-----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, CSEBBlPGuTQJEDQT7KXrSLrbKPci1u9NYVP0MbWHgdv1XDiPK6cOOws8k87THD+1 YkP0UZMuUaUJcQXiPKXcGA== 0000950124-02-003549.txt : 20021118 0000950124-02-003549.hdr.sgml : 20021118 20021114192324 ACCESSION NUMBER: 0000950124-02-003549 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12928 FILM NUMBER: 02827779 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-Q 1 k72328e10vq.txt QUARTERLY REPORT FOR PERIOD END SEPTEMBER 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2002 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 1-12928 AGREE REALTY CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MARYLAND 38-3148187 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 31850 NORTHWESTERN HIGHWAY, FARMINGTON HILLS, MICHIGAN 48334 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, included area code: (248) 737-4190 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No [X] [ ] 4,448,531 Shares of Common Stock, $.0001 par value, were outstanding as of November 14, 2002 AGREE REALTY CORPORATION FORM 10-Q INDEX
PART I: FINANCIAL INFORMATION PAGE Item 1. Interim Consolidated Financial Statements 3 Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 4-5 Consolidated Statements of Operations for the nine months ended September 30, 2002 and 2001 6 Consolidated Statements of Operations for the three months ended September 30, 2002 and 2001 7 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2002 8 Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 9 Notes to Consolidated Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 20 PART II: OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5 Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22
2 AGREE REALTY CORPORATION PART I: FINANCIAL INFORMATION ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS 3 AGREE REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, December 31, 2002 2001 - ---------------------------------------------------------------------------------------- ASSETS REAL ESTATE INVESTMENTS Land $ 49,103,915 $ 46,838,530 Buildings 150,098,338 148,283,359 Property under development 813,123 1,363,939 - ---------------------------------------------------------------------------------------- 200,015,376 196,485,828 Less accumulated depreciation (36,486,416) (33,634,461) - ---------------------------------------------------------------------------------------- NET REAL ESTATE INVESTMENTS 163,528,960 162,851,367 CASH AND CASH EQUIVALENTS 192,536 1,101,861 ACCOUNTS RECEIVABLE - TENANTS, net of allowance of $175,000 and $50,000 for possible losses 139,834 666,749 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES 246,768 255,203 UNAMORTIZED DEFERRED EXPENSES Financing 1,161,767 1,355,864 Leasing costs 324,819 352,441 OTHER ASSETS 714,858 927,861 - ---------------------------------------------------------------------------------------- $ 166,309,542 $ 167,511,346 ========================================================================================
See accompanying notes to consolidated financial statements. 4 AGREE REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, December 31, 2002 2001 - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY MORTGAGE PAYABLE $ 70,833,904 $ 69,209,337 CONSTRUCTION LOANS 13,338,182 16,560,202 NOTES PAYABLE 20,758,232 19,958,232 DIVIDENDS AND DISTRIBUTIONS PAYABLE 2,356,156 2,341,591 ACCRUED INTEREST PAYABLE 249,714 218,598 ACCOUNTS PAYABLE Operating 650,213 1,244,950 Capital expenditures 301,820 598,362 TENANT DEPOSITS 96,258 50,020 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 108,584,479 110,181,292 - ---------------------------------------------------------------------------------------------------------------- MINORITY INTEREST 5,707,392 5,698,101 - ---------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $.0001 par value; 20,000,000 shares authorized, 445 442 4,448,531 and 4,416,869 shares issued and outstanding Additional paid-in capital 64,506,772 63,937,682 Deficit (11,661,307) (11,724,832) - ---------------------------------------------------------------------------------------------------------------- 52,845,910 52,213,292 Less: unearned compensation - restricted stock (828,239) (581,339) - ---------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 52,017,671 51,631,953 - ---------------------------------------------------------------------------------------------------------------- $ 166,309,542 $ 167,511,346 ================================================================================================================
