,068 Increase (decrease) in accrued interest 69,620 (106,246) 165,732 Increase (decrease) in tenant deposits (3,467) 846 (3,083) ------------ ------------ ------------ Net Cash Provided By Operating Activities 11,157,160 9,226,804 7,756,985 ------------ ------------ ------------ Cash Flows From Investing Activities Acquisition of real estate investments (including capitalized interest of $470,671 in 1998, $117,892 in 1997 and $78,703 in 1996) (13,688,468) (8,727,691) (13,577,181) Investments in and advances to unconsolidated entities - net 655,665 4,791 (1,761,901) Proceeds from sale of land -- 148,270 144,688 ------------ ------------ ------------ Net Cash Used In Investing Activities (13,032,803) (8,574,630) (15,194,394) ------------ ------------ ------------ See accompanying notes to consolidated financial statements.
F - 7
Agree Realty Corporation Consolidated Statements of Cash Flows - ----------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Increase in line-of-credit 26,517,216 16,275,009 21,638,574 Payments of mortgages payable (15,830,943) (2,709,973) (306,526) Dividends and limited partners' distributions paid (9,179,457) (7,494,505) (5,912,300) Proceeds from construction loans 3,299,235 4,099,043 4,874,157 Payment of related party payables (1,757,359) -- -- Payments of payables for capital expenditures (1,338,399) (596,794) (1,637,861) Payment of note payable (450,000) -- -- Payments of leasing costs (83,131) (84,898) (53,764) Payments for financing costs (58,000) (145,410) (293,148) Redemption of restricted stock (35,328) -- -- Net proceeds from the issuance of common stock -- 31,888,196 -- Payment on line-of-credit -- (31,250,375) -- Payment of construction loans -- (9,140,888) (11,861,006) ------------ ------------ ------------ Net Cash Provided By Financing Activities 1,083,834 839,405 6,448,126 ------------ ------------ ------------ Net Increase (Decrease) In Cash and Cash Equivalents (791,809) 1,491,579 (989,283) Cash and Cash Equivalents, beginning of year 1,785,968 294,389 1,283,672 ------------ ------------ ------------ Cash and Cash Equivalents, end of year $ 994,159 $ 1,785,968 $ 294,389 ============ ============ ============ Supplemental Disclosure of Cash Flow Information Cash paid for interest (net of amounts capitalized) $ 4,790,000 $ 5,313,000 $ 5,551,000 ============ ============ ============ Supplemental Disclosure of Non-Cash Transactions Dividends and limited partners' distributions declared and unpaid $ 2,309,136 $ 2,284,792 $ 1,479,345 Real estate investments financed with accounts payable $ 1,444,517 $ 1,516,379 $ 596,794 Operating partnership units issued for purchase of real estate $ 691,119 $ -- $ -- Shares issued under Stock Incentive Plan $ 405,830 $ 618,913 $ 170,617 Shares retired under Stock Incentive Plan $ -- $ 64,362 $ -- ============ ============ ============ See accompanying notes to consolidated financial statements.
