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 June 30, 1998
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number 1-12928
Agree Realty Corporation
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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: (248) 737-4190
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes No
|X| |_|
4,346,313 Shares of Common Stock, $.0001 par value, were
outstanding as of August 7, 1998
<PAGE>
Agree Realty Corporation
Form 10-Q
Index
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Part I: Financial Information Page
Item 1. Interim Consolidated Financial Statements 3
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997. 4-5
Consolidated Statements of Operations for the six months
ended June 30, 1998 and 1997. 6
Consolidated Statements of Operations for the three months
ended June 30, 1998 and 1997. 7
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1998. 8
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997. 9
Notes to Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11-18
Part II: Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
Agree Realty Corporation
Part I: Financial Information
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ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
Agree Realty Corporation
Consolidated Balance Sheets (Unaudited)
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<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets
Real Estate Investments
Land $ 33,197,481 $ 29,952,532
Buildings 114,308,527 112,307,266
Property under development 2,482,819 488,651
------------- -------------
149,988,827 142,748,449
Less accumulated depreciation (21,466,460) (20,043,235)
------------- -------------
Net Real Estate Investments 128,522,367 122,705,214
Cash and Cash Equivalents 1,041,228 1,785,968
Accounts Receivable - Tenants 474,319 473,918
Restricted Asset - Cash Held in Escrow 310,078 276,564
Investments In and Advances To
Unconsolidated Entities 1,336,277 1,810,241
Unamortized Deferred Expenses
Financing costs 1,924,448 2,133,426
Leasing costs 242,935 236,151
Other Assets 1,288,596 1,070,022
------------- -------------
$ 135,140,248 $ 130,491,504
============= =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
Agree Realty Corporation
Consolidated Balance Sheets (Unaudited)
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<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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<S> <C> <C>
Liabilities and Stockholders' Equity
Mortgages Payable $ 50,775,045 $ 50,954,026
Construction Loans 7,720,913 5,575,091
Note Payable 12,873,944 8,641,016
Dividends and Distributions Payable 2,292,765 2,284,792
Accrued Interest Payable 261,349 248,742
Accounts Payable
Operating 460,149 602,862
Capital expenditures 782,509 1,516,379
Tenant Deposits 52,907 51,240
------------- -------------
Total Liabilities 75,219,581 69,874,148
------------- -------------
Minority Interest 5,514,501 5,651,347
------------- -------------
Stockholders' Equity
Common stock, $.0001 par value, 20,000,000
shares authorized, 4,346,313 and 4,328,980
shares issued and outstanding 435 433
Additional paid-in capital 62,873,987 62,503,487
Deficit (8,468,256) (7,537,911)
------------- -------------
Total Stockholders' Equity 54,406,166 54,966,009
------------- -------------
$ 135,140,248 $ 130,491,504
============= =============
<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>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Rental income $ 8,347,856 $ 8,027,824
Operating cost reimbursement 1,040,904 956,845
Management fees and other 47,062 46,079
----------- -----------
Total Revenues 9,435,822 9,030,748
----------- -----------
Operating Expenses
Real estate taxes 723,847 630,833
Property operating expenses 524,611 529,315
Land lease payments 271,364 223,000
General and administrative 547,379 592,648
Depreciation and amortization 1,465,946 1,386,455
----------- -----------
Total Operating Expenses 3,533,147 3,362,251
----------- -----------
Income From Operations 5,902,675 5,668,497
----------- -----------
Other Income (Expense)
Interest expense, net (2,438,725) (3,178,804)
Development fee income 59,031 23,275
Equity in net income (loss) of
unconsolidated entities (4,641) 784
Gain on land sales -- 103,270
----------- -----------
Total Other Expense (2,384,335) (3,051,475)
----------- -----------
Income Before Minority Interest 3,518,340 2,617,022
Minority Interest (450,077) (465,859)
----------- -----------
Net Income $ 3,068,263 $ 2,151,163
=========== ===========
Earnings Per Share $ .71 $ .71
=========== ===========
Weighted Average Number of
Common Shares Outstanding 4,346,313 3,048,596
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
Agree Realty Corporation
Consolidated Statements of Operations (Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Rental income $4,177,315 $3,998,671
