UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 38-3148187
- ------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
31850 Northwestern Highway, Farmington Hills, Michigan 48334
- ------------------------------------------------------------------------------
(Address-of-principal-executive-offices) (Zip Code)
Registrant's telephone number, included area code: (248) 737-4190
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes No
|X| |_|
4,346,313 Shares of Common Stock, $.0001 par value, were outstanding as of
November 3, 1998.
<PAGE>
Agree Realty Corporation
Form 10-Q
Index
- -----------------------------------------------------------------------------
Part I: Financial Information Page
Item 1. Interim Consolidated Financial Statements 3
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997. 4-5
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997. 6
Consolidated Statements of Operations for the three months
ended September 30, 1998 and 1997. 7
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1998. 8
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997. 9
Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 12-20
Part II: Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE>
Agree Realty Corporation
Part I: Financial Information
- -----------------------------------------------------------------------------
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
Agree Realty Corporation
Consolidated Balance Sheets (Unaudited)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Real Estate Investments
Land $ 34,955,162 $ 29,952,532
Buildings 126,602,399 112,307,266
Property under development 926,722 488,651
------------- -------------
162,484,283 142,748,449
Less accumulated depreciation (22,216,629) (20,043,235)
------------- -------------
Net Real Estate Investments 140,267,654 122,705,214
Cash and Cash Equivalents 666,331 1,785,968
Accounts Receivable - Tenants 337,866 473,918
Restricted Asset - Cash Held in Escrow 326,848 276,564
Investments In and Advances To
Unconsolidated Entities 1,306,109 1,810,241
Unamortized Deferred Expenses
Financing costs 1,815,959 2,133,426
Leasing costs 265,865 236,151
Other Assets 1,246,405 1,070,022
------------- -------------
$ 146,233,037 $ 130,491,504
============= =============
</FN>
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
Agree Realty Corporation
Consolidated Balance Sheets (Unaudited)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Mortgages Payable $ 50,682,527 $ 50,954,026
Construction Loans 8,643,862 5,575,091
Note Payable 22,823,944 8,641,016
Dividends and Distributions Payable 2,309,136 2,284,792
Accrued Interest Payable 308,575 248,742
Accounts Payable
Operating 228,510 602,862
Capital expenditures 925,519 1,516,379
Tenant Deposits 53,740 51,240
------------- -------------
Total Liabilities 85,975,813 69,874,148
------------- -------------
Minority Interest 6,151,595 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 (8,768,793) (7,537,911)
------------- -------------
Total Stockholders' Equity 54,105,629 54,966,009
------------- -------------
$ 146,233,037 $ 130,491,504
============= =============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
Agree Realty Corporation
Consolidated Statements of Operations (Unaudited)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Rental income $12,791,131 $12,057,757
Operating cost reimbursement 1,553,175 1,409,491
Management fees and other 65,912 65,710
---------- ----------
Total Revenues 14,410,218 13,532,958
---------- ----------
Operating Expenses
Real estate taxes 1,108,647 959,230
Property operating expenses 717,187 728,549
Land lease payments 408,279 337,533
General and administrative 836,644 881,098
Depreciation and amortization 2,239,264 2,082,347
---------- ----------
Total Operating Expenses 5,310,021 4,988,757
---------- ----------
Income From Operations 9,100,197 8,544,201
---------- ----------
Other Income (Expense)
Interest expense, net (3,796,523) (4,385,104)
Development fee income 175,520 22,369
Equity in net income (loss) of unconsolidated entities (6,281) 4,109
Gain on land sales - 103,270
---------- ----------
Total Other Expense (3,627,284) (4,255,356)
---------- ----------
Income Before Minority Interest 5,472,913 4,288,845
Minority Interest (705,883) (680,439)
---------- ----------
Net Income $4,767,030 $3,608,406
========== ==========
Earnings Per Share $ 1.10 $ 1.04
========== ==========
Weighted Average Number of
Common Shares Outstanding 4,346,313 3,481,193
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
Agree Realty Corporation
Consolidated Statements of Operations (Unaudited)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Rental income $ 4,443,275 $ 4,029,933
Operating cost reimbursement 512,271 452,646
Management fees and other 18,850 19,631
----------- -----------
Total Revenues 4,974,396 4,502,210
----------- -----------
Operating Expenses
Real estate taxes 384,800 328,397
Property operating expenses 192,576 199,234
Land lease payments 136,915 114,533
General and administrative 289,265 288,450
Depreciation and amortization 773,318 695,892
----------- -----------
Total Operating Expenses 1,776,874 1,626,506
----------- -----------
Income From Operations 3,197,522 2,875,704
----------- -----------
Other Income (Expense)
Interest expense, net (1,357,798) (1,206,300)
Development fee income (expense) 116,489 (906)
Equity in net income (loss) of unconsolidated entities (1,640) 3,325
----------- -----------
Total Other Expense (1,242,949) (1,203,881)
----------- -----------
Income Before Minority Interest 1,954,573 1,671,823
Minority Interest (255,806) (214,580)
----------- -----------
Net Income $ 1,698,767 $ 1,457,243
=========== ===========
Earnings Per Share $ .39 $ .34
=========== ===========
Weighted Average Number of
Common Shares Outstanding 4,346,313 4,332,280
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
7
<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, 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 September 30, 1998 -- -- -- (5,997,912)
Net income for the period January 1, 1998 to
September 30, 1998 -- -- -- 4,767,030
--------- ----- ----------- -----------
Balance, September 30, 1998 4,346,313 $ 435 $62,873,987 $(8,768,793)
--------- ----- ----------- -----------
<FN>
See accompanying notes to consolidated financial statements.
