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, 1997
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
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(Exact name of registrant as specified in its charter)
Maryland 38-3148187
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31850 Northwestern Highway, Farmington Hills, Michigan 48334
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(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| |_|
2,678,430 Shares of Common Stock, $.0001 par value, were outstanding as of
May 12, 1997
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<TABLE>
<CAPTION>
Agree Realty Corporation
Form 10-Q
Index
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Part I: Financial Information Page
<S> <C> <C>
Item 1. Interim Consolidated Financial Statements 3
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996. 4-5
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996. 6
Consolidated Statement of Stockholders' Equity for
the three months ended March 31, 1997. 7
Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996. 8
Notes to Consolidated Financial Statements 9
<CAPTION>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10-14
<S> <C> <C>
Part II: Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
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Agree Realty Corporation
Part I: Financial Information
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
3
<PAGE>
Agree Realty Corporation
Consolidated Balance Sheets
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<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Real Estate Investments
Land $ 25,183,667 $ 25,183,667
Buildings 107,493,837 107,204,583
Property under development 117,011 85,993
------------- -------------
132,794,515 132,474,243
Less accumulated depreciation (18,013,592) (17,339,353)
------------- -------------
Net Real Estate Investments 114,780,923 115,134,890
Cash and Cash Equivalents 353,300 294,389
Accounts Receivable - Tenants 626,944 638,735
Restricted Asset - Cash Held in Escrow 282,355 266,771
Investments In and Advances To Unconsolidated Entities 2,084,212 1,820,605
Unamortized Deferred Expenses
Financing costs 2,313,581 2,398,377
Leasing costs 139,566 141,757
Other Assets 1,204,825 686,346
------------- -------------
$ 121,785,706 $ 121,381,870
============= =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
Agree Realty Corporation
Consolidated Balance Sheets
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<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Mortgages Payable $ 53,583,023 $ 53,663,999
Construction Loans 1,701,406 10,616,936
Note Payable 33,485,835 23,616,382
Dividends and Distributions Payable 1,492,375 1,479,345
Accrued Interest Payable 416,549 354,988
Accounts Payable
Operating 302,646 691,981
Capital expenditures 165,852 596,794
Tenant Deposits 62,727 50,394
------------- -------------
Total Liabilities 91,210,413 91,070,819
------------- -------------
Minority Interest 5,800,787 5,869,014
------------- -------------
Stockholders' Equity
Common stock, $.0001 par value, 20,000,000
shares authorized, 2,678,430 and 2,649,475
shares issued and outstanding 268 265
Additional paid-in capital 30,679,818 30,060,908
Deficit (5,905,580) (5,619,136)
------------- -------------
Total Stockholders' Equity 24,774,506 24,442,037
------------- -------------
$ 121,785,706 $ 121,381,870
============= =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
Agree Realty Corporation
Consolidated Statements of Operations (Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
------------------ ------------------
<S> <C> <C>
Revenues
Rental income $ 4,029,153 $ 3,371,031
Operating cost reimbursement 499,347 476,673
Management fees and other 26,150 19,860
----------- -----------
Total Revenues 4,554,650 3,867,564
----------- -----------
Operating Expenses
Real estate taxes 308,630 292,114
Property operating expenses 337,544 313,482
Land lease payments 111,500 14,000
General and administrative 295,742 268,841
Depreciation and amortization 693,406 632,629
----------- -----------
Total Operating Expenses 1,746,822 1,521,066
----------- -----------
Income From Operations 2,807,828 2,346,498
----------- -----------
Other Income (Expense)
Interest expense, net (1,676,937) (1,400,214)
Equity in net income of unconsolidated
entities 6,813 63,797
----------- -----------
Total Other Expense (1,670,124) (1,336,417)
----------- -----------
Income Before Minority Interest 1,137,704 1,010,081
Minority Interest (218,855) (196,057)
----------- -----------
Net Income $ 918,849 $ 814,024
=========== ===========
Earnings Per Share $ .34 $ .31
=========== ===========
Weighted Average Number of
Common Shares Outstanding 2,678,430 2,649,475
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
Agree Realty Corporation
Consolidated Statement of Stockholders' Equity (Unaudited)
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<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-In
Shares Amount Capital Deficit
--------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 2,649,475 $ 265 $30,060,908 $(5,619,136)
Issuance of shares under the Stock Incentive Plan 28,955 3 618,910 --
Dividends declared for the period January 1, 1997
to March 31, 1997, $0.45 per share -- -- -- (1,205,293)
Net income for the period January 1, 1997 to
March 31, 1997 -- -- -- 918,849
--------- ----- ----------- -----------
Balance, March 31, 1997 2,678,430 $ 268 $30,679,818 $(5,905,580)
========= ===== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
7
<PAGE>
Agree Realty Corporation
Consolidated Statements of Cash Flows (Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
------------------ ------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 918,849 $ 814,024
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 673,013 618,479
Amortization 122,113 110,439
Equity in net income of unconsolidated entities (6,813) (63,797)