F - 8 Agree Realty Corporation Notes to Consolidated Financial Statements - ----------------------------------------------------------------------------- 1. The Company Agree Realty Corporation (the "Company") is a self-administered, self-managed real estate investment trust which develops, acquires, owns and operates properties which are primarily leased to national and regional retail companies under net leases. At December 31, 1998, the Company's properties are comprised of fourteen shopping centers and eighteen single tenant retail facilities located in twelve states. In addition, the Company owns joint venture interests ranging from 8% to 20% in seven free-standing retail properties. During the year ended December 31, 1998, approximately 94% of the Company's base rental revenues were received from national and regional tenants under long-term leases, including approximately 28% from Kmart Corporation and 24% from Borders, Inc. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of Agree Realty Corporation include the accounts of the Company, its majority-owned partnership, Agree Limited Partnership (the "Operating Partnership"), and its wholly-owned subsidiaries. The Company controlled, as the sole general partner, 86.58% and 87.16% of the Operating Partnership as of December 31, 1998 and 1997, respectively. All material intercompany accounts and transactions are eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and (2) revenues and expenses during the reporting period. Actual results could differ from those estimates. F - 9 Fair Values of Financial Instruments The carrying amounts of the Company's financial instruments, which consist of cash, cash equivalents, receivables, notes payable, accounts payable and long-term debt, approximate their fair values. Valuation of Long-Lived Assets Long-lived assets such as real estate investments are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. No impairment loss recognition has been required through December 31, 1998. Real Estate Investments Real estate assets are stated at cost less accumulated depreciation. All costs related to planning, development and construction of buildings prior to the date they become operational, including interest and real estate taxes during the construction period, are capitalized for financial reporting purposes. Subsequent to completion of construction, expenditures for property maintenance are charged to operations as incurred, while significant renovations are capitalized. Depreciation of the buildings is recorded on the straight-line method using an estimated useful life of forty years. Cash and Cash Equivalents Cash and cash equivalents include cash and money market accounts. Accounts Receivable - Tenants Accounts receivable from tenants reflect primarily reimbursement of specified common area expenses. No allowance for uncollectible accounts is considered necessary due to past collection results. F - 10 Investments in Unconsolidated Entities The Company uses the equity method of accounting for investments in non- majority owned entities where the Company has the ability to exercise significant influence over operating and financial policies. The Company's initial investment is recorded at cost, and the carrying amount of the investment is (a) increased by the Company's share of the investees' earnings (as defined in the limited liability company agreements), and (b) reduced by distributions paid from the investees to the Company. Unamortized Deferred Expenses Deferred expenses are stated net of total accumulated amortization. The nature and treatment of these capitalized costs are as follows: (1) financing costs, consisting of expenditures incurred to obtain long-term financing, are being amortized using the interest method over the term of the related loan, and (2) leasing costs, which are amortized on a straight-line basis over the term of the related lease. Accounts Payable - Capital Expenditures Included in accounts payable are amounts related to the construction of buildings. Due to the nature of these expenditures, they are reflected in the statements of cash flows as a financing activity. Minority Interest This amount represents the limited partners' interest ("OP Units") of 13.42% (convertible into 673,547 shares) and 12.84% (convertible into 637,959 shares) in the Operating Partnership as of December 31, 1998 and 1997, respectively. F - 11 Revenue Recognition Base rental income attributable to leases is recorded when due from tenants. Certain leases provide for additional rents based on tenants' sales volume. These percentage rents are reflected based on the tenants' fiscal