See accompanying notes to consolidated financial statements. 5 AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED Nine Months Ended SEPTEMBER 30, 2002 September 30, 2001 - -------------------------------------------------------------------------------------------- REVENUES Minimum rents $ 16,757,133 $ 16,266,919 Percentage rents 77,996 265,456 Operating cost reimbursements 1,855,840 1,832,947 Management fees and other 4,897 32,859 - -------------------------------------------------------------------------------------------- TOTAL REVENUES 18,695,866 18,398,181 - --------------------------------------------------------------------------------------------- OPERATING EXPENSES Real estate taxes 1,344,221 1,282,484 Property operating expenses 1,194,401 1,021,823 Land lease payments 554,175 554,220 General and administrative 1,465,993 1,319,502 Depreciation and amortization 2,938,804 2,876,944 - --------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 7,497,594 7,054,973 - --------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 11,198,272 11,343,208 - --------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense, net (4,580,025) (5,185,504) Equity in net income of unconsolidated entities 520,738 520,739 Gain on sale of assets - 218,543 - --------------------------------------------------------------------------------------------- TOTAL OTHER EXPENSE (4,059,287) (4,446,222) - --------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST 7,138,985 6,896,986 MINORITY INTEREST (938,787) (912,492) - --------------------------------------------------------------------------------------------- NET INCOME $ 6,200,198 $ 5,984,494 ============================================================================================= EARNINGS PER SHARE $ 1.39 $ 1.35 ============================================================================================= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,446,205 4,416,869 =============================================================================================
See accompanying notes to consolidated financial statements. 6 AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED Three Months Ended SEPTEMBER 30, 2002 September 30, 2001 - --------------------------------------------------------------------------------------------------------------- REVENUES Minimum rents $ 5,715,427 $ 5,428,064 Percentage rents 34,399 134,096 Operating cost reimbursements 577,348 523,970 Management fees and other 332 11,024 - --------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 6,327,506 6,097,154 - --------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Real estate taxes 448,986 418,657 Property operating expenses 368,234 271,229 Land lease payments 184,695 184,740 General and administrative 502,552 460,277 Depreciation and amortization 979,542 969,962 - --------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 2,484,009 2,304,865 - --------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 3,843,497 3,792,289 - --------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense, net (1,556,900) (1,588,216) Equity in net income of unconsolidated entities 173,579 173,579 Gain on sale of assets - 80,000 - --------------------------------------------------------------------------------------------------------------- TOTAL OTHER EXPENSE (1,383,321) (1,334,637) - --------------------------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST 2,460,176 2,457,652 - --------------------------------------------------------------------------------------------------------------- MINORITY INTEREST (323,044) (325,152) NET INCOME $ 2,137,132 $ 2,132,500 =============================================================================================================== EARNINGS PER SHARE $ .48 $ .48 =============================================================================================================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,446,547 4,416,869 ===============================================================================================================
See accompanying notes to consolidated financial statements. 7 AGREE REALTY CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Unearned Common Stock Additional Compensation - ---------------------- Paid-In Restricted Shares Amount Capital Deficit Stock - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, January 1, 2002 4,416,869 $ 442 $ 63,937,682 $(11,724,832) $ (581,339) Issuance of shares under Stock Incentive Plan 37,662 3 680,030 - (482,900) Shares redeemed under the stock Incentive Plan (6,000) - (110,940) - - Vesting of restricted stock - - - - 236,000 Dividends declared for the period January 1, 2002 to September 30, 2002 - - - (6,136,673) - Net income for the period January 1, 2002 to September 30, 2002 - - - 6,200,198 - - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, September 30, 2002 4,448,531 $ 445 $ 64,506,772 $(11,661,307) $ (828,239) ==============================================================================================================================
See accompanying notes to consolidated financial statements. 8 AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED Nine Months Ended SEPTEMBER 30, 2002 September 30, 2001 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,200,198 $ 5,984,494 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 2,881,888 2,819,093 Amortization 267,366 340,850 Stock-based compensation 236,000 201,000 Gain on sale of assets - (218,543) Equity in net income of unconsolidated entities (520,738) (520,739) Minority interests 938,787 912,492 Decrease in accounts receivable 526,915 571,950 Decrease in other assets 185,840 126,599 Decrease in accounts payable (594,737) (509,929) Increase (decrease) in accrued interest 31,116 (43,562) Increase (decrease) in tenant deposits 46,238 (1,220) - -------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 10,198,873 9,662,485 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of real estate investments (including capitalized interest of (3,227,728) (2,995,966) $76,000 in 2002 and $137,800 in 2001) Distributions from unconsolidated entities 520,738 520,739 Proceeds