8
<PAGE>
Agree Realty Corporation
Consolidated Statements of Cash Flows (Unaudited)
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 4,767,030 $ 3,608,406
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 2,176,576 2,027,901
Amortization 387,580 359,784
Equity in net (income) loss of unconsolidated entities 6,281 (4,109)
Minority interests 705,883 680,439
Gain on land sales -- (103,270)
Decrease in accounts receivable 136,052 400,324
Decrease (increase) in other assets 29,481 (83,535)
Decrease in accounts payable (374,352) (467,260)
Increase (decrease) in accrued interest 59,833 (112,251)
Increase in tenant deposits 1,667 7,963
------------ ------------
Net Cash Provided By Operating Activities 7,896,031 6,314,392
------------ ------------
Cash Flows From Investing Activities
Acquisition of real estate investments
(including capitalized interest of $340,671
in 1998 and $46,221 in 1997) (10,696,266) (3,461,445)
Investments in and advances to unconsolidated entities 489,417 121,447
Proceeds from sale of land -- 148,270
------------ ------------
Cash Flows Used In Investing Activities (10,206,849) (3,191,728)
------------ ------------
Cash Flows From Financing Activities
Line-of-credit proceeds 14,182,928 14,499,452
Dividends and limited partners' distributions paid (6,870,322) (5,208,328)
Payments of mortgages payable (6,447,710) (2,623,421)
Construction loan proceeds 3,068,771 --
Payment of related party payables (1,757,359) --
Payment of note payble (450,000) --
Net repayment of capital expenditure payables (412,880) (413,421)
Increase in escrow deposits (50,284) (46,752)
Redemption of restricted stock (35,328) --
Payments of leasing costs (28,635) (29,793)
Payments for financing costs (8,000) (19,555)
Proceeds from issuance of common stock -- 31,897,641
Payment on line-of-credit -- (31,250,375)
Payment of construction loans -- (8,915,530)
------------ ------------
Net Cash Provided By (Used In) Financing Activities 1,191,181 (2,110,082)
============ ============
</TABLE>
9
<PAGE>
Agree Realty Corporation
Consolidated Statements of Cash Flows (Unaudited)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net Increase (Decrease) In Cash and Cash Equivalents (1,119,637) 1,012,582
Cash and Cash Equivalents, beginning of period 1,785,968 294,389
----------- -----------
Cash and Cash Equivalents, end of period $ 666,331 $ 1,306,971
=========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest (net of amounts capitalized) $ 3,457,367 $ 4,235,205
=========== ===========
Supplemental Disclosure of Non-Cash Transactions
Dividends and limited partners' distributions
declared and unpaid $ 2,309,136 $ 2,286,310
Operating partnership units issued for purchase
of real estate $ 691,119 --
Shares issued under Stock Incentive Plan $ 405,830 $ 618,913
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
10
<PAGE>
Agree Realty Corporation
Notes to Consolidated Financial Statements
(Unaudited)
- -----------------------------------------------------------------------------
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 nine months ended September 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.