year; however, such amounts earned by the Company historically have not been material. In addition, leases for certain tenants contain rent escalations and/or free rent during the first several months of the lease term; however, such amounts are not material. The Company acts as the construction developer on certain properties. Related development fee income is recognized upon completion of construction. Operating Cost Reimbursement Substantially all of the Company's leases contain provisions requiring tenants to pay as additional rent a proportionate share of operating expenses such as real estate taxes, repairs and maintenance, insurance, etc. The related revenue from tenant billings is recognized in the same period the expense is recorded. Income Taxes The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code") and began operating as such on April 22, 1994. As a result, the Company is not subject to federal income taxes to the extent that it distributes annually at least 95% of its taxable income to its shareholders and satisfies certain other requirements defined in the Code. Accordingly, no provision was made for federal income taxes in the accompanying consolidated financial statements. F - 12 The Company declared dividends per share of $1.84, $1.82, and $1.80 during the years ended December 31, 1998, 1997, and 1996, respectively; the dividends have been reflected for federal income tax purposes as follows: 1998 1997 1996 - ----------------------------------------------- Ordinary income $1.32 $1.20 $1.24 Return of capital .52 .62 .56 ----- ----- ----- Total $1.84 $1.82 $1.80 ===== ===== ===== The aggregate federal income tax basis of Real Estate Investments is approximately $16.8 million less than the financial statement basis. Comprehensive Income On January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. For the year ended December 31, 1998, comprehensive income for the Company did not differ from net income. Earnings Per Share Earnings per share reflected in the consolidated statements of operations are presented for all periods in accordance with SFAS No. 128, "Earnings per Share". In connection therewith, any conversion of OP Units to common stock would have no effect on the earnings per share calculation since the allocation of earnings to an OP Unit is equivalent to earnings allocated to a share of common stock. F - 13 The following table sets forth the computation of basic and diluted earnings per share: 1998 1997 1996 - ---------------------------------------------------------------------- Numerator Net income $6,086,776 $5,220,223 $3,733,972 Income allocated to minority interests 911,962 943,287 899,323 ---------- ---------- ---------- Numerator for Basic and Diluted Earnings Per Share - Income Available to Shareholders After Assumed Conversions $6,998,738 $6,163,510 $4,633,295 ========== ========== ========== Denominator Weighted average shares outstanding 4,346,313 3,695,162 2,649,475 Weighted average OP Units outstanding, assuming conversion 651,122 637,959 637,959 ---------- ---------- ---------- Denominator for Basic Earnings Per Share - Adjusted Weighted Average Shares and Assumed Conversions 4,997,435 4,333,121 3,287,434 Employee Stock Options 685 1,406 -- ---------- ---------- ---------- Denominator for Diluted Earnings Per Share 4,998,120 4,334,527 3,287,434 ========== ========== ========== Reclassifications Certain amounts in prior years' financial statements have been reclassified to conform with current year's presentation. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement, which is effective in fiscal 2000, is not expected to have an impact on the Company's financial statements. F - 14 3. Mortgages Payable Mortgages payable consisted of the following:
December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------- Note payable in monthly installments of interest only at 6.875% per annum until April 1999; beginning May 1999, monthly installments of $249,750 including interest at 7.0% per annum, with the remaining balance then due November 2005; collateralized by related real estate and tenants' leases $33,600,000 $33,600,000 Note payable in monthly installments of $62,881 including interest at 7.75% per annum, collateralized by related real estate and tenants' leases, final balloon installment scheduled to be due March 1999 7,699,294 7,850,740 Other, repaid during 1998 (also see Note 10) -- 9,503,286 ----------- ----------- Total $41,299,294 $50,954,026 =========== ===========