from sale of assets - 280,000 - -------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (2,706,990) (2,195,227) - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends and limited partners' distributions paid (7,051,603) (7,014,561) Payments of mortgages payable (1,557,103) (1,048,690) Line-of-credit net borrowings 800,000 800,000 Repayments of capital expenditure payables (401,229) (1,040,673) Redemption of restricted stock (110,940) (70,000) Payment on construction loan (40,350) (40,350) Payment of leasing costs (23,630) (70,677) Payments for financing costs (16,353) (500) - -------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (8,401,208) (8,485,451) - -------------------------------------------------------------------------------------------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (909,325) (1,018,193) CASH AND CASH EQUIVALENTS, beginning of period 1,101,861 1,119,072 - -------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of period $ 192,536 $ 100,879 ================================================================================================================================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest (net of amounts capitalized) $ 4,344,074 $ 4,950,278 ================================================================================================================================ SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Construction loan paid with mortgage $ 3,181,670 $ - Dividends and limited partners' distributions declared and unpaid $ 2,356,156 $ 2,341,591 Shares issued under Stock Incentive Plan $ 680,033 $ 375,251 Real estate investments financed with accounts payable $ 301,820 $ 1,225,029 ================================================================================================================================
See accompanying notes to consolidated financial statements. 9 AGREE REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF The accompanying unaudited 2002 consolidated PRESENTATION financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002, or for any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report for the year ended December 31, 2001. 2. EARNINGS PER Earnings per share have been computed by dividing SHARE the income by the weighted average number of common shares outstanding. The per share amounts reflected in the consolidated statements of income are presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share"; the amounts of the Company's "basic" and "diluted" earnings per share (as defined in SFAS No. 128) are the same. 3. RECENT ACCOUNTING In October 2001, the Financial Accounting PRONOUNCEMENTS Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS 144 superceded Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of (SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The provisions of SFAS 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively. The Company adopted this standard on January 1, 2002. The adoption had no impact on its results of operations and financial position. 10 AGREE REALTY CORPORATION PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- OVERVIEW The Company was established to continue to operate and expand the retail property business of its predecessors. The Company commenced its operations on April 22, 1994. The assets of the Company are held by, and all operations are conducted through, Agree Limited Partnership (the "Operating Partnership"), of which the Company is the sole general partner and held an 86.85% interest as of September 30, 2002. The Company is operating so as to qualify as a real estate investment trust ("REIT") for federal income tax purposes. The Company has entered into sixteen (16) leases with Kmart Corporation. Thirteen (13) of the Kmart stores are anchors in the Company's Community Shopping Centers and three (3) Kmart stores are free-standing properties. Kmart Corporation and 37 of its U.S. subsidiaries have filed voluntary petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code. Kmart has outlined certain strategic operational and financial initiatives that it intends to continue or implement during the reorganization process. One of its initiatives is to evaluate the performance of every store and the terms of every lease in its portfolio, with the objective of closing unprofitable or under performing stores. The Kmart stores in the Company's Portfolio provided 24% of the Company's Annual Base Rent as of December 31, 2001. Seven of the Kmart stores pay percentage rent in addition to their minimum rent. All Kmart stores in the Company's Portfolio are open and operating as Kmart discount stores. On March 8, 2002, Kmart announced that it intends to close 284 under-performing stores as part of its initial Chapter 11 financial objectives review. None of the Company's Kmart stores were included in this initial list of stores to be closed. However, there can be no assurance that Kmart won't announce additional store closing in the future which may include some of the Company's stores. The following should be read in conjunction with the Consolidated Financial Statements of Agree Realty Corporation, including the respective notes thereto, which are included in this Form 10-Q. RECENT ACCOUNTING PRONOUNCEMENTS In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). 