Operating cost reimbursement 515,982 457,498
Management fees and other 22,805 19,929
---------- ----------
Total Revenues 4,716,102 4,476,098
---------- ----------
Operating Expenses
Real estate taxes 363,222 322,203
Property operating expenses 249,642 191,771
Land lease payments 129,443 111,500
General and administrative 269,383 296,906
Depreciation and amortization 739,240 693,049
---------- ----------
Total Operating Expenses 1,750,930 1,615,429
---------- ----------
Income From Operations 2,965,172 2,860,669
---------- ----------
Other Income (Expense)
Interest expense, net (1,198,668) (1,501,867)
Equity in net loss of unconsolidated
entities (1,642) (6,029)
Gain on land sales -- 103,270
Development fee income -- 23,275
---------- ----------
Total Other Expense (1,200,310) (1,381,351)
---------- ----------
Income Before Minority Interest 1,764,862 1,479,318
Minority Interest (223,693) (247,004)
Net Income $1,541,169 $1,232,314
========== ==========
Earnings Per Share $ .36 $ .36
========== ==========
Weighted Average Number of
Common Shares Outstanding 4,346,313 3,414,694
========== ==========
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
7
<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, 1998 4,328,980 $ 433 $ 62,503,487 $ (7,537,911)
Issuance of shares under the Stock
Incentive Plan 19,033 2 405,828 --
Shares redeemed under the Stock
Incentive Plan (1,700) -- (35,328) --
Dividends declared for the period
January 1, 1998 to June 30, 1998 -- -- -- (3,998,608)
Net income for the period January 1,
1998 to June 30, 1998 -- -- -- 3,068,263
--------- ------ ------------ ------------
Balance, June 30, 1998 4,346,313 $ 435 $ 62,873,987 $ (8,468,256)
========= ====== ============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
8
<PAGE>
Agree Realty Corporation
Consolidated Statements of Cash Flows (Unaudited)
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<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 3,068,263 $ 2,151,163
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation 1,423,037 1,350,853
Amortization 259,886 239,042
Equity in net (income) loss of
unconsolidated entities 4,641 (784)
Minority interests 450,077 465,859
Gain on land sales -- (103,270)
(Increase) decrease in accounts
receivable (401) 415,034
Increase in other assets (5,970) (382,586)
Decrease in accounts payable (142,713) (326,519)
Increase (decrease) in accrued interest 12,607 (138,216)
Increase in tenant deposits 1,667 10,667
------------ ------------
Net Cash Provided By Operating Activities 5,071,094 3,681,243
------------ ------------
Cash Flows From Investing Activities
Acquisition of real estate investments
(including capitalized interest of
$210,671 in 1998 and $13,222 in 1997) (7,240,378) (1,378,227)
Investments in and advances to
unconsolidate entities 463,700 (142,746)
Proceeds from sale of land -- 148,270
------------ ------------
Cash Flows Used In Investing Activities (6,776,678) (1,372,703)
------------ ------------
Cash Flows From Financing Activities
Dividends and limited partners'
distributions paid (4,577,558) (2,971,720)
Line-of-credit proceeds 4,232,928 10,869,452
Construction loan proceeds 2,145,822 --
Net increase in (repayment of) capital
expenditure payables (555,890) 11,644
Payments of mortgages payable (178,981) (174,514)
Redemption of restricted stock (35,328) --
Increase in escrow deposits (33,514) (31,168)
Payments of leasing costs (28,635) (18,289)
Payments for financing costs (8,000) (16,924)
Proceeds from issuance of common stock -- 31,814,700
Payment on line-of-credit -- (31,250,375)
Payment of construction loans -- (8,915,530)
------------ ------------
Net Cash Provided By (Used In)
Financing Activities 960,844 (682,724)
------------ ------------
Net Increase (Decrease) In Cash and
Cash Equivalents (744,740) 1,625,816
Cash and Cash Equivalents, beginning
of period 1,785,968 294,389
------------ ------------
Cash and Cash Equivalents, end of period $ 1,041,228 $ 1,920,205
============ ============
Supplemental Disclosure of Cash Flow
Information Cash paid for interest (net
of amounts capitalized) $ 2,243,230 $ 3,147,328
============ ============
Supplemental Disclosure of Non-Cash
Transactions Dividends and limited
partners' distributions declared
and unpaid $ 2,292,765 $ 2,236,608
Shares issued under Stock Incentive Plan $ 405,830 $ 618,913
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
9
Agree Realty Corporation
Notes to Consolidated Financial Statements
(Unaudited)
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1. Basis of
Presentation The accompanying unaudited 1998 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, 1997 has been derived from
the audited consolidated financial statements at that
date. Operating results for the six months ended June
30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31,
1998, 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,
1997.