Future scheduled annual maturities of mortgages payable for years ending December 31, are as follows: 1999 - $8,138,507; 2000 - $698,354; 2001 - $748,838; 2002 - $802,972; 2003 - $861,019 and $30,049,604 thereafter. 4. Construction Loans The Company's wholly-owned subsidiaries have obtained construction financing totalling approximately $7,300,000, which is available to fund the development of two retail properties. Quarterly interest payments are made based on LIBOR. The notes mature on October 16, 2002 and are secured by the related land and buildings. The Company owed $7,143,836 and $3,844,601 for these loans at December 31, 1998 and 1997, respectively. F - 15 The Company has also received funding from an unaffiliated third party for certain of its single tenant retail properties. Borrowings under this arrangement bear no interest and are required to be repaid within sixty (60) days after the date the construction has been completed. The advances are secured by the specific land and buildings being developed. As of December 31, 1998 and 1997, $1,730,490 was outstanding under this arrangement. 5. Notes Payable The Operating Partnership has entered into a $50 million line-of-credit agreement which is guaranteed by the Company. The agreement expires on August 7, 2000 and can be extended, at the option of the Company, for an additional three years. Advances under this credit facility bear interest within a range of either 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 specific properties. At December 31, 1998 and 1997, $35,158,232 and $6,865,459 was outstanding under this facility, respectively. In addition, the Company maintains a $5,000,000 line-of-credit agreement with a bank. Monthly interest payments are required, either 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. At December 31, 1998 and 1997, $-0- and $1,775,557 was outstanding under this agreement, respectively. 6. Dividends and Distributions Payable On December 7, 1998, the Company declared a dividend of $.46 per share for the quarter ended December 31, 1998; approximately 28 percent of the dividend represented a return of capital. The holders of OP Units were entitled to an equal distribution per OP Unit held as of December 31, 1998. The dividends and distributions payable are recorded as liabilities in the Company's balance sheet at December 31, 1998. The dividend has been reflected as a reduction of stockholders' equity and the distribution has been reflected as a reduction of the limited partners' minority interest. These amounts were paid on January 7, 1999. F - 16 7. Minority Interest The following summarizes the changes in minority interest since January 1, 1996: Minority interest at January 1, 1996 $ 6,118,017 Minority interests' share of income for the year ended December 31, 1996 899,323 Distributions for the year ended December 31, 1996 (1,148,326) ----------- Minority Interest at December 31, 1996 5,869,014 Minority interests' share of income for the year ended December 31, 1997 943,287 Distributions for the year ended December 31, 1997 (1,160,954) ----------- Minority Interest at December 31, 1997 5,651,347 Acquisition of Mt. Pleasant Shopping Center (see Note 9) 691,119 Minority interests' share of income for the year ended December 31, 1998 911,962 Distributions for the year ended December 31, 1998 (1,206,585) ----------- Minority Interest at December 31, 1998 $ 6,047,843 ----------- 8. Issuance of Common Stock During May and June 1997, the Company sold 1,653,850 shares of common stock. The cash proceeds (net of underwriting fees and related issuance costs) to the Company from the stock issuance sales were approximately $31.9 million, which was used to reduce outstanding indebtedness. 9. Related Party Transactions In August 1998 the Operating Partnership purchased the Mt. Pleasant Shopping Center. 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 OP Units. The sellers are members of the Agree organization and are existing limited partners in the Operating Partnership. F - 17 The Company currently manages certain additional properties which are owned by certain officers and directors of the Company, but are not included in the consolidated financial statements. Income related to these activities is reflected as "Management fees and other" in the accompanying consolidated statements of income. 