Minority interests 218,855 196,057
Decrease in accounts receivable 11,791 283,808
Increase in other assets (290,229) (240,662)
Decrease in accounts payable (389,335) (227,675)
Increase in accrued interest 61,561 131,061
Increase (decrease) in tenant deposits 12,333 (1,333)
------------ ------------
Net Cash Provided By Operating Activities 1,332,138 1,620,401
------------ ------------
Cash Flows From Investing Activities
Acquisition of real estate investments (including
capitalized interest of $17,164 in 1996) (195,136) (3,463,741)
Investments in and advances to unconsolidated entities (954) (1,199,057)
------------ ------------
Cash Flows Used In Investing Activities (196,090) (4,662,798)
------------ ------------
Cash Flows From Financing Activities
Line-of-credit proceeds 9,869,453 17,442,218
Payment of construction loans (8,915,530) (11,861,006)
Dividends and limited partners' distributions paid (1,479,345) (1,474,265)
Repayment of payables - capital expenditures (430,942) (1,468,227)
Payments for financing costs (16,924) (153,470)
Payments of mortgages payable (80,976) (74,102)
Payments of leasing costs (7,289) (15,624)
Increase in escrow deposits (15,584) (15,463)
------------ ------------
Net Cash Provided By (Used In) Financing Activities (1,077,137) 2,380,061
------------ ------------
Net Decrease In Cash and Cash Equivalents 58,911 (662,336)
Cash and Cash Equivalents, beginning of period 294,389 1,283,672
------------ ------------
Cash and Cash Equivalents, end of period $ 353,300 $ 621,336
============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 1,519,602 $ 1,197,499
============ ============
Supplemental Disclosure of Non-Cash Transactions
Dividends and limited partners' distributions
declared and unpaid $ 1,492,375 $ 1,479,345
Shares issued under Stock Incentive Plan $ 618,913 $ 170,616
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
8
<PAGE>
Agree Realty Corporation
Notes to Consolidated Financial Statements
(Unaudited)
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1. Basis of
Presentation The accompanying unaudited 1997 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, 1996 has been derived from the
audited consolidated financial statements at that
date. Operating results for the three-month period
ended March 31, 1997 are not necessarily
indicative of the results that may be expected for
the year ending December 31, 1997, 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, 1996.
2. Earnings Per
Share Earnings per share has been computed by dividing
the income by the weighted average number of
common shares and dilutive common equivalent
shares outstanding.
9
<PAGE>
Agree Realty Corporation
Part I
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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 with the sale of 2,500,000 shares of common stock. The net
cash proceeds to the Company from the completion of the initial public
offering were approximately $45.4 million which were 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 are conducted
through, Agree Limited Partnership (the "Operating Partnership"), in which
the Company held an 80.76% interest as of March 31, 1997 as the sole general
partner. The Company is operating so as to qualify as a real estate
investment trust for federal income tax purposes.
The following should be read in conjunction with the Unaudited Consolidated
Financial Statements of Agree Realty Corporation including the respective
notes thereto, all of which are included in this Form 10-Q.
Comparison of Three Months Ended March 31, 1997 to Three Months Ended March
31, 1996
Rental income for the three months ended March 31, 1997 ("1997") increased
$658,000, or 20%, to $4,029,000, compared to $3,371,000 for the three months
ended March 31, 1996 ("1996"). The increase is primarily the result of the
development and acquisition of five properties in fiscal 1996.
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 5% to
$499,000 in 1997, compared to $476,000 in 1996. Operating cost reimbursements
increased due to the increase in real estate taxes and property operating
expenses in 1997 as compared to 1996 as explained below.
Management fees and other income remained relatively constant at $26,000 in
1997 versus $20,000 in 1996.
10
<PAGE>
Agree Realty Corporation
Part I
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Real estate taxes increased $16,000, or 6%, to $308,000 in 1997 versus
$292,000 in 1996. The increase is the result of the addition of new
properties.
Property operating expenses (property maintenance, insurance and utilities)
increased $24,000, or 8%, to $337,000 in 1997 versus $313,000 in 1996. The
increase was the result of increased snow removal costs of $12,000, an
increase in shopping center maintenance costs of $19,000, a decrease in
utility costs of $6,000 and a decrease in insurance costs of $1,000 in 1997
versus 1996.
Land lease payments increased $97,000 to $111,000 in 1997 versus $14,000 in
1996 as a result of the acquisition of a ground lease of a single tenant
property in Aventura, Florida.
General and administrative expenses increased $27,000, or 10%, to $296,000 in
1997 versus $269,000 in 1996. The increase was primarily the result of
increases in compensation-related expenses of $9,000, increases in state
franchise and income taxes of $11,000 and increased expenses in connection
with the management of the Company's properties of $7,000. General and
administrative expenses as a percentage of rental income decreased from 8.0%
for 1996 to 7.3% for 1997.
Depreciation and amortization increased $61,000, or 10%, to $693,000 in 1997
versus $632,000 in 1996. The increase is the result of the completion of five
new properties in fiscal 1996.
Interest expense increased $277,000, or 20%, to $1,677,000 in 1997, from
$1,400,000 in 1996. The increase in interest expense was the result of the
Company financing the development and acquisition of five new properties in
fiscal 1996.