11
<PAGE>
Agree Realty Corporation
Part I
- -----------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company was established to continue to operate and expand the retail
property business of its Predecessors. The Company commenced its operations
on April 22, 1994 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 86.58% interest as of
September 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 Nine Months Ended September 30, 1998 to Nine Months Ended
September 30, 1997
Rental income increased $733,000, or 6%, to $12,791,000 in 1998, compared to
$12,058,000 in 1997. The increase is primarily the result of the development
of four properties and the acquisition of one property in 1997 and 1998.
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 $144,000, or 10%, to
$1,553,000 in 1998, compared to $1,409,000 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.
12
<PAGE>
Agree Realty Corporation
Part I
- -----------------------------------------------------------------------------
Management fees and other income remained constant at $66,000 in both 1998
and 1997.
Real estate taxes increased $150,000, or 16%, to $1,109,000 in 1998 versus
$959,000 in 1997. The increase is the result of the addition of new
properties.
Property operating expenses (shopping center maintenance, insurance and
utilities) decreased $12,000, or 2%, to $717,000 in 1998 versus $729,000 in
1997. The decrease was the result of decreased snow removal costs of $35,000;
an increase in shopping center maintenance costs of $34,000; a increase in
utility costs of $28,000 and a decrease in insurance costs of $39,000 in 1998
versus 1997.
Land lease payments increased $70,000 to $408,000 in 1998 versus $338,000 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 $44,000, or 5%, to $837,000
in 1998 versus $881,000 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 $31,000. General and administrative expenses as a percentage of
rental income decreased from 7.3% for 1997 to 6.5% for 1998.
Depreciation and amortization increased $157,000, or 8%, to $2,239,000 in
1998 versus $2,082,000 in 1997. This increase was the result of the
completion of four new properties and the acquisition of one property.
Interest expense decreased $588,000, or 13%, to $3,797,000 in 1998, from
$4,385,000 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 sale gains in 1998.
Development fee income increased $153,000, to $175,000 in 1998, from $22,000
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.
13
<PAGE>
Agree Realty Corporation
Part I
- -----------------------------------------------------------------------------
Equity in net income (loss) of unconsolidated entities decreased $10,000 to a
loss of ($6,000) in 1998 versus income of $4,000 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 $1,184,000 as a
result of the foregoing factors.
Comparison of Three Months Ended September 30, 1998 to Three Months Ended
September 30, 1997
Rental income increased $413,000, or 10%, to $4,443,000 in 1998, compared to
$4,030,000 in 1997. The increase is primarily the result of the development
of four properties and the acquisition of one property in 1997 and 1998.
Operating cost reimbursements increased $59,000, or 13%, to $512,000 in 1998,
compared to $453,000 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 $19,000 in
1998 and $20,000 in 1997.
Real estate taxes increased $57,000, or 17%, to $385,000 in 1998 versus
$328,000 in 1997. The increase is the result of the addition of new
properties.
Property operating expense (shopping center maintenance, insurance and
utilities) decreased $6,000, or 3% to $193,000 in 1998 versus $199,000 in
1997. The decrease was the result of decreased snow removal costs of $1,000;
a decrease in shopping center maintenance costs of $11,000; an increase in
utility costs of $15,000 and a decrease in insurance costs of $9,000 in 1998
versus 1997.
Land lease payments increased $22,000 to $137,000 in 1998 versus $115,000 in
1997 as a result of the acquisition of a ground lease for the free standing
Property in Lawrence, Kansas.
General and administrative expenses remained relatively constant at $289,000
in 1998 versus $288,000 in 1997. General and administrative expenses as a
percentage of rental income decreased from 7.2% for 1997 to 6.5% for 1998.
14
<PAGE>
Agree Realty Corporation
Part I
- -----------------------------------------------------------------------------
Depreciation and amortization increased $77,000, or 11%, to $773,000 in 1998
versus $696,000 in 1997. This increase was the result of the completion of
four new properties and the acquisition of one property in 1997 and 1998.
Interest expense increased $152,000, or 13%, to $1,358,000 in 1998, from
$1,206,000 in 1997. This increase was the result of the completion of four
new properties and the acquisition of one property in 1997 and 1998.
Development fee income increased $117,000, to $116,000 in 1998, from an
expense of $1,000 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.
Equity in net income (loss) of unconsolidated entities decreased $5,000 to a
loss of ($2,000) in 1998 versus income of $3,000 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 $283,000 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.
