10-Q 1 k79129e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2003 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] [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No [X] [ ] 6,434,345 Shares of Common Stock, $.0001 par value, were outstanding as of August 14, 2003 AGREE REALTY CORPORATION FORM 10-Q INDEX
PART I: FINANCIAL INFORMATION PAGE ---- Item 1. Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 3-4 Consolidated Statements of Income for the six months ended June 30, 2003 and 2002 5 Consolidated Statements of Income for the three months ended June 30, 2003 and 2002 6 Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2003 7 Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 8 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and 10-16 Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 18 PART II: OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5 Other Information 19 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21
2 AGREE REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, December 31, 2003 2002 ------------- ------------- ASSETS REAL ESTATE INVESTMENTS Land $ 54,905,054 $ 53,177,464 Buildings 163,668,782 155,536,789 Property under development 1,909,997 2,271,413 ------------- ------------- 220,483,833 210,985,666 Less accumulated depreciation (39,527,249) (37,456,301) ------------- ------------- NET REAL ESTATE INVESTMENTS 180,956,584 173,529,365 CASH AND CASH EQUIVALENTS 201,202 1,095,610 ACCOUNTS RECEIVABLE - TENANTS, net of allowance of $200,000 and $185,000 for possible losses 415,906 784,637 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES 271,946 315,496 UNAMORTIZED DEFERRED EXPENSES Financing 1,030,583 1,117,253 Leasing costs 291,345 307,746 OTHER ASSETS 950,558 1,012,065 ------------- ------------- $ 184,118,124 $ 178,162,172 ============= =============
See accompanying notes to consolidated financial statements. 3 AGREE REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, December 31, 2003 2002 ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY MORTGAGE PAYABLE $ 78,071,649 $ 71,588,863 CONSTRUCTION LOANS 5,585,413 5,612,313 NOTES PAYABLE 37,458,232 38,083,232 DIVIDENDS AND DISTRIBUTIONS PAYABLE 2,499,153 2,356,156 ACCRUED INTEREST PAYABLE 241,299 249,706 ACCOUNTS PAYABLE Operating 836,433 1,179,273 Capital expenditures 345,514 589,760 TENANT DEPOSITS 82,516 93,138 ------------- ------------- TOTAL LIABILITIES 125,120,209 119,752,441 ------------- ------------- MINORITY INTEREST 5,831,345 5,787,007 ------------- ------------- STOCKHOLDERS' EQUITY Common stock, $.0001 par value; 20,000,000 shares authorized, 4,479,345 and 4,448,531 shares issued and outstanding 448 445 Additional paid-in capital 65,027,522 64,506,772 Deficit (10,840,106) (11,135,499) ------------- ------------- 54,187,864 53,371,718 Less: unearned compensation - restricted stock (1,021,294) (748,994) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 53,166,570 52,622,724 ------------- ------------- $ 184,118,124 $ 178,162,172 ============= =============
See accompanying notes to consolidated financial statements. 4 AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED Six Months Ended JUNE 30, 2003 June 30, 2002 ---------------- ----------------- REVENUES Minimum rents $ 12,511,193 $ 11,041,706 Percentage rents 51,060 43,597 Operating cost reimbursements 1,541,303 1,278,492 Other income 1,777 4,565 ------------ ------------ TOTAL REVENUES 14,105,333 12,368,360 ------------ ------------ OPERATING EXPENSES Real estate taxes 1,031,557 895,235 Property operating expenses 1,119,003 826,167 Land lease payments 369,480 369,480 General and administrative 1,123,000 963,441 Depreciation and amortization 2,122,400 1,959,262 ------------ ------------ TOTAL OPERATING EXPENSES 5,765,440 5,013,585 ------------ ------------ INCOME FROM OPERATIONS 8,339,893 7,354,775 ------------ ------------ OTHER INCOME (EXPENSE) Interest expense, net (3,259,020) (3,023,125) Equity in net income of unconsolidated entities 231,399 347,159 ------------ ------------ TOTAL OTHER EXPENSE (3,027,621) (2,675,966) ------------ ------------ INCOME BEFORE MINORITY INTEREST 5,312,272 4,678,809 MINORITY INTEREST (694,311) (615,743) ------------ ------------ NET INCOME $ 4,617,961 $ 4,063,066 ============ ============ EARNINGS PER SHARE - BASIC AND DILUTIVE $ 1.03 $ .91 ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 4,479,345 4,446,031 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTIVE 4,480,654 4,446,031 ============ ============
