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 March 31, 1996
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number 1-12928
Agree Realty Corporation
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 38-3148187
- ------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31850 Northwestern Highway, Farmington Hills, Michigan 48334
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, included area code: (810) 737-4190
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes No
/X/ / /
2,649,475 Shares of Common Stock, $.0001 par value,
were outstanding as of May 9, 1996
<PAGE>
Agree Realty Corporation
Form 10-Q
Index
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Part I: Financial Information Page
<S> <C> <C>
Item 1. Financial Information 3
Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995. 4-5
Consolidated Statements of Operations for the three months ended
March 31, 1996 and 1995. 6
Consolidated Statement of Stockholders' Equity for the three months
ended March 31, 1996. 7
Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and 1995. 8
Note to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 10-13
<CAPTION>
Part II: Other Information
<S> <C> <C>
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
<CAPTION>
Signatures 15
</TABLE>
2
<PAGE>
Agree Realty Corporation
Part I
- ------------------------------------------------------------------------------
ITEM 1. FINANCIAL INFORMATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with 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.
The information furnished in the accompanying consolidated balance sheets,
consolidated statements of operations, and consolidated statements of cash
flows reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the aforementioned financial statements
for the interim periods. Operating results for the three months ended March
31, 1996, are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996.
The aforementioned consolidated financial statements should be read in
conjunction with the notes to the consolidated financial statements,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Agree Realty Corporation's Form 10-K for the year ended
December 31, 1995.
3
<PAGE>
Agree Realty Corporation
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
- ------------------------------------------------------------------------------
(Unaudited) (Audited)
Assets
<S> <C> <C>
Real Estate Investments
Land $ 23,672,168 $ 23,224,377
Buildings 98,864,743 94,955,086
Property under development 549,952 180,805
------------- -------------
123,086,863 118,360,268
Less accumulated depreciation (15,408,244) (14,792,193)
------------- -------------
Net Real Estate Investments 107,678,619 103,568,075
Cash and Cash Equivalents 621,336 1,283,672
Accounts Receivable - Tenants 342,472 626,280
Restricted Asset - Cash Held in Escrow 274,667 259,204
Unamortized Deferred Expenses
Financing costs 2,570,846 2,513,665
Leasing costs 143,487 140,026
Other Assets 944,350 537,487
------------- -------------
$ 112,575,777 $ 108,928,409
============= =============
<FN>
See accompanying note to consolidated financial statements.
</TABLE>
4
<PAGE>
Agree Realty Corporation
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
- ---------------------------------------------------------------------------------------
(Unaudited) (Audited)
Liabilities and Stockholders' Equity
<S> <C> <C>
Mortgages Payable $ 53,896,423 $ 53,970,525
Construction Loans 5,742,779 17,603,785
Notes Payable 19,420,026 1,977,808
Dividends and Distributions Payable 1,479,345 1,474,265
Accrued Interest Payable 320,317 189,256
Accounts Payable
Operating 369,238 596,913
Capital expenditures 169,634 1,637,861
Tenant Deposits 52,144 53,477
------------- -------------
Total Liabilities 81,449,906 77,503,890
------------- -------------
Minority Interest 6,026,992 6,118,017
------------- -------------
Stockholders' Equity
Common stock, $.0001 par value, 20,000,000
shares authorized, 2,649,475 and 2,638,185
shares issued and outstanding 265 264
Additional paid-in capital 30,060,908 29,890,292
Deficit (4,962,294) (4,584,054)
------------- -------------
Total Stockholders' Equity 25,098,879 25,306,502
------------- -------------
$ 112,575,777 $ 108,928,409
============= =============
<FN>
See accompanying note to consolidated financial statements.