11 AGREE REALTY CORPORATION PART I SFAS 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS 144 superceded Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of (SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The provisions of SFAS 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively. The Company adopted this standard on January 1, 2002. The adoption had no impact on its results of operations and financial position. CRITICAL ACCOUNTING POLICIES In the course of developing and evaluating accounting policies and procedures, the Company used estimates, assumptions and judgements to determine the most appropriate methods to be applied. Such processes are used in determining capitalization of costs related to real estate investments, potential impairment of real estate investments, operating cost reimbursements, and taxable income. 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 and recorded as "Property under development" until construction has been completed. 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. In determining the fair value of real estate investments, we consider future cash flow projections on a property by property basis, current interest rates and current market conditions of the geographical location of each property. Substantially all of the Company's leases contain provisions requiring tenants to pay as additional rent a proportionate share of operating expenses (Operating Cost Reimbursements) 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. The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with the Company's 1994 tax year. As a result, the Company is not subject to federal income taxes to the extent that it distributes annually at least 90% 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 12 AGREE REALTY CORPORATION PART I COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 TO NINE MONTHS ENDED SEPTEMBER 30, 2001 Minimum rental income increased $490,000, or 3%, to $16,757,000 in 2002, compared to $16,267,000 in 2001. The increase is primarily the result of the development of two properties in 2001 and one property in 2002. Percentage rental income decreased $187,000, or 71%, to $78,000 in 2002, compared to $265,000 in 2001. The decrease was the result of the elimination of a tenant's percentage rent provision in exchange for an increase in their base rental income ($128,000); a decrease in percentage rent received from Kmart ($66,000) and an increase in percentage rent received from other tenants - $7,000. Operating cost reimbursements, which represent additional rent required by substantially all of the Company's leases to cover the tenants' proportionate share of the property's operating expenses, increased $23,000, or 1%, to $1,856,000 in 2002, compared to $1,833,000 in 2001. The increase in operating cost reimbursements is a result of increased real estate taxes and property operating expenses as explained below, reduced by a $125,000 charge in 2002 for a possible collection loss related to Kmart. Management fees and other income decreased $28,000, or 85% to $5,000 in 2002, compared to $33,000 in 2001. The decrease was the result of the termination of the management agreement between the Company and two properties it previously managed but did not own. Real estate taxes increased $62,000, or 5%, to $1,344,000 in 2002, compared to $1,282,000 in 2001. The increase is the result of general assessment changes. Property operating expenses (snow removal, shopping center maintenance, insurance and utilities) increased $172,000, or 17%, to $1,194,000 in 2002 compared to $1,022,000 in 2001. The increase was the result of increased snow removal costs of $116,000; an increase in shopping center maintenance costs of $21,000; a decrease in utility costs of ($5,000); and an increase in insurance costs of $40,000 in 2002 versus 2001. Land lease payments remained constant at $554,000 for 2002 and 2001. General and administrative expenses increased by $146,000, or 11%, to $1,466,000 in 2002, compared to $1,320,000 in 2001. The increase was primarily the result of an increase in compensation related expenses. General and administrative expenses as a percentage of total rental income increased from 8.0% in 2001 to 8.7% in 2002. Depreciation and amortization increased $62,000, or 2%, to $2,939,000 in 2002, compared to $2,877,000 in 2001. This increase was the result of the development of two properties in 2001 and one property in 2002. Interest expense decreased $606,000, or 12%, to $4,580,000 in 2002, from $5,186,000 in 2001. The decrease in interest expense was the result of decreased interest rates on variable rate notes payable. 