See accompanying notes to consolidated financial statements. 5 AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED Three Months Ended JUNE 30, 2003 June 30, 2002 ------------------ ------------------ REVENUES Minimum rents $ 6,299,408 $ 5,565,176 Percentage rents 9,651 8,401 Operating cost reimbursements 776,968 624,681 Other income 51 658 ----------- ----------- TOTAL REVENUES 7,086,078 6,198,916 ----------- ----------- OPERATING EXPENSES Real estate taxes 525,472 454,223 Property operating expenses 456,519 277,513 Land lease payments 184,740 184,740 General and administrative 566,403 488,436 Depreciation and amortization 1,059,700 980,102 ----------- ----------- TOTAL OPERATING EXPENSES 2,792,834 2,385,014 ----------- ----------- INCOME FROM OPERATIONS 4,293,244 3,813,902 ----------- ----------- OTHER INCOME (EXPENSE) Interest expense, net (1,674,915) (1,545,430) Equity in net income of unconsolidated entities 112,568 173,579 ----------- ----------- TOTAL OTHER EXPENSE (1,562,347) (1,371,851) ----------- ----------- INCOME BEFORE MINORITY INTEREST 2,730,897 2,442,051 MINORITY INTEREST (356,926) (321,378) ----------- ----------- NET INCOME $ 2,373,971 $ 2,120,673 =========== =========== EARNINGS PER SHARE - BASIC AND DILUTIVE $ .53 $ .48 =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 4,479,345 4,446,031 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTIVE 4,481,962 4,446,031 =========== ===========
See accompanying notes to consolidated financial statements. 6 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, 2003 4,448,531 $ 445 $ 64,506,772 $(11,135,499) $ (748,994) Issuance of shares under Stock Incentive Plan 36,814 3 622,150 -- (456,300) Shares redeemed under the (6,000) (101,400) stock Incentive Plan -- -- -- Vesting of restricted stock -- -- -- -- 184,000 Dividends declared for the period January 1, 2003 to June 30, 2003 -- -- -- (4,322,568) -- Net income for the period January 1, 2003 to June 30, 2003 -- -- -- 4,617,961 -- --------- ------------ ------------ ------------ ------------ BALANCE, June 30, 2003 4,479,345 $ 448 $ 65,027,522 $(10,840,106) $ (1,021,294) ========= ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 7 AGREE REALTY CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED Six Months Ended JUNE 30, 2003 June 30, 2002 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,617,961 $ 4,063,066 Adjustments to reconcile net income to net cash provided by operating Activities Depreciation 2,090,134 1,921,318 Amortization 125,890 178,244 Stock based-compensation 184,000 156,000 Equity in net income of unconsolidated entities (231,399) (347,159) Minority interests 694,311 615,743 Decrease in accounts receivable 368,731 486,635 Decrease (increase) in other assets 82,098 (9,729) Decrease in accounts payable (342,840) (437,169) Increase (decrease) in accrued interest (8,407) 12,492 Increase (decrease) in tenant deposits (10,622) 30,983 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,569,857 6,670,424 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of real estate investments (including capitalized interest of $91,000 in 2003 and $59,000 in 2002) (9,152,653) (841,188) Distributions from unconsolidated entities 231,399 347,159 ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (8,921,254) (494,029) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Mortgage proceeds 7,699,151 -- Dividends and limited partners' distributions paid (4,829,544) (4,696,597) Payments of mortgages payable (1,216,365) (1,019,539) Line-of-credit net borrowings (payments) (625,000) (200,000) Repayment of capital expenditure payables (423,910) (401,229) Redemption of restricted stock (101,400) (110,940) Payments on construction loan (26,900) (26,900) Payment of leasing costs (12,089) (23,630) Payment for financing costs (6,954) (37,951) ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 456,989 (6,516,786) ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (894,408) (340,391) CASH AND CASH EQUIVALENTS, beginning of period 1,095,610 1,101,861 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 201,202 $ 761,470 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest (net of amounts capitalized) $ 3,173,823 $ 2,875,402 =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Construction loan paid with mortgage $ -- $ 3,181,670 Dividends and limited partners' distributions declared and unpaid $ 2,499,153 $ 2,355,006 Real estate investments financed with accounts payable $ 345,514 $ 148,326 Shares issued under Stock Incentive Plan $ 622,153 $ 630,783 =========== ===========
See accompanying notes to consolidated financial statements. 8 AGREE REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- 1. BASIS OF The accompanying unaudited 2003 consolidated financial statements have been prepared in PRESENTATION 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, 2002 has been derived from the audited consolidated financial statements at that date. Operating results for the three months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003, 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 on Form 10-K for the year ended December 31, 2002. 2. EARNINGS PER SHARE Earnings per share has been computed by dividing the net 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". 3. SUBSEQUENT EVENT On August 4, 2003, the Company completed an offering of 1,700,000 shares of common stock at $23.50 per share; on August 12, 2003 the underwriters exercised their over allotment option for an additional 255,000 shares at the same per share price (collectively, "the 2003 Offering"). The net proceeds from the 2003 Offering of approximately $43.2 million were used to repay amounts outstanding under the Company's credit facility.