Equity in net income of unconsolidated entities decreased $57,000 to $7,000
in 1997 versus $64,000 in 1996 as a result of additional expenses in 1997
related to certain of the seven properties held in joint ventures, in which
the Company holds interests ranging from 8% to 20%.
The Company's income before minority interest increased $128,000 as a result
of the foregoing factors.
11
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Agree Realty Corporation
Part I
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Funds from Operations
Management considers funds from operations ("FFO") to be a supplemental
measure of the Company's operating performance. FFO is defined by the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT") to
mean net income (loss) before minority interest, computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains (losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of financing costs),
and after adjustments for unconsolidated partnerships and joint ventures. FFO
does not represent cash generated from operating activities in accordance
with GAAP and is not necessarily indicative of cash available to fund cash
needs. FFO should not be considered as an alternative to net income as the
primary indicator of the Company's operating performance, or as an
alternative to cash flow as a measure of liquidity.
The following table illustrates the calculation of FFO for the three months
ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Net income before minority interest $1,137,704 $1,010,081
Depreciation of real estate assets 668,872 607,256
Amortization of leasing costs 20,393 22,945
Amortization of stock awards 32,475 20,718
Depreciation of real estate assets held in
unconsolidated entities 167,996 --
---------- ----------
Funds from operations $2,027,440 $1,661,000
---------- ----------
Funds from Operations per share $ 0.61 $ 0.51
---------- ----------
Weighted average shares and OP Units outstanding 3,316,389 3,287,434
========== ==========
</TABLE>
12
<PAGE>
Agree Realty Corporation
Part I
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FFO increased $366,000, or 22%, to $2,027,000 in 1997. The increase in FFO is
primarily the result of the development and acquisition of five properties in
fiscal 1996.
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 March 31, 1997 the Company declared a quarterly
dividend of $.45 per share. The dividend was paid on April 16, 1997 to
holders of record on March 24, 1997.
As of March 31, 1997, the Company had total mortgage indebtedness of
$53,583,023 with a weighted average interest rate of 7.63%. Future scheduled
annual maturities of mortgages payable for the years ended March 31, are as
follows: 1998 - $378,839; 1999 - $2,699,651; 2000 - $8,534,604; 2001 -
$988,630; 2002 - $1,067,065. This mortgage debt is all fixed rate debt with
the exception of $2,375,000 which bears interest at one half percent over
prime rate.
In addition, the Operating Partnership has in place a $50 million line of
credit facility (the "Credit Facility") with a bank group headed by Michigan
National Bank which is guaranteed by the Company. The loan matures in
November 1998 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 property value and debt service coverage. The
Credit Facility is used to fund property acquisitions and development
activities and is secured by all of the Company's existing properties which
are not otherwise encumbered and properties to be acquired or developed. As
of March 31, 1997 $33,485,835 was outstanding under the Credit Facility.
The Company also has in place a $5 million line of credit which matures in
September 1997, and which the Company expects to renew for an additional
12-month period. 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 capital to the Company
and fund land options and start-up costs associated with new projects. As of
March 31, 1997 no balance was outstanding under the line of credit.
13
<PAGE>
Agree Realty Corporation
Part I
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The Company received funding from an unaffiliated entity to fund construction
of certain of its 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, 1997 $1,701,406 was
outstanding under this arrangement.
The Company filed a registration statement on Form S-11 (Registration No.
333-25313) with the Securities and Exchange Commission on April 16, 1997
relating to the proposed offering and sale by the Company of 1,500,000 shares
of common stock of the Company. Should the offering be consummated, net
proceeds from the offering will be used primarily to repay debt outstanding
under the aforementioned Credit Facility.
The Company intends to meet its short-term liquidity requirements, including
capital expenditures related to the leasing and improvement of the
properties, through its cash flow provided by operations and the
line-of-credit. Management believes that adequate cash flow will be available
to fund the Company's operations and pay dividends in accordance with REIT
requirements. The Company intends to maintain a ratio of total indebtedness
(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 line of credit and the Credit
Facility. Management intends to periodically refinance short term
construction and acquisition financing with long-term debt and equity. Upon
the completion of such refinancing, the Company intends to lower its ratio of
total indebtedness to Total Market Capitalization to 50% or less.
Nevertheless, the Company may operate with debt levels which are in excess of
50% for extended periods of time prior to such refinancings.
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.
14
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Agree Realty Corporation
Part II
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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)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
Agree Realty Corporation
Signatures
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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 12, 1997
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> $ 353,300
<SECURITIES> 0
<RECEIVABLES> 626,944
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 132,794,515
<DEPRECIATION> 18,013,592
<TOTAL-ASSETS> 121,785,706
<CURRENT-LIABILITIES> 0
<BONDS> 88,770,264
<COMMON> 268
0
0
<OTHER-SE> 24,774,238
<TOTAL-LIABILITY-AND-EQUITY> 121,785,706
<SALES> 4,554,650
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,746,822
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,676,937
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 918,849
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.00
</TABLE>