15
<PAGE>
Agree Realty Corporation
Part I
- -----------------------------------------------------------------------------
The following tables illustrate the calculation of FFO for the nine months
and three months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Net income before minority interest $ 5,472,913 $ 4,288,845
Depreciation of real estate assets 2,171,229 2,008,722
Amortization of leasing costs 54,253 62,881
Amortization of stock awards 117,000 97,425
Depreciation of real estate assets held in
unconsolidated entities 525,660 515,765
Gain on sale of assets -- (103,270)
Development fee income (175,520) (22,369)
----------- -----------
Funds from Operations $ 8,165,535 $ 6,847,999
=========== ===========
Funds from Operations Per Share $ 1.64 $ 1.66
=========== ===========
Weighted Average Shares and OP Units Outstanding 4,989,877 4,119,152
=========== ===========
</TABLE>
FFO increased $1,318,000, or 19%, to $8,166,000. The increase in FFO is
primarily the result of the reduction in interest expense as a result of the
1997 Offering and the development of four properties and the acquisition of
one property.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Net income before minority interest $ 1,954,573 $ 1,671,823
Depreciation of real estate assets 752,345 670,273
Amortization of leasing costs 16,968 21,656
Amortization of stock awards 39,000 32,475
Depreciation of real estate assets held in
unconsolidated entities 175,220 171,922
Development fee (income) expense (116,489) 906
----------- -----------
Funds from Operations $ 2,821,617 $ 2,569,055
=========== ===========
Funds from Operations Per Share $ .56 $ .52
=========== ===========
Weighted Average Shares and OP Units Outstanding 5,000,906 4,970,239
=========== ===========
</TABLE>
FFO increased $253,000, or 10%, to $2,822,000. The increase in FFO is
primarily the result of the development of four properties and the
acquisition of one property.
16
<PAGE>
Agree Realty Corporation
Part I
- -----------------------------------------------------------------------------
Forward-Looking Statements
Management has included herein certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. When used,
statements which are not historical in nature including the words
"anticipate," "estimate," "should," "expect," "believe," "intend" and similar
expressions are intended to identify forward-looking statements. Such
statements are, by their nature, subject to certain risks and uncertainties.
Risks and other factors that might cause such a difference include, but are
not limited to, the effect of economic and market conditions; risks that the
Company's acquisition and development projects will fail to perform as
expected; financing risks, such as the inability to obtain debt or equity
financing on favorable terms; the level and volatility of interest rates;
loss or bankruptcy of one or more of the Company's major retail tenants; and
failure of the Company's properties to generate additional income to offset
increases in operating expenses.
Liquidity and Capital Resources
The Company's principal demands for liquidity are distributions to its
stockholders, debt repayment, development of new properties and future
property acquisitions.
During the quarter ended September 30, 1998, the Company declared a quarterly
dividend of $.46 per share. The dividend was paid on October 15, 1998 to
holders of record on September 30, 1998.
As of September 30, 1998, the Company had total mortgage indebtedness of
$50,682,527 with a weighted average interest rate of 7.54%. Future scheduled
annual maturities of mortgages payable for the years ending September 30 are
as follows: 1999 - $8,245,831; 2000 - $951,659; 2001 - $1,027,078; 2002 -
$1,108,655; 2003 - $1,196,906. 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 September 30, 1998, $22,073,944 was
outstanding under the Credit Facility.
17
<PAGE>
Agree Realty Corporation
Part I
- -----------------------------------------------------------------------------
The Company also has in place a $5 million line of credit (the "Line of
Credit"), which matures October 19, 1999, and which the Company expects to
renew for an additional 12-month period. The Line of Credit bears interest at
the bank's prime rate less 50 basis points or 175 basis points in excess of
the one-month LIBOR rate, at the option of the Company. The purpose of the
Line of Credit is to provide working capital to the Company and fund land
options and start-up costs associated with new projects. As of September 30,
1998, $750,000 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 September 30, 1998, $6,913,372 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 September 30, 1998,
$1,730,490 was outstanding under this arrangement.
During the quarter ended September 30, 1998, the Company completed the
development of two properties that added 39,000 square feet to the portfolio.
One property is located in Tulsa, Oklahoma and contains 25,000 square feet.
The other property is located in Pontiac, Michigan and contains 14,000 square
feet.