9 AGREE REALTY CORPORATION PART I ------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. OVERVIEW Agree Realty Corporation ( the "Company") was established to continue to operate and expand the retail property business of its predecessors. The Company commenced its operations in April 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 86.93% interest as of June 30, 2003. The Company is operating so as to qualify as a real estate investment trust ("REIT") for federal income tax purposes. On August 4, 2003, the Company completed an offering of 1,700,000 shares of common stock at $23.50 per share; on August 12, 2003 the underwriters exercised their over allotment option for an additional 255,000 shares at the same per share price (collectively, "the 2003 Offering"). The net proceeds from the 2003 Offering of approximately $43.2 million were used to repay amounts outstanding under the Company's credit facility. The Company has fifteen (15) leases with Kmart Corporation. Twelve (12) of the Kmart stores are currently anchors in the Company's Community Shopping Centers and three (3) Kmart stores are free-standing properties. The Kmart stores in the Company's Portfolio provided 19% of the Company's Annual Base Rent as of June 30, 2003. Nine of the Kmart stores paid percentage rent in addition to their minimum rent during 2002. As of June 30, 2003, all of the Kmart stores in the Company's Portfolio were open and operating as Kmart discount stores. In May 2003, Kmart Corporation emerged from the bankruptcy proceeding which it had initiated in January 2002. Pursuant to the confirmed plan of reorganization, Kmart closed a number of stores, including one that was located on our property in Lakeland, Florida. Kmart vacated the premises in Lakeland, Florida in April 2003 and we are actively marketing the space formerly occupied by Kmart. Kmart's annual rent on this property was approximately $480,000 10 AGREE REALTY CORPORATION PART I ------------------------------------------------------------------------------- and Kmart's annual contribution under the lease for real estate taxes, insurance and common area maintenance was approximately $110,000. Certain tenants in the Lakeland, Florida community shopping center have co-tenancy clauses in their leases which provide either for modification of their rent to be based on gross sales or an option to terminate their lease when the Kmart store closes, if we are unable to obtain a replacement anchor tenant. As of June 30, 2003, none of these tenants have indicated that they will exercise their option to terminate their leases with us. We believe it will take between six to 12 months to re-let the Kmart location. In connection with this re-letting of the Kmart location, we may have to agree to make capital expenditures with respect to the property. In addition, we have agreed to rent reductions aggregating $300,000 per year under two other Kmart leases, for the stores in Perrysburg, Ohio and Winter Garden, Florida. In both cases, the rent reductions are for a 5-year periods. 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. 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, and insurance. 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 11 AGREE REALTY CORPORATION PART I ------------------------------------------------------------------------------- COMPARISON OF SIX MONTHS ENDED JUNE 30, 2003 TO SIX MONTHS ENDED JUNE 30, 2002 Minimum rental income increased $1,469,000, or 13%, to $12,511,000 in 2003, compared to $11,042,000 in 2002. The increase was the result of rental increases of $371,000 from existing properties; an increase of $908,000 due to additional rent as a result of the acquisition of the joint venture partner's interest in three Joint Venture Properties in 2002 and one Joint Venture Property in 2003; and an increase of $190,000 from the development of one property in 2002 and one property in 2003. Percentage rental income increased $7,000, or 17%, to $51,000 in 2003, compared to $44,000 in 2002. The increase was primarily the result of increased tenant sales. Operating cost reimbursements, which represent additional rent required by substantially all of the Company's leases to cover the tenants' proportionate share of real estate taxes and property operating expenses, increased $263,000, or 21%, to $1,541,000 in 2003, compared to $1,278,000 in 2002. Operating cost reimbursements increased due to the increase in real estate taxes and property operating expenses as explained below. Other income remained relatively constant at $2,000 in 2003, compared to $5,000 in 2002. Real estate taxes increased $137,000, or 15%, to $1,032,000 in 2003 compared to $895,000 in 2002. The increase is the result of general assessment charges on the Company's properties and additional real estate taxes related to a closed Kmart store. Property operating expenses (shopping center maintenance, insurance and utilities), which are reimbursed by the tenants, increased $293,000, or 35%, to $1,119,000 in 2003 compared to $826,000 in 2002. The increase was the result of increased snow removal costs of $19,000; an increase in shopping center maintenance costs of $118,000; an