</TABLE>
5
<PAGE>
Agree Realty Corporation
Consolidated Statements of Operations (Unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Rental income $ 3,434,828 $ 2,958,719
Operating cost reimbursement 476,673 424,312
Interest income and other 27,331 46,044
----------- -----------
Total Revenues 3,938,832 3,429,075
----------- -----------
Expenses
Real estate taxes 292,114 277,250
Property operating expenses 313,482 252,942
General and administrative 282,841 246,486
Interest 1,311,396 1,035,587
Amortization of financing costs 96,289 57,740
Depreciation and amortization 632,629 572,011
----------- -----------
Total Expenses 2,928,751 2,442,016
----------- -----------
Income Before Minority Interest 1,010,081 987,059
Minority Interest (196,057) (192,180)
----------- -----------
Net Income $ 814,024 $ 794,879
=========== ===========
Earnings Per Share $ .31 $ .30
=========== ===========
Weighted Average Number of
Common Shares Outstanding 2,649,475 2,638,185
=========== ===========
<FN>
See accompanying note to consolidated financial statements.
</TABLE>
6
<PAGE>
Agree Realty Corporation
Consolidated Statement of Stockholders' Equity (Unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-In
Shares Amount Capital Deficit
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 2,638,185 $ 264 $29,890,292 $(4,584,054)
Stock awards 11,290 1 170,616 --
Dividends declared for the period January 1, 1996
to March 31, 1996, $.45 per share -- -- -- (1,192,264)
Net income for the period January 1, 1996 to
March 31, 1996 -- -- -- 814,024
--------- ----------- ----------- -----------
Balance, March 31, 1996 2,649,475 $ 265 $30,060,908 $(4,962,294)
========= =========== =========== ===========
<FN>
See accompanying note to consolidated financial statements.
</TABLE>
7
<PAGE>
Agree Realty Corporation
Consolidated Statements of Cash Flows (Unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31,1996 March 31, 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 814,024 $ 794,879
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 618,479 557,400
Amortization 110,439 72,351
Minority interests 196,057 192,180
Decrease in accounts receivable 283,808 209,568
Increase in other assets (240,662) (353,686)
Decrease in accounts payable (227,675) (216,375)
Increase in accrued interest 131,061 5,341
Decrease in tenant deposits (1,333) --
------------ ------------
Net Cash Provided By Operating Activities 1,684,198 1,261,658
------------ ------------
Cash Flows Used In Investing Activities
Acquisition of real estate investments (including
capitalized interest of $17,164 in 1996) (4,726,595) --
------------ ------------
Cash Flows From Financing Activities
Line-of-credit proceeds 17,442,218 --
Payment of construction loans (11,861,006) --
Dividends and limited partners' distributions paid (1,474,265) (1,474,263)
Repayment of payables - capital expenditures (1,468,227) --
Payments for financing costs (153,470) --
Payments of mortgages payable (74,102) (67,818)
Payments of leasing costs (15,624) --
Increase in escrow deposits (15,463) (15,309)
------------ ------------
Net Cash Provided By (Used In) Financing Activities 2,380,061 (1,557,390)
------------ ------------
Net Decrease In Cash and Cash Equivalents (662,336) (295,732)
Cash and Cash Equivalents, beginning of period 1,283,672 1,659,406
------------ ------------
Cash and Cash Equivalent, end of period $ 621,336 $ 1,363,674
============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 1,197,499 $ 1,030,246
============ ============
Supplemental Disclosure of Non-Cash Transactions
Dividends and limited partners' distributions declared and unpaid $ 1,479,345 $ 1,474,265
Shares issued under Restricted Stock Plan $ 170,616 $ --
============ ============
<FN>
See accompanying note to consolidated financial statements.
</TABLE>
8
<PAGE>
Agree Realty Corporation
Note to Consolidated Financial Statements
(Unaudited)
- ------------------------------------------------------------------------------
1. Basis of Presentation The accompanying unaudited 1996 consolidated
financial statements have been prepared in
accordance with generally accepted accounting
principles for interim financial information and
with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not
include all of the information and footnotes
required by generally accepted accounting
principles for complete financial statements. In
the opinion of management, all adjustments
(consisting of normal recurring accruals)
considered necessary for a fair presentation have
been included. The consolidated balance sheet at
December 31, 1995 has been derived from the
audited consolidated financial statements at that
date. Operating results for the three month period
ended March 31, 1996 are not necessarily
indicative of the results that may be expected for
the year ending December 31, 1996 or any other
interim period. For further information, refer to
the consolidated financial statements and
footnotes thereto included in the Company's Annual
Report for the year ended December 31, 1995.