On August 18, 1998, the Company purchased, through its operating partnership,
the Mt. Pleasant Shopping Center located in Mt. Pleasant, Michigan. This
property is anchored by national tenants and contains 241,458 square feet of
gross leasable area and is 100% leased and occupied. An independent appraisal
determined the purchase price of $9,076,000. Payment consisted of $8,385,000
in debt assumption, with the balance paid through the issuance of 35,588
Operating Partnership units. The sellers are members of the Agree
organization and are existing limited partners in the operating partnership.
The Company has managed this property since April 1994, the date of its
initial public offering.
18
<PAGE>
Agree Realty Corporation
Part I
- -----------------------------------------------------------------------------
The Company has two development projects under construction that will add an
additional 28,000 square feet of retail space to the Company's portfolio. The
projects are expected to be completed during the first quarter of 1999.
Additional Company funding required for this project is estimated to be
$3,200,000 and will come from 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.
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 Compliance
The Company's information system consists of a three station Windows NT
network system. All accounting and property management functions are
processed via Timberline Software, a nationally recognized provider of
software to the real estate industry. The Company is currently assessing its
tenants, vendors, banks and others with whom it does business to determine if
their failure to be Year 2000 compliant would have a material adverse effect
upon the Company. To date, nothing has come to the attention of management
that leads it to conclude that the likelihood of such adverse effect
reasonably exists.
The Company believes its information systems are fully compliant, however it
will obtain verification of Year 2000 compliance. Verification will be
obtained through an independent Year 2000 review of the Company's information
system. The cost for this review is expected to be less than $5,000.
19
<PAGE>
Agree Realty Corporation
Part I
- -----------------------------------------------------------------------------
In the event that any of the Company's significant tenants or suppliers do
not successfully and timely achieve year 2000 compliance, the Company's
operations may be affected. The Company does not anticipate any material
impact on its results from operations or its financial condition as a result
of any Year 2000 compliance issures.
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.
20
<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
(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 Second amendment to amended and restated $5 million
business loan agreement dated October 19, 1998 between
Agree Limited Partnership and Michigan National
Bank.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
21
<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: November 3, 1998
22
Exhibit 10
SECOND AMENDMENT TO
AMENDED AND RESTATED BUSINESS LOAN AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED BUSINESS LOAN
AGREEMENT ("Second Amendment"), made October 19, 1998, by and between AGREE
LIMITED PARTNERSHIP, a Delaware limited partnership, whose address is 31850
Northwestern Highway, Farmington Hills, Michigan 48334 (the "Borrower") and
MICHIGAN NATIONAL BANK, a national banking association, whose address is
27777 Inkster Road (10-02), Farmington Hills, Michigan 48333-9065 (the
"Bank"). Capitalized terms used but not defined in this Second Amendment
shall have the meaning assigned to such terms in the Restated Agreement (as
defined below).
RECITALS
WHEREAS, Borrower and Bank entered into an Amended and Restated
Business Loan Agreement dated September 30, 1996, but effective September 21,
1996, as amended by First Amendment thereto ("Restated Agreement"), whereby
Bank agreed to make a $5,000,000 Line of Credit Loan ("Loan") available to
Borrower;
WHEREAS, the Loan has matured; and
WHEREAS, Borrower has requested Bank to extend the maturity date
of the Loan and modify and amend certain terms of the Restated Loan Agreement
to evidence the extension of the Loan and Bank has agreed to do so upon the
terms and condition of this Second Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of and in reliance upon the
foregoing recitals of fact and the agreements among the parties set forth in
this Agreement, the Restated Agreement is hereby amended as follows:
A. AMENDMENT OF RESTATED AGREEMENT.
1. Amendment of Section I. The INTEREST RATE, MATURITY DATE AND
LOAN DATE set forth in Section I of the Restated Agreement are changed to
read "MNB Prime less 50b.p. (.5%) or 175 b.p. (1.75%) in excess of 1-month
LIBOR", "October 19, 1999" and "October 19, 1998", respectively.
2. Amendment of Section IV.A. Section IV.A of the Restated
Agreement is restated in its entirety to read as follows:
"Total Debt. Permit the Total Interest Bearing Funded
Debt, including the Indebtedness, to exceed seventy (70%) percent
of the Total Market Capital."
<PAGE>
3. Amendment of Section XI. Section XI of the Restated Agreement
is amended by replacing the definition of Total Interest Bearing Funded Debt
with the following:
"Total Interest Bearing Funded Debt" shall mean, as of
any date, the outstanding principal amount of interest bearing
indebtedness for borrowed money of Borrower and Guarantor."