increase in insurance costs of $143,000 and an increase in utilities of $13,000 in 2003 as compared to 2002. Land lease payments remained constant at $369,000 for 2003 and 2002. General and administrative expenses increased $160,000, or 17%, to $1,123,000 in 2003 compared to $963,000 in 2002. The increase was primarily the result of increased compensation-related expenses and property management related expenses. General and administrative expenses as a percentage of rental income increased from 8.7% for 2002 to 8.9% for 2003. Depreciation and amortization increased $163,000, or 8%, to $2,122,000 in 2003 compared to $1,959,000 in 2002. The increase was the result of the development of one property in 2002 and one property in 2003; the acquisition of the joint venture partner's interest in three (3) Joint Venture Properties in 2002 and one (1) Joint Venture Property in 2003. Interest expense increased $236,000, or 8%, to $3,259,000 in 2003, from $3,023,000 in 2002. The increase in interest expense was the result of increased borrowings to fund acquisitions and developments. 12 AGREE REALTY CORPORATION PART I ------------------------------------------------------------------------------- Equity in net income of unconsolidated entities decreased $116,000, or 33%, to $231,000 in 2003 compared to $347,000 in 2002 as a result of the acquisition of the joint venture partner's interest in three Joint Venture Properties in 2002 and one Joint Venture Property in 2003. The Company's income before minority interest increased $633,000, or 14%, to $5,312,000 in 2003 from $4,679,000 in 2002 as a result of the foregoing factors. COMPARISON OF THREE MONTHS ENDED JUNE 30, 2003 TO THREE MONTHS ENDED JUNE 30, 2002 Minimum rental income increased $734,000, or 13%, to $6,299,000 in 2003, compared to $5,565,000 in 2002. The increase was the result of rental increases of $122,000 from existing properties; an increase of $514,000 due to additional rent as a result of the acquisition of the joint venture partner's interest in three Joint Venture Properties in 2002 and one Joint Venture Property in 2003; and an increase of $98,000 from the development of one property in 2002 and one property in 2003. Percentage rental income increased $2,000, or 15%, to $10,000 in 2003, compared to $8,000 in 2002. The increase was the result of increased tenant sales. Operating cost reimbursements increased $152,000, or 24%, to $777,000 in 2003, compared to $625,000 in 2002. Operating cost reimbursements increased due to the increase in real estate taxes and property operating expenses as explained below. Other income remained relatively constant at $-0- in 2003, compared to $1,000 in 2002. Real estate taxes increased $71,000, or 16%, to $525,000 in 2003 compared to $454,000 in 2002. The increase is the result of general assessment charges on the Company's properties and additional real estate taxes related to a closed Kmart store. Property operating expenses (shopping center maintenance, insurance and utilities), which are reimbursed by the tenants, increased $179,000, or 64%, to $457,000 in 2003 compared $278,000 in 2002. The increase was the result of increased snow removal costs of $25,000; an increase in shopping center maintenance of $77,000; an increase in insurance costs of $71,000 and an increase in utilities of $6,000. Land lease payments remained constant at $185,000 for 2003 and 2002. General and administrative expenses increased $78,000, or 16%, to $566,000 in 2003 compared to $488,000 in 2002. The increase was primarily the result of an increase in compensation-related expenses and property management expenses. General and administrative expenses as a percentage of rental income increased from at 8.8% in 2002 to 9.0% in 2003. Depreciation and amortization increased $80,000, or 8%, to $1,060,000 in 2003 compared to $980,000 in 2002. The increase was the result of the development of one property in 2002 and one property in 2003 and the acquisition of the joint venture partner's interest in three Joint Venture Properties in 2002 and one Joint Venture Property in 2003. Interest expense increased $130,000, or 8%, to $1,675,000 in 2003, from $1,545,000 in 2002. The increase in interest expense was the result of increased borrowings to fund acquisitions and developments. 13 AGREE REALTY CORPORATION PART I ------------------------------------------------------------------------------- Equity in net income of unconsolidated entities decreased $61,000, or 35%, to $113,000 in 2003 compared to $174,000 in 2002 as a result of the acquisition of the joint venture partner's interest in three Joint Venture Properties in 2002 and one Joint Venture Property in 2003. The Company's income before minority interest increased $289,000, or 12%, to $2,731,000 in 2003, from $2,442,000 in 2002 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. The Company calculates FFO using NAREIT's definition. 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. The following tables illustrate the calculation of FFO and shows reconciling items to income before minority interest for the six months and three months ended June 30, 2003 and 2002:
Six Months Ended June 30, 2003 2002 ------------------------- ---------- ---------- Income before minority interest $5,312,272 $4,678,809 Depreciation of real estate assets 2,080,347 1,911,045 Amortization of leasing costs 28,490 34,168 ---------- ---------- FUNDS FROM OPERATIONS $7,421,109 $6,624,022 ========== ========== WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING - DILUTIVE 5,154,201 5,119,578 ========== ==========
Three Months Ended June 30, 2003 2002 --------------------------- ---------- ---------- Income before minority interest $2,730,897 $2,442,051 Depreciation of real estate assets 1,038,670 955,973 Amortization of leasing costs 14,245 17,084 ---------- ---------- FUNDS FROM OPERATIONS $3,783,812 $3,415,108 ========== ========== WEIGHTED AVERAGE SHARES AND OP UNITS OUTSTANDING - DILUTIVE 5,155,509 5,119,578 ========== ==========
14 AGREE REALTY CORPORATION PART I ------------------------------------------------------------------------------- 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 June 30, 2003, the Company declared a quarterly dividend of $.485 per share. The dividend was paid on July 15, 2003, to holders of record on June 30, 2003. As of June 30, 2003, the Company had total mortgage indebtedness of $78,071,649 with a weighted average interest rate of 6.90%. Future scheduled annual maturities of mortgages payable for the years ending June 30 are as follows: 2004 - $2,550,052; 2005 - $2,808,168; 2006 - $30,622,398; 2007 - $2,121,905; and 2008 - $2,261,672. 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 credit facility has a draw termination date in November 2003 and matures in August 2006. During the period between termination and maturity, the Company will have no further ability to borrow under this facility and will be required to repay a portion of the unpaid principal on a quarterly basis. 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 June 30, 2003, $36,758,232 was outstanding under the Credit Facility bearing a weighted average interest rate of 2.78%. The Company is currently in discussions with its lender regarding the further extension of the termination date, the extension of the maturity date and other terms of the credit facility. There can be no assurance that the Company will receive the requested extensions or that the terms of the extensions will be acceptable to the Company. The Company also has in place a $5 million line of credit (the "Line of Credit"), which matures on April 30, 2004, 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 June 30, 2003, $700,000 was outstanding under the Line of Credit at a rate of 3.50%. 15 AGREE REALTY CORPORATION PART I ------------------------------------------------------------------------------- One of the Company's wholly-owned subsidiaries has obtained construction financing of approximately $4,350,000 to fund the development of a retail property. The note requires quarterly interest payments, at a weighted average interest rate based on LIBOR, computed by the lender. The note matures on June 20, 2004 and is secured by the underlying land and buildings. As of June 30, 2003, $4,002,873 was outstanding under this note, bearing an interest rate of 2.75%. 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 June 30, 2003, $1,582,540 was outstanding under this arrangement. 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 Credit Facility. 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 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. Management has refinanced in the past and intends to periodically refinance short-term construction and acquisition financing with long-term debt or equity. Upon completion of any refinancing, the Company intends to lower the ratio of total debt to market capitalization to 50% or less. Nevertheless, the Company may operate with debt levels or ratios which are in excess of 50% for extended periods of time prior to such refinancing. INFLATION The Company's leases generally contain provisions designed to mitigate the adverse impact of inflation on net income. These provisions include clauses enabling the Company to pass through to tenants certain operating costs, including real estate taxes, common area maintenance, utilities and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Certain of the Company's leases contain clauses enabling the Company to receive percentage rents based on tenants' gross sales, which generally increase as prices rise, and, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. In addition, expiring tenant leases permit the Company to seek increased rents upon re-lease at market rates if rents are below the then existing market rates. 16 AGREE REALTY CORPORATION PART I ------------------------------------------------------------------------------- ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk primarily through its borrowing activities. There is inherent 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. The Company's interest rate risk is monitored using a variety of techniques. The table below presents the principal payments (in thousands) and the weighted average interest rates on remaining debt, by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.