2. Earnings Per
Share Earnings per share has been computed by dividing the
income by the weighted average number of common shares
outstanding. The per share amounts reflected in the
consolidated statements of income are presented in
accordance with Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings per Share"; the
amounts of the Company's "basic" and "diluted" earnings
per share (as defined in SFAS No. 128) are the same.
3. Comprehensive
Income The amounts of the Company's net and comprehensive
income (as defined in SFAS No. 130, "Reporting
Comprehensive Income") are the same.
10
<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 in an
initial public offering. The net cash proceeds to the Company from the
completion of this offering were approximately $45.4 million, which were used
primarily to reduce outstanding indebtedness, pay stock issuance costs and
establish a working capital reserve. On May 21, 1997, the Company completed
an offering of 1,625,000 shares of common stock at $20.625 per share; on June
18, 1997 the underwriters exercised their overallotment option for an
additional 28,850 shares at the same per share price (collectively, "the 1997
Offering"). The net proceeds from the 1997 Offering of approximately $31.9
million were used to repay amounts outstanding under the Company's Credit
Facility.
The assets of the Company are held by, and all operations are conducted
through, Agree Limited Partnership (the "Operating Partnership"), of which
the Company is the sole general partner and held an 87.20% interest as of
June 30, 1998. The Company is operating so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes.
The following should be read in conjunction with the Consolidated Financial
Statements of Agree Realty Corporation, including the respective notes
thereto, which are included in this Form 10-Q.
Comparison of Six Months Ended June 30, 1998 to Six Months Ended June 30,
1997
Rental income increased $320,000, or 4%, to $8,348,000 in 1998, compared to
$8,028,000 in 1997. The increase is primarily the result of the development
of two properties.
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 operating expenses, increased $84,000, or 9%, to
$1,041,000 in 1998, compared to $957,000 in 1997. Operating cost
reimbursements increased due to the increase in real estate taxes and
property operating expenses from 1997 to 1998 as explained below.
11
<PAGE>
Agree Realty Corporation
Part I
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Management fees and other income remained relatively constant at $47,000 in
1998 versus $46,000 in 1997.
Real estate taxes increased $93,000, or 15%, to $724,000 in 1998 versus
$631,000 in 1997. The increase is the result of the addition of new
properties.
Property operating expense (shopping center maintenance, insurance and
utilities) decreased $4,000, or 1% to $524,000 in 1998 versus $529,000 in
1997. The decrease was the result of decreased snow removal costs of $34,000;
an increase in shopping center maintenance costs of $46,000; and increase in
utility costs of $14,000 and a decrease in insurance costs of $30,000 in 1997
versus 1996.
Land lease payments increased $48,000 to $271,000 in 1998 versus $223,000 in
1997 as a result of the acquisition of a ground lease for the free standing
property in Lawrence, Kansas.