9
<PAGE>
Agree Realty Corporation
Part I
- ------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following should be read in conjunction with the Unaudited Consolidated
Financial Statements of Agree Realty Corporation (the "Company") including the
respective note thereto, all of which are included in this Form 10-Q.
Formation of the Company and Initial Public Offering
Agree Realty Corporation was established to continue the business of the Agree
Predecessors in operating and expanding the community shopping center
business. The Company effectively commenced its operations on April 22, 1994
with the sale of 2,500,000 shares of common stock at a price of $19.50 per
share. The net cash proceeds to the Company from the completion of this
initial public offering was approximately $45.4 million which was used
primarily to reduce outstanding indebtedness, pay stock issuance costs and
establish a working capital reserve.
The assets of the Company are held by, and all operations conducted through
the Operating Partnership. The Company is operating as a real estate
investment trust ("REIT") for federal income tax purposes.
Comparison of Three Months Ended March 31, 1996 to Three Months Ended March
31, 1995
Rental income increased $476,000 or 16% to $3,435,000 in 1996, compared to
$2,959,000 in 1995. The increase in 1996 was the result of $520,000 from the
development and acquisition of six single tenant properties, and a reduction
of $44,000 relating primarily to expired leases for which the Company is
actively pursuing replacement tenants.
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 $53,000 or 12% to
$477,000 in 1996, compared to $424,000 in 1995. Operating cost reimbursements
increased due to the increase in real estate taxes and property operating
expenses from 1996 and 1995 as explained below.
Interest and other income decreased $19,000 to $27,000 in 1996 versus $46,000
in 1995. The decrease was a result of a reduction in investment income.
10
<PAGE>
Agree Realty Corporation
Part I
- ------------------------------------------------------------------------------
Real estate taxes increased $15,000 or 5% to $292,000 in 1996 versus $277,000
in 1995. The increase in the result of general assessment increases related to
the shopping center properties and the addition of one single tenant property
located in Monroeville, Pennsylvania.
Property operating expense (shopping center maintenance, insurance and
utilities) increased $60,000, or 24% to $313,000 in 1996 versus $253,000 in
1995. The majority of the increase ($42,000) related to increased snow removal
costs as a result of heavy snows in northern Michigan and Wisconsin. Shopping
center maintenance increased $19,000, insurance decreased $6,000 and utilities
increased $5,000 in 1996 versus 1995.
General and administrative expenses increased $36,000, or 15% to $283,000 in
1996 versus $247,000 in 1995. The increase was primarily the result of
compensation related expenses ($16,000) and other general inflationary
increases.
Interest expense and amortization of financing costs increased $315,000 or
29%, to $1,408,000 in 1996, from $1,093,000 in 1995. The increase in interest
expense of $276,000 was the result of the Company financing the development
and acquisition of six single tenant properties completed in late 1995 and
early 1996. The increase in amortization of financing costs of $39,000 was the
result of costs incurred in connection with the Company's $50 million credit
facility.
Depreciation and amortization increased $61,000 or 11% to $633,000 in 1996
versus $572,000 in 1995. The increase is the result of the completion of six
single tenant properties in late 1995 and early 1996.
The Company's income before minority interest increased $23,000 as a result of
the foregoing factors.
Liquidity and Capital Resources
The Company's principal demands for liquidity are expected to be distributions
to its stockholders, debt repayment, development of new properties, and future
property acquisitions.
During the quarter ended March 31, 1996 the Company declared a quarterly
dividend of $.45 per share. The dividend was paid on April 18, 1996 to holders
of record on March 29, 1996.
Historical funds from operations (revised definition) for the quarter ended
March 31, 1996 increased to $1,661,000 from $1,569,000 for the same period in
1995, due primarily to the development and acquisition of additional single
tenant properties.
11
<PAGE>
Agree Realty Corporation
Part I
- ------------------------------------------------------------------------------
As of March 31, 1996, the Company had total mortgage indebtedness of
$53,896,423 with a weighted average interest rate of 7.61%. Future scheduled
annual maturities of mortgages payable for the years ended March 31, are as
follows: 1997 - $300,981; 1998 - $390,258; 1999 - $2,699,651; 2000 -
$8,834,604; 2001 - $988,630. The debt is all fixed rate debt with the
exception of $2,375,000 which bears interest at one half percent over the
prime rate.