Year ended June 30, -------------------------------------------------- 2004 2005 2006 2007 2008 THEREAFTER TOTAL ---- ---- ---- ---- ---- ---------- ----- FIXED RATE DEBT 2,550 2,808 30,622 2,122 2,262 37,708 78,072 AVERAGE INTEREST RATE 6.90 6.90 6.83 6.83 6.83 6.83 -- CONSTRUCTION LOANS -- 4,003 -- -- -- 1,582 5,585 AVERAGE INTEREST RATE -- 2.75 -- -- -- -- -- VARIABLE RATE DEBT 1,685 985 985 33,803 -- -- 37,458 AVERAGE INTEREST RATE 2.78 2.78 2.78 2.78 -- -- --
The fair value (in thousands) is estimated at $78,500, $5,585 and $37,458 for fixed rate debt, construction loans and variable rate debt, respectively. The table above incorporates those exposures that exist as of June 30, 2003; it does not consider those exposures or position, which could arise after that date. As a result, the Company's ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period and interest rates. 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 $101,000. 17 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 13a-15(e) and 15d-15(e) as of the end of the period covered by 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. 18 AGREE REALTY CORPORATION PART II ------------------------------------------------------------------------------- OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On May 5, 2003, the Company held its Annual Meeting of Stockholders. The following were the results of the meeting: The stockholders elected Farris Kalil and Gene Silverman as Directors until the annual meeting of stockholders in 2006 or until a successor is elected and qualified.
The vote was as follows: Farris Kalil Gene Silverman ------------- -------------- Votes cast for 4,279,830 4,278,560 Votes withheld 26,420 27,690 Not voting 173,095 173,095
Item 5. Other Information None 19 AGREE REALTY CORPORATION PART II ------------------------------------------------------------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation and Articles of Amendment of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-11 (Registration Statement No. 33-73858, as amended ("Agree S-11")) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Agree S-11) 10.1 Sixth amendment to amended and restated $5 million business loan agreement dated April 30, 2003, between Agree Limited Partnership and Standard Federal Bank. 10.2 Fourth amendment to $50 million Line of Credit agreement dated July 11, 2003 among Agree Realty Corporation and Standard Federal Bank, N.A. 31.1 Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 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 32.2 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 o On July 24, 2003, the Company filed a Form 8-K under Item 7 and Item 12 furnishing its second quarter 2003 results of operations and financial condition. o On April 22, 2003, the Company filed a Form 8-K under Item 7 and Item 12 furnishing its first quarter 2003 results of operations and financial condition. 20 AGREE REALTY CORPORATION SIGNATURES ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has fully caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AGREE REALTY CORPORATION /s/ RICHARD AGREE -------------------------------------- Richard Agree President and Chief Executive Officer /s/ KENNETH R. HOWE -------------------------------------- Kenneth R. Howe Vice-President - Finance and Secretary (Principal Financial Officer) Date: August 14, 2003 -------------------------------------- 21 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 10.1 Sixth amendment to amended and restated $5 million business loan agreement dated April 30, 2003, between Agree Limited Partnership and Standard Federal Bank. 10.2 Fourth amendment to $50 million Line of Credit agreement dated July 11, 2003 among Agree Realty Corporation and Standard Federal Bank, N.A. 31.1 Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 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 32.2 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