10. Extraordinary Item During the fourth quarter of 1998, the Company recognized an extraordinary loss related to loan prepayment penalties and the write-off of deferred financing costs for debt that was repaid prior to its scheduled due date. 11. Stock Incentive Plan The Company has established a stock incentive plan (the "Plan") under which 29,400 options were granted in April 1994. The options, which have an exercise price equal to the initial public offering price ($19.50/share), can be exercised in increments of 25% on each anniversary of the date of the grant. A total of 29,400 and 22,050 of the options were exercisable at December 31, 1998 and 1997, respectively. No options were exercised during either 1998 or 1997. The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation." However, since no compensation cost would have been recognized pursuant to SFAS No. 123 under the Plan in either 1998 or 1997, there is no effect on the Company's net income for these years. 12. Restricted Stock As part of the Company's stock incentive plan, restricted common shares are granted to certain employees. The restricted shares vest in increments of 20% per year for five years. Plan participants are entitled to receive the quarterly dividends on their respective restricted shares. The following table summarizes the restricted shares for the years ended December 31, 1998, 1997 and 1996: F - 18
1998 1997 1996 - --------------------------------------------------------------------------------- Restricted shares outstanding January 1 49,445 23,790 12,500 Restricted shares granted during the year 19,033 28,955 11,290 Restricted shares redeemed during the year (1,700) -- -- Restricted shares forfeited during the year -- (3,300) -- --------- --------- --------- Restricted shares outstanding December 31 66,778 49,445 23,790 ========= ========= ========= Compensation Expense Recorded Related to Restricted Common Shares $ 156,106 $ 113,380 $ 82,873 ========= ========= =========
13. Profit-Sharing Plan The Company has a discretionary profit-sharing plan whereby it contributes to the plan such amounts as the Board of Directors of the Company determines. The participants in the plan cannot make any contributions to the plan. Contributions to the plan are allocated to the employees based on their percentage of compensation to the total compensation of all employees for the plan year. Participants in the plan become fully vested after six years of service. No contributions were made to the plan in 1998, 1997 or 1996. 14. Rental Income The Company leases premises in its properties to tenants pursuant to lease agreements which provide for terms ranging generally from 5 to 25 years. The majority of leases provide for additional rents based on tenants' sales volume; however, such amounts earned by Agree historically have not been material. As of December 31, 1998, the future minimum revenues for the next five years from rental property under the terms of all noncancellable tenant leases, assuming no new or renegotiated leases are executed for such premises, are as follows (in thousands): 1999 $ 18,885 2000 18,399 2001 17,168 2002 16,072 2003 15,110 Thereafter 153,074 -------- Total $238,708 ======== F - 19 Of these future minimum rentals, approximately 33% of the total is attributable to Kmart Corporation, approximately 31% is attributable to Borders, Inc. and approximately 11% is attributable to Walgreen Company. Kmart's principal business is general merchandise retailing through a chain of discount department stores, Borders is a major operator of book superstores in the United States and Walgreen operates in the U.S. chain drugstore industry. 15. Lease Commitments The Company has entered into certain land lease agreements for four of its properties. As of December 31, 1998, approximate future annual lease commitments under these agreements are as follows: Year Ended December 31, - --------------------------------------- 1999 $ 547,860 2000 583,610 2001 586,860 2002 589,649 2003 591,143 Thereafter 7,183,012 =========== F - 20 16. Interim Results (Unaudited) The following summary represents the unaudited results of operations of the Company, expressed in thousands except per share amounts, for the periods from January 1, 1997 through December 31, 1998:
Three Months Ended - ------------------------------------------------------------------------------------- 1998 March 31, June 30, September 30, December 31, - ------------------------------------------------------------------------------------- Revenues $4,720 $4,716 $4,974 $5,264 ====== ====== ====== ====== Income before minority interest and extra- ordinary item $1,753 $1,765 $1,955 $1,845 Extraordinary item -- -- -- 319 Minority interest 226 224 256 206 ------ ------ ------ ------ Net Income $1,527 $1,541 $1,699 $1,320 ====== ====== ====== ====== Earnings Per Share Income before extra- ordinary item $ .35 $ .36 $ .39 $ .36 Extraordinary item -- -- -- .06 ====== ====== ====== ====== Earnings Per Share $ .35 $ .36 $ .39 $ .30 ====== ====== ====== ====== Three Months Ended - ------------------------------------------------------------------------------------- 1997 March 31, June 30, September 30, December 31, - ------------------------------------------------------------------------------------- Revenues $4,555 $4,476 $4,502 $4,701 ====== ====== ====== ====== Income before minority interest $1,138 $1,479 $1,672 $1,874 Minority interest 219 247 215 262 ------ ------ ------ ------ Net Income $ 919 $1,232 $1,457 $1,612 ====== ====== ====== ====== Earnings Per Share $ .34 $ .36 $ .34 $ .37 ====== ====== ====== ====== F - 21