13 AGREE REALTY CORPORATION PART I Equity in net income of unconsolidated entities remained constant at $521,000 for 2002 and 2001, since rental rates remained constant over the periods. The Company recognized a gain on the sale of an asset of $219,000 in 2001. There was no such gain in 2002. The Company's income before minority interest increased $242,000, or 4% to $7,139,000 in 2002 from $6,897,000 in 2001 as a result of the foregoing factors. COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THREE MONTHS ENDED SEPTEMBER 30, 2001 Rental income increased $287,000, or 5%, to $5,715,000 in 2002, compared to $5,428,000 in 2001. The increase is primarily the result of the development of one property in 2001, one property in 2002 and the increased occupancy in two of the Company's properties. Percentage rental income decreased $100,000, or 74%, to $34,000 in 2002, compared to $134,000 in 2001. The decrease was the result of the elimination of a tenant's percentage rent provision in exchange for an increase in their base rental income ($29,000) and a decrease in percentage rent received from Kmart ($66,000); and other tenants ($5,000). Operating cost reimbursements increased $53,000, or 10%, to $577,000 in 2002, compared to $524,000 in 2001. The increase in operating cost reimbursements is a result of increased real estate taxes and property operating expenses as explained below, reduced by a $29,000 charge in 2002 for a possible collection loss related to Kmart. The Company received management fees and other income of $11,000 in 2001. There was no such income in 2002 as a result of the termination of the management agreements between the Company and two properties it previously managed. Real estate taxes increased $30,000, or 7%, to $449,000 in 2002 to $419,000 in 2001. The increase is the result of general assessment changes. Property operating expenses (snow removal, shopping center maintenance, insurance and utilities) increased $97,000, or 36%, to $368,000 in 2002, compared to $271,000 in 2001. The increase was the result of an increase in shopping center maintenance costs of $79,000; an increase in insurance costs of $16,000 and an increase in utilities of $2,000 in 2002 versus 2001. Land lease payments remained constant at $185,000 for 2002 and 2001. General and administrative expenses increased $43,000, or 9%, to $503,000 in 2002, compared to $460,000 in 2001. The increase was primarily the result of increased compensation related expenses. General and administrative expenses as a percentage of total rental income increased from 8.3% in 2001 to 8.7% in 2002. 14 AGREE REALTY CORPORATION PART I Depreciation and amortization increased $10,000, or 1%, to $980,000 in 2002, compared to $970,000 in 2001. The increase was the result of the development of one property in 2001 and one property in 2002. Interest expense decreased $31,000, or 2%, to $1,557,000 in 2002, from $1,588,000 in 2001. The decrease in interest expense was the result of decreased interest rates on variable rate notes payable. Equity in net income of unconsolidated entities remained constant at $174,000 in 2002 and 2001, since rental rates remained constant over the periods. The Company recognized a gain on the sale of an asset of $80,000 in 2001. There was no such gain in 2002. The Company's income before minority interest increased $2,000, to $2,460,000 in 2002 compared to $2,458,000 in 2001 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 Investments Trusts, Inc. ("NAREIT") to mean net income computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization. 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. In addition, our method of calculating FFO may not be comparable to the methods used by other REITs and, accordingly, may be different from similarly titled measures reported by other companies. 15 AGREE REALTY CORPORATION PART I The following tables illustrate the calculation of FFO for the nine months and three months ended September 30, 2002 and 2001:
Nine Months Ended September 30, 2002 2001 - -------------------------------------------------------------------------------------------- Net income before minority interest $ 7,138,985 $ 6,896,986 Depreciation of real estate assets 2,866,054 2,804,286 Amortization of leasing costs 51,252 51,070 Gain on sale of assets - (218,543) - -------------------------------------------------------------------------------------------- FUNDS FROM OPERATIONS $ 10,056,291 $ 9,533,799 ============================================================================================ WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING 5,119,752 5,090,416 ============================================================================================
Three Months Ended September 30, 2002 2001 - -------------------------------------------------------------------------------------------- Net income before minority interest $ 2,460,176 $ 2,457,652 Depreciation of real estate assets 955,009 942,001 Amortization of leasing costs 17,084 17,800 Gain on sale of assets - (80,000) - -------------------------------------------------------------------------------------------- FUNDS FROM OPERATIONS $ 3,432,269 $ 3,337,453 ============================================================================================ WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING 5,120,094 5,090,416 ============================================================================================