General and administrative expenses decreased by $46,000, or 8%, to $547,000
in 1998 versus $593,000 in 1997. The decrease was primarily the result of
decreased directors' and officers' liability insurance of $13,000 and
decreased expenses in connection with the management of the Company's
properties of $33,000. General and administrative expenses as a percentage of
rental income decreased from 7.4% for 1997 to 6.6% for 1998.
Depreciation and amortization increased $80,000, or 6%, to $1,466,000 in 1998
versus $1,386,000 in 1997. This increase was the result of the completion of
two new properties.
Interest expense decreased $740,000, or 23%, to $2,439,000 in 1997, from
$3,179,000 in 1997. The decrease in interest expense was the result of the
Company using the proceeds of the 1997 Offering to reduce the Company's
indebtedness.
The Company recognized income of $103,000 on the sale of a parcel of land in
1997. There were no land sales in 1998.
Development fee income increased $36,000, to $59,000 in 1998, from $23,000 in
1997. The above amount was not included in the Company's calculation of Funds
from Operations due to the non-recurring nature of this type of income.
12
<PAGE>
Agree Realty Corporation
Part I
- ------------------------------------------------------------------------------
Equity in net income (loss) of unconsolidated entities decreased $6,000 to a
loss of ($5,000) in 1998 versus income of $1,000 in 1997 as a result of
additional expenses 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 $901,000 as a result
of the foregoing factors.
Comparison of Three Months Ended June 30, 1998 to Three Months Ended June 30,
1997
Rental income increased $179,000, or 4%, to $4,177,000 in 1998, compared to
$3,998,000 in 1997. The increase is primarily the result of the development
and acquisition of two properties.
Operating cost reimbursements increased $58,000, or 13%, to $516,000 in 1998,
compared to $458,000 in 1997. Operating cost reimbursements increased due to
the increase in real estate taxes and property operating expenses from 1997
to 1998 as explained below.
Management fees and other income remained relatively constant at $23,000 in
1998 and $20,000 in 1997.
Real estate taxes increased $41,000, or 13%, to $363,000 in 1998 versus
$322,000 in 1997. The increase is the result of the addition of new
properties.
Property operating expense (shopping center maintenance, insurance and
utilities) increased $58,000, or 30% to $250,000 in 1998 versus $192,000 in
1997. The increase was the result of increased snow removal costs of $5,000;
an increase in shopping center maintenance costs of $64,000; an increase in
utility costs of $4,000 and a decrease in insurance costs of $15,000 in 1998
versus 1997.
Land lease payments increased $18,000 to $129,000 in 1998 versus $111,000 in
1997 as a result of the acquisition of a ground lease for the free standing
property in Lawrence, Kansas.
General and administrative expenses decreased by $28,000, or 9%, to $269,000
in 1998 versus $297,000 in 1997. This decrease was primarily the result of
decreases in expenses in connection with the management of the Company's
properties. General and administrative expenses as a percentage of rental
income decreased from 7.4% for 1997 to 6.4% for 1998.
13
<PAGE>
Agree Realty Corporation
Part I
- ------------------------------------------------------------------------------
Depreciation and amortization increased $46,000, or 7%, to $739,000 in 1998
versus $693,000 in 1997. This increase was the result of the completion of
two new properties.
Interest expense decreased $303,000, or 20%, to $1,199,000 in 1998, from
$1,502,000 in 1997. The decrease in interest expense was the result of the
Company using the proceeds of the 1997 Offering to reduce the Company's
indebtedness.
The Company recognized income of $103,000 on the sale of a parcel of land in
1997. There were no land sales in 1998.
The Company received $23,000 of development fee income in 1997 in connection
with the completion of four joint venture properties. There was no
development fee income in 1998.
Equity in net loss of unconsolidated entities decreased $4,000 to $2,000 in
1998 versus $6,000 in 1997 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 $286,000 as a result
of the foregoing factors.