The Company has in place a $50 million line-of-credit facility (the "Credit
Facility") which is guaranteed by the Company. The loan is for a three year
period and can be extended by the Company for an additional three years.
Advances under the Credit Facility bear interest within a range of LIBOR plus
200 basis points to 263 basis points or the bank's prime rate plus 37 basis
points to 75 basis points, at the option of the Company, based on certain
factors such as debt to capital value and debt service coverage. The Credit
Facility will be used to fund property acquisitions and development
acquisitions and development activities and is secured by existing
unencumbered properties and properties to be acquired or developed. As of
March 31, 1996, $15,433,761 was outstanding under this facility.
The Company also has in place a $5 million dollar line-of-credit. The line
bears interest at the bank's prime rate or 225 basis points in excess of the
one month LIBOR rate at the option of the Company. The purpose of the loan is
to provide working to the Company and fund land options and start-up costs
associated with new projects. As of March 31, 1996, $3,986,265 is outstanding
under this line.
The Company has entered into an agreement to fund the construction of certain
Single Tenant retail properties. Advances under this agreement bear no
interest and are required to be repaid within sixty (60) days after the date
construction has been completed. The advances are secured by the specific land
and buildings being developed. As of March 31, 1996 $5,742,779 was outstanding
under this agreement.
The Company has development activity under way which will add an additional
87,000 square feet of retail space to the Company's portfolio during 1996. In
addition, to the development activity, the Company acquired a 21,000 square
foot retail facility located in Columbus, Ohio and an interest in a 110,000
square foot Single Tenant Property located in Ann Arbor, Michigan. In April
1996 the Company acquired a 30,000 square foot Single Tenant Property located
in Aventura, Florida. Management expects the development and acquisition of
these retail projects to have a positive effect on cash generated by operating
activities and Funds From Operations. Additional Company funding required for
these projects is estimated to be $5.3 million and will come from the Credit
Facility.
12
<PAGE>
Agree Realty Corporation
Part I
- ------------------------------------------------------------------------------
The Company intends to meet its short-term liquidity requirements, including
capital expenditures related to the leasing and improvement of the properties,
through its cash flow provided by operations and the line-of-credit
arrangement. Management believes that adequate cash flow will be available to
fund its operations and pay dividends in accordance with REIT requirements.
The Company may obtain additional funds for future development or acquisitions
through other borrowings or the issuance of additional shares of common stock.
The Company intends to incur additional debt in a manner consistent with its
policy of maintaining a long-term debt to total market capitalization ratio of
50% or less, provided that during the period when temporary construction or
acquisition financing is used in connection with the development or
acquisition of a property, the Company intends to maintain a ratio of total
debt (including construction an acquisition financing) to total market
capitalization of 65% or less.
Kmart Corporation is the Company's largest tenant in terms of both GLA and
base rental revenue. As of December 31, 1995, the Company's 15 leases with
Kmart represented approximately 51% of its GLA, 39% of its average annual base
rental income and 52% of the Company's future minimum rentals. Kmart has
experienced declining earnings in recent periods, and has announced plans to
eliminate a significant number of jobs and close over 175 of its existing
stores (none of which were leased from the Company). In January of 1996,
Standard and Poor's (S&P) downgraded Kmart's senior debt rating to "BB" from
"BBB". Leases with Kmart generally provide that it may cease to occupy the
property, although it remains liable for payment of all future base rental and
recoveries under the relevant lease. The Company is not aware of any plans by
Kmart to vacate a property; however, should Kmart abandon a property, although
it would remain liable for its lease payments, such an action would result in
other tenants having the right to terminate their leases at the affected
property.
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.
13
<PAGE>
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
None
14
<PAGE>
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: May 9, 1996
--------------
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> $ 621,336
<SECURITIES> 0
<RECEIVABLES> 342,472
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 123,086,893
<DEPRECIATION> 15,408,244
<TOTAL-ASSETS> 112,575,777
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 112,575,777
<SALES> 0
<TOTAL-REVENUES> 3,938,832
<CGS> 0
<TOTAL-COSTS> 2,928,751
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 814,024
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.00
</TABLE>