16 AGREE REALTY CORPORATION PART I FORWARD-LOOKING STATEMENTS Management has included herein certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. When used, statements which are not historical in nature including the words "anticipate," "estimate," "should," "expect," "believe," "intend" and similar expressions are intended to identify forward-looking statements. Such statements are, by their nature, subject to certain risks and uncertainties. Risks and other factors that might cause such a difference include, but are not limited to, the effect of economic and market conditions; risks that the Company's acquisition and development projects will fail to perform as expected; financing risks, such as the inability to obtain debt or equity financing on favorable terms; the level and volatility of interest rates; loss or bankruptcy of one or more of the Company's major retail tenants; and failure of the Company's properties to generate additional income to offset increases in operating expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's principal demands for liquidity are distributions to its stockholders, debt repayment, development of new properties and future property acquisitions. During the quarter ended September 30, 2002, the Company declared a quarterly dividend of $.46 per share. The dividend was paid on October 10, 2002, to holders of record on September 27, 2002. As of September 30, 2002, the Company had total mortgage indebtedness of $70,833,904 with a weighted average interest rate of 6.94%. Future scheduled annual maturities of mortgages payable for the years ending September 30 are as follows: 2003 - $2,172,138; 2004 - $2,400,301; 2005 - $2,571,583; 2006 - $30,102,239; and 2007 - $1,833,089. This mortgage debt is all fixed rate debt. In addition, the Operating Partnership has in place a $50 million line of Credit Facility (the "Credit Facility") which is guaranteed by the Company. The loan matures in August 2003 and can be extended by the Company for an additional three years. Advances under the Credit Facility bear interest within a range of one-month to six-month LIBOR plus 150 basis points to 213 basis points or the bank's prime rate, at the option of the Company, based on certain factors such as debt to property value and debt service coverage. The Credit Facility is used to fund property acquisitions and development activities and is secured by most of the Company's Properties which are not otherwise encumbered and properties to be acquired or developed. As of September 30, 2002, $19,758,232 was outstanding under the Credit Facility bearing a weighted average interest rate of 3.55%. 17 AGREE REALTY CORPORATION PART I The Company also has in place a $5 million line of credit (the "Line of Credit"), which matures on April 30, 2003, and which the Company expects to renew for an additional 12-month period. The Line of Credit bears interest at the bank's prime rate less 50 basis points or 175 basis points in excess of the one-month LIBOR rate, at the option of the Company. The purpose of the Line of Credit is to provide working capital to the Company and fund land options and start-up costs associated with new projects. As of September 30, 2002, $1,000,000 was outstanding under the Line of Credit at a rate of 4.25%. The Company's wholly owned subsidiaries have obtained construction financing of approximately $12,900,000 to fund the development of three 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 June 20, 2004 and are secured by the underlying land and buildings. As of September 30, 2002, $11,715,292 was outstanding under these notes, bearing a weighted average interest rate of 3.20%. The Company has received funding from an unaffiliated third party for the construction of certain of its Properties. Advances under this agreement bear no interest and are secured by the specific land and buildings being developed. As of September 30, 2002, $1,622,890 was outstanding under this arrangement. The Company has one development project under construction that will add an additional 13,560 square feet of retail space to the Company's portfolio. The project is expected to be completed during the first quarter of 2003. Additional Company funding required for this project is estimated to be $2,400,000 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 and the 2003 maturities of debt, through its cash flow provided by operations and the Line of Credit. Management believes that adequate cash flow will be available to fund the Company's operations and pay dividends in accordance with REIT requirements. The Company may obtain additional funds for future development or acquisitions through other borrowings or the issuance of additional shares of capital stock. The Company intends to incur additional debt in a manner consistent with its policy of maintaining a ratio of total debt (including construction and acquisition financing) to total market capitalization of 65% or less. The Company plans to begin construction of additional pre-leased developments and may acquire additional properties, which will initially be financed by the Credit Facility and Line of Credit. Management intends to periodically refinance short-term construction and acquisition financing with long-term debt and/or equity. Upon completion of refinancing, the Company intends to lower the ratio of total debt to market capitalization to 50% or less. Nevertheless, the Company may operate with debt levels or ratios, which are in excess of 50% for extended periods of time prior to such refinancing. 18 AGREE REALTY CORPORATION PART I INFLATION The Company's leases generally contain provisions designed to mitigate the adverse impact of inflation on net income. These provisions include clauses enabling the Company to pass through to tenants certain operating costs, including real estate taxes, common area maintenance, utilities and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Certain of the Company's leases contain clauses enabling the Company to receive percentage rents based on tenants' gross sales, which generally increase as prices rise, and, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. In addition, expiring tenant leases permit the Company to seek increased rents upon re-lease at market rates if rents are below the then existing market rates. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk primarily through its borrowing activities. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's future financing requirements. Mortgages payable - As of September 30, 2002 the Company had five mortgages outstanding. The first mortgage in the amount of $31,116,650 bears interest at 7.00%. The mortgage matures on November 15, 2005. The second mortgage in the amount of $6,892,092 bears interest at 7.00%. The mortgage matures on April 1, 2013 and is subject to a rate review after the 7th year (April 1, 2006). The third mortgage in the amount of $11,077,334 bears interest at 6.63%. The mortgage matures on February 5, 2017. The fourth mortgage in the amount of $18,589,358 bears interest at 6.90%. The mortgage matures January 1, 2020. The fifth mortgage in the amount of $3,158,470 bears interest at 7.50%. The mortgage matures May 15, 2022. Construction loans - As of September 30, 2002 the Company had Construction loans outstanding of $13,338,182. Under the terms of the construction loans the Company bears no interest rate risk, since any change in interest rate results in a corresponding increase or decrease in rental income. Notes Payable - As of September 30, 2002 the Company had $20,758,232 outstanding on its Lines-of-Credit which was subject to interest at a variable interest rate based on LIBOR. The carrying amounts of the Company's borrowings are equal to their fair values as of September 30, 2002. The Company does not enter into financial instrument transactions for trading or other speculative purposes or to manage interest rate exposure. A 10% adverse change in interest rates on the portion of the Company's debt bearing interest at variable rates would result in an annual increase in interest expense of approximately $75,000. 19 AGREE REALTY CORPORATION PART I ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our Chief Executive Officer and Vice-President-Finance have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Vice-President-Finance have concluded that our current disclosure controls and procedures are effective and timely, providing them with material information relating to us required to be disclosed in the reports we file or submit under the Exchange Act. CHANGES IN INTERNAL CONTROLS There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. We are not aware of any significant deficiencies or material weaknesses, therefore no corrective actions were taken. 20 AGREE REALTY CORPORATION PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation and Articles of Amendment of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-11 (Registration Statement No. 33-73858, as amended ("Agree S-11")) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Agree S-11) 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Richard Agree, Chief Executive Officer 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kenneth R. Howe, Chief Financial Officer (b) Reports on Form 8-K None 21 AGREE REALTY CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has fully caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AGREE REALTY CORPORATION /s/ RICHARD AGREE --------------------------------------- Richard Agree President and Chief Executive Officer /s/ KENNETH R. HOWE ---------------------------------------- Kenneth R. Howe Vice-President -- Finance and Secretary (Principal Financial Officer) Date: November 14, 2002 ---------------------------------------- 22 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard Agree, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Agree Realty Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Richard Agree - ----------------------- ----------------- Name: Richard Agree Title: President and Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kenneth R. Howe, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Agree Realty Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Kenneth R. Howe - ----------------------- ------------------- Name: Kenneth R. Howe Title: Vice President, Finance EXHIBIT INDEX EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Richard Agree, Chief Executive Officer 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kenneth R. Howe, Chief Financial Officer EX-99.1 3 k72328exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Agree Realty Corporation (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard Agree, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairy presents, in all material respects, the financial condition and results of operations of the Company. /S/ RICHARD AGREE ------------------------------------ Richard Agree Chief Executive Officer Dated: November 14, 2002 EX-99.2 4 k72328exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Agree Realty Corporation (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kenneth R. Howe, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairy presents, in all material respects, the financial condition and results of operations of the Company. /S/ KENNETH R. HOWE -------------------------------------- Kenneth R. Howe Chief Financial Officer Dated: November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----