Funds from Operations
Management considers funds from operations ("FFO") to be a supplemental
measure of the Company's operating performance. FFO is defined by the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT") to
mean net income (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 net income as the primary indicator of the Company's operating performance
or as an alternative to cash flow as a measure of liquidity.
14
<PAGE>
Agree Realty Corporation
Part I
- ------------------------------------------------------------------------------
The following table illustrates the calculation of FFO for the six months and
three months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998 1997
- ------------------------- ---- -----
<S> <C> <C>
Net income before minority interest $ 3,518,340 $ 2,617,022
Depreciation of real estate assets 1,418,884 1,338,449
Amortization of leasing costs 37,285 41,225
Amortization of stock awards 78,000 64,950
Depreciation of real estate assets held in
unconsolidated entities 350,440 343,843
Gain on sale of assets -- (103,270)
Development fee income (59,031) (23,275)
----------- -----------
Funds from Operations $ 5,343,918 $ 4,278,944
----------- -----------
Funds from Operations Per Share $ 1.07 $ 1.16
----------- -----------
Weighted Average Shares and
OP Units Outstanding 4,984,272 3,686,555
=========== ===========
<CAPTION>
FFO increased $1,065,000, or 25%, to $5,344,000. The increase in FFO is
primarily the result of the reduction in interest expense as a result of the
completion of the 1997 Offering and the development of additional properties.
Three Months Ended June 30, 1998 1997
- --------------------------- ---- ----
<S> <C> <C>
Net income before minority interest $ 1,764,862 $ 1,479,318
Depreciation of real estate assets 715,350 669,577
Amortization of leasing costs 20,105 20,832
Amortization of stock awards 39,000 32,475
Depreciation of real estate assets held in
unconsolidated entities 175,221 175,847
Gain on sale of assets -- (103,270)
Development fee income -- (23,275)
----------- -----------
Funds from Operations $ 2,714,538 $ 2,251,504
----------- -----------
Funds from Operations Per Share $ .54 $ .55
----------- -----------
Weighted Average Shares and
OP Units Outstanding 4,984,272 4,052,653
=========== ===========
<CAPTION>
FFO increased $463,000, or 21%, to $2,715,000. The increase in FFO is
primarily the result of the reduction in interest expense as a result of the
completion of the 1997 Offering and the development of additional properties.
</TABLE>
15
<PAGE>
Agree Realty Corporation
Part I
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Forward-Looking Statements
Management has included herein certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. When used,
statements which are not historical in nature including the words
"anticipate," "estimate," "should," "expect," "believe," "intend" and similar
expressions are intended to identify forward-looking statements. Such
statements are, by their nature, subject to certain risks and uncertainties.
Risks and other factors that might cause such a difference include, but are
not limited to, the effect of economic and market conditions; risks that the
Company's acquisition and development projects will fail to perform as
expected; financing risks, such as the inability to obtain debt or equity
financing on favorable terms; the level and volatility of interest rates;
loss or bankruptcy of one or more of the Company's major retail tenants; and
failure of the Company's properties to generate additional income to offset
increases in operating expenses.
Liquidity and Capital Resources
The Company's principal demands for liquidity are distributions to its
stockholders, debt repayment, development of new properties and future
property acquisitions.
During the quarter ended June 30, 1998, the Company declared a quarterly
dividend of $.46 per share. The dividend was paid on July 16, 1998 to holders
of record on June 30, 1998.
As of June 30, 1998, the Company had total mortgage indebtedness of
$50,775,045 with a weighted average interest rate of 7.54%. Future scheduled
annual maturities of mortgages payable for the years ending June 30 are as
follows: 1999 - $8,111,544; 2000 - $933,709; 2001 - $1,007,666; 2002 -
$1,087,656; 2003 - $1,174,186. This mortgage debt is all fixed rate debt.
In addition, the Operating Partnership has in place a $50 million line of
Credit Facility (the "Credit Facility") which is guaranteed by the Company.