AGREE REALTY CORPORATION SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998 ========================================================================================== Column A Column B Column C Column D - -------- ------------ -------------------------- ------------- Costs Capitalized Subsequent to Initial Cost Acquisition -------------------------- ------------ Building and Building and Description Encumbrance Land Improvements Improvements - ------------------------------------------------------------------------------------------- Completed Retail Facilities Borman Center, MI $2,088,399 $ 550,000 $ 562,404 $1,066,115 Capital Plaza, KY 1,856,355 7,379 2,240,607 514,580 Charlevoix Commons, MI 3,981,600 305,000 5,152,992 46,718 Chippewa Commons, WI 5,103,840 1,197,150 6,367,560 168,783 Grayling Plaza, MI 1,297,339 200,000 1,778,657 -- Iron Mountain Plaza, MI 3,526,371 677,820 7,014,996 425,395 Ironwood Commons, MI 4,222,504 167,500 8,181,306 244,753 Marshall Plaza Two, MI 3,407,040 -- 4,662,230 28,095 North Lakeland Plaza, FL 7,699,294 1,641,879 6,364,379 342,435 Oscoda Plaza, MI 1,445,003 183,295 1,872,854 -- Perrysburg Plaza, OH -- 21,835 2,291,651 31,000 Petoskey Town Center, MI 5,577,600 875,000 8,895,289 17,985 Plymouth Commons, WI 4,811,520 535,460 5,667,504 225,827 Rapids Associates, MI 5,120,640 705,000 6,854,790 27,767 Shawano Plaza, WI 5,597,760 190,000 9,133,934 101,471 West Frankfort Plaza, IL 383,225 8,002 784,077 36,807 Winter Garden Plaza, FL -- 1,631,448 8,459,024 -- Omaha Store, NE 2,155,200 1,705,619 2,053,615 2,152 Wichita Store, KS 1,740,332 1,039,195 1,690,644 24,666 Santa Barbara Store, CA 3,582,624 2,355,423 3,240,557 2,650 Column E Column F Column G Column H -------------------------------------------- ------------- ----------- ------------ Life on Which Gross Amount at Which Carried Depreciation at Close of Period in Latest -------------------------------------------- Income Building and Accumulated Date of Statement Land Improvements Total Depreciation Construction is Computed - ----------------------------------------------------------------------------------------------------------------------- Completed Retail Facilities Borman Center, MI $ 550,000 $ 1,628,519 $ 2,178,519 $ 959,687 1977 40 Years Capital Plaza, KY 7,379 2,755,187 2,762,566 1,203,705 1978 40 Years Charlevoix Commons, MI 305,000 5,199,710 5,504,710 1,060,081 1991 40 Years Chippewa Commons, WI 1,197,150 6,536,343 7,733,493 1,381,980 1990 40 Years Grayling Plaza, MI 200,000 1,778,657 1,978,657 671,035 1984 40 Years Iron Mountain Plaza, MI 677,820 7,440,391 8,118,211 1,351,217 1991 40 Years Ironwood Commons, MI 167,500 8,426,059 8,593,559 1,577,035 1991 40 Years Marshall Plaza Two, MI -- 4,690,325 4,690,325 911,827 1990 40 Years North Lakeland Plaza, FL 1,641,879 6,706,814 8,348,693 2,002,553 1987 40 Years Oscoda Plaza, MI 183,295 1,872,854 2,056,149 700,048 1984 40 Years Perrysburg Plaza, OH 21,835 2,322,651 2,344,486 874,662 1983 40 Years Petoskey Town Center, MI 875,000 8,913,274 9,788,274 1,772,817 1990 40 Years Plymouth Commons, WI 535,460 5,893,331 6,428,791 1,189,401 1990 40 Years Rapids Associates, MI 705,000 6,882,557 7,587,557 1,411,264 1990 40 Years Shawano Plaza, WI 190,000 9,235,405 9,425,405 1,971,129 1990 40 Years West Frankfort Plaza, IL 8,002 820,884 828,886 330,786 1982 40 Years Winter Garden Plaza, FL 1,631,448 8,459,024 10,090,472 2,120,041 1988 40 Years Omaha Store, NE 1,705,619 2,055,767 3,761,386 160,600 1995 40 Years Wichita Store, KS 1,039,195 1,715,310 2,754,505 133,932 1995 40 Years Santa Barbara Store, CA 2,355,423 3,243,207 5,598,630 253,367 1995 40 Years F - 22 Column A Column B Column C Column D - -------- ------------ -------------------------- ------------- Costs Capitalized Subsequent to Initial Cost Acquisition -------------------------- ------------ Building and Building and Description Encumbrance Land Improvements Improvements - ------------------------------------------------------------------------------------------- Monroeville, PA 5,266,703 6,332,158 2,249,724 -- Norman, OK 1,525,867 879,562 1,626,501 -- Columbus, OH 1,743,848 826,000 2,336,791 -- Aventura, FL 1,786,038 -- 3,173,121 -- Boyton Beach, FL 4,107,424 3,103,942 2,043,122 -- Lawrence, KS 3,181,670 -- 3,000,000 155,407 Waterford, MI -- 971,009 1,562,869 95,517 Chesterfield Township, MI -- 1,350,590 1,757,830 -- Grand Blanc, MI -- 1,104,285 1,998,919 -- Pontiac, MI -- 1,144,190 1,808,955 -- Mt. Pleasant Shopping Center, MI -- 907,600 8,081,968 -- Tulsa, OK 3,962,166 1,100,000 2,394,512 -- ------------ ------------ ------------ ------------ Sub Total 85,170,362 31,716,341 125,303,382 3,558,123 ------------ ------------ ------------ ------------ Retail Facilities Under Development Rochester, MI 161,490 2,438,740 835,870 -- Waterford, MI -- 800,081 128,348 -- Ypsilanti, MI -- 2,050,000 78,257 -- New Baltimore, MI -- -- 11,860 -- ------------ ------------ ------------ ------------ 161,490 5,288,821 1,054,335 -- ------------ ------------ ------------ ------------ Total $ 85,331,852 $ 37,005,162 $126,357,717 $ 3,558,123 ============ ============ ============ ============ Column E Column F Column G Column H -------------------------------------------- ------------- ----------- ------------ Life on Which Gross Amount at Which Carried Depreciation at Close of Period in Latest -------------------------------------------- Income Building and Accumulated Date of Statement Land Improvements Total Depreciation Construction is Computed - ----------------------------------------------------------------------------------------------------------------------- Monroeville, PA 6,332,158 2,249,724 8,581,882 119,264 1996 40 Years Norman, OK 879,562 1,626,501 2,506,063 91,297 1996 40 Years Columbus, OH 826,000 2,336,791 3,162,791 170,387 1996 40 Years Aventura, FL -- 3,173,121 3,173,121 214,847 1996 40 Years Boyton Beach, FL 3,103,942 2,043,122 5,147,064 106,225 1996 40 Years Lawrence, KS -- 3,155,407 3,155,407 84,281 1997 40 Years Waterford, MI 971,009 1,658,386 2,629,395 41,460 1997 40 Years Chesterfield Township, MI 1,350,590 1,757,830 3,108,420 21,973 1998 40 Years Grand Blanc, MI 1,104,285 1,998,919 3,103,204 -- 1998 40 Years Pontiac, MI 1,144,190 1,808,955 2,953,145 11,306 1998 40 Years Mt. Pleasant Shopping Center, MI 907,600 8,081,968 8,989,568 101,025 1973 40 Years Tulsa, OK 1,100,000 2,394,512 3,494,512 23,059 1998 40 Years ------------ ------------ ------------ ------------ ---- -------- Sub Total 31,716,341 128,861,505 160,577,846 23,022,291 ------------ ------------ ------------ ------------ Retail Facilities Under Development Rochester, MI 2,438,740 835,870 3,274,610 -- N/A N/A Waterford, MI 800,081 128,348 928,429 -- N/A N/A Ypsilanti, MI 2,050,000 78,257 2,128,257 -- N/A N/A New Baltimore, MI -- 11,860 11,860 -- N/A N/A ------------ ------------ ------------ ------------ ---- -------- 5,288,821 1,054,335 6,343,156 -- ------------ ------------ ------------ ------------ Total $ 37,005,162 $129,915,840 $166,921,002 $ 23,022,291 ============ ============ ============ ============
F - 23 AGREE REALTY CORPORATION NOTES TO SCHEDULE III DECEMBER 31, 1998 - ----------------------------------------------------------------------------- 1) Reconciliation of Real Estate Properties The following table reconciles the Real Estate Properties from January 1, 1996 to December 31, 1998:
1998 1997 1996 - ----------------------------------------------------------------------------------- Balance at January 1 $ 142,748,449 $ 132,474,243 $ 118,360,268 Construction and acquisition costs 24,172,553 10,319,206 14,173,975 Sales -- (45,000) (60,000) ------------- ------------- ------------- Balance at December 31 $ 166,921,002 $ 142,748,449 $ 132,474,243 ============= ============= =============
2) Reconciliation of Accumulated Depreciation The following table reconciles the accumulated depreciation from January 1, 1996 to December 31, 1998:
1998 1997 1996 - --------------------------------------------------------------------------- Balance at January 1 $20,043,235 $17,339,353 $14,792,193 Current year depreciation expense 2,979,056 2,703,882 2,547,160 ----------- ----------- ----------- Balance at December 31 $23,022,291 $20,043,235 $17,339,353 =========== =========== ===========
3) Tax Basis of Buildings and Improvements The aggregate cost of Building and Improvements for federal income tax purposes is approximately $1,358,000 less than the cost basis used for financial statement purposes. F - 24 EX-27 2 ARTICLE 5 FDS FOR FORM 10-K
5 12-Mos DEC-31-1998 DEC-31-1998 $ 994,159 0 645,052 0 0 0 166,921,002 23,022,291 149,647,872 0 85,331,852 435 0 0 53,426,071 149,647,872 19,673,552 0 0 7,292,576 0 0 5,231,088 0 0 0 0 319,422 0 6,086,776 1.40 1.40
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