The loan matures in August 2000 and can be extended by the Company for an
additional three years. Advances under the Credit Facility bear interest
within a range of one-month to six-month LIBOR plus 150 basis points to 213
basis points or the bank's prime rate less 50 basis points to plus 13 basis
points, at the option of the Company, based on certain factors such as debt
to property value and debt service coverage. The Credit Facility is used to
fund property acquisitions and development activities and is secured by most
of the Company's Properties which are not otherwise encumbered and properties
to be acquired or developed. As of June 30, 1998, $11,673,944 was outstanding
under the Credit Facility.
16
<PAGE>
Agree Realty Corporation
Part I
- ------------------------------------------------------------------------------
The Company also has in place a $5 million line of credit (the "Line of
Credit"), which matures September 1998, 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 or 200 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, 1998, $1,200,000 was
outstanding under the Line of Credit.
The Company's two wholly-owned subsidiaries have obtained construction
financing of approximately $6,850,000 to fund the development of two retail
properties. The notes require quarterly interest payments, based on a
weighted average interest rate based on LIBOR, computed by the lender. The
notes mature on October 16, 2002 and are secured by the underlying land and
buildings. As of June 30, 1998, $5,990,423 was outstanding under these notes.
The Company has received funding from an unaffiliated third party for the
construction of certain of its Properties. Advances under this 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 June 30, 1998, $1,730,490
was outstanding under this arrangement.
In June 1998, the Company completed development of a property that added
14,000 square feet to the portfolio. The property is located in Chesterfield
Township, Michigan. The development of this retail project is expected to
have a positive effect on cash generated by operating activities and Funds
from Operations.
The Company has three development projects under construction that will add
an additional 53,000 square feet of retail space to the Company's portfolio.
The projects are expected to be completed during the third and fourth
quarters of 1998. Additional Company funding required for this project is
estimated to be $4,500,000 and will come from available construction
financing and the Credit Facility. Management expects the development of
these projects to have a positive effect on cash generated by operating
activities and Funds from Operations.
17
<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. Management believes that adequate cash flow will be available to fund
the Company's operations and pay dividends in accordance with REIT
requirements. The Company may obtain additional funds for future development
or acquisitions through other borrowings or the issuance of additional shares
of capital stock. The Company intends to incur additional debt in a manner
consistent with its policy of maintaining a ratio of total debt (including
construction and acquisition financing) to total market capitalization of 65%
or less.
The Company plans to begin construction of additional pre-leased developments
and may acquire additional properties, which will initially be financed by
the Credit Facility and Line of Credit. Management intends to periodically
refinance short-term construction and acquisition financing with long-term
debt and/or equity. Upon completion of refinancing, the Company intends to
lower the ratio of total debt to market capitalization to 50% or less.
Nevertheless, the Company may operate with debt levels or ratios which are in
excess of 50% for extended periods of time prior to such refinancing.
Year 2000 Costs
The Company, like most owners of computer software, will be required to
modify certain portions of its software so that it will function properly in
the year 2000. Maintenance or modification costs will be expensed as
incurred, while the costs of any new software will be capitalized and
amortized over the software's useful life. Management believes these "year
2000" costs will be immaterial.
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.
18
<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
On May 11, 1998, the Company held its Annual Meeting of
Stockholders. The following were the results of the meeting:
The stockholders elected Edward Rosenberg and Ellis Wachs as
Directors until the annual meeting of stockholders in 2001 or until
a successor is elected and qualified.
The vote was as follows:
Edward Rosenberg
Votes cast for 4,076,376
Votes withheld 48,768
Abstained 221,169
Ellis Wachs
Votes cast for 4,068,331
Votes withheld 56,813
Abstained 221,169
19
<PAGE>
Agree Realty Corporation
Part II
- ------------------------------------------------------------------------------
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
20
<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: August 7, 1998
--------------
21
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<PERIOD-END> JUN-30-1998
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