4. Amendment of Section VII.A(1) of Addendum. Section VII.A(1) of
the Addendum to Restated Agreement is restated in its entirety to read as
follows:
"For a Prime Advance at a rate equal to the Prime Rate
less One-Half (.5%) Percent."
5. Amendment of Section VII.A.(2) of Addendum. Section VII.A.(1)
of the Addendum to the Restated Agreement is restated in its entirety to read
as follows:
"For a LIBOR Advance at a rate equal to the LIBOR
Interest Rate plus One and Three-Quarters (1.75%) Percent."
6. Amendment of Section VII.C.(2) of Addendum. Section VII.C.(2)
of the Addendum to the Restated Agreement is restated in its entirety to read
as follows:
"For each LIBOR Advance at a rate equal to the LIBOR
Interest Rate plus Three and Three-Quarters (3.75%) Percent from
the time of default in payment of principal until the end of the
then current Interest Period therefore, and thereafter at a rate
equal to the Prime Rate plus One and One-Half (1.50%) Percent."
B. REPRESENTATIONS AND WARRANTIES.
Borrower represents, warrants, covenants and agrees that as of the
date hereof, after giving effect to the consummation of the transactions
contemplated by this Second Amendment:
1. Authority. Each of Borrower and Guarantor, as applicable, has
full power, authority and legal right to enter into the Second Amendment and
the Note (as defined below). The execution, delivery and performance by
Borrower and Guarantor of the applicable Second Amendment documents:
(a) have been duly authorized by all necessary
partnership or corporate action, as applicable, of Borrower and
Guarantor;
(b) do not and will not, by lapse of time, the giving of
notice or otherwise, contravene the terms of Borrower's or
Guarantor's respective
<PAGE>
partnership agreement or certificate, articles of incorporation or
bylaws or of any indenture, agreement or undertaking to which
Borrower or Guarantor is a party or by which Borrower or Guarantor
is or any of their respective property are bound;
(c) do not and will not require any governmental
consent, registration or approval;
(d) do not and will not, by lapse of time, the giving of
notice or otherwise, contravene any material contractual or
governmental restriction to which Borrower or Guarantor, or any of
their respective property may be subject; and
(e) do not and will not, except as contemplated herein,
result in the imposition of any lien, charge, security interest or
encumbrance upon any property of Borrower or Guarantor under any
existing indenture, mortgage, deed of trust, loan or credit
agreement or other material agreement or instrument to which
Borrower or Guarantor is a party or by which Borrower or Guarantor
or any of their respective property may be bound or affected.
2. Binding Effect. Each of the Second Amendment documents is the
legal, valid and binding obligation of Borrower and Guarantor, as
appropriate, and is enforceable against Borrower and Guarantor, as
appropriate, in accordance with its terms, except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally and
by equitable principles (whether or not any action to enforce such document
is brought at law or in equity).
3. Agreement Representations and Warranties. The warranties and
representations of Borrower contained in the Restated Agreement and the
Related Documents are true, correct and complete on and as of the Effective
Date and the date hereof, to the same extent as though made on and as of that
date, and taking into account any revised Exhibits attached to this Second
Amendment.
4. Default. Upon closing of the Second Amendment transaction, no
Event of Default or Default has occurred and is continuing.
C. CONDITIONS TO CLOSING.
In addition to those conditions set forth elsewhere in the
Agreement, the obligations of Bank under this Second Amendment are
conditioned upon (a) the fulfillment, in a manner satisfactory to Bank on or
before the date hereof, of each of the following terms and conditions or (b)
the delivery on or before the date hereof, duly executed, in form and
substance satisfactory to Bank (and their counsel) of the following
documents, as the case may be:
<PAGE>
1. Second Amendment Documents.
(a) Second Amendment. Borrower and Guarantor shall have
executed and delivered this Second Amendment to Bank.
(b) Fourth Amended and Restated Note. Borrower shall
have executed and delivered the Fourth Amended and Restated Note ("Note").
(c) Other Agreements. Borrower shall have executed and
delivered to Bank such other agreements and documents in connection with the
Loan as Bank may request in form and substance satisfactory to Bank and its
counsel.
2. Organizational Documents. Bank shall have received (i) with
respect to Guarantor, the certificate of incorporation of Guarantor, as
amended, modified or supplemented to the date hereof, certified to be true,
correct and complete by the appropriate Secretary of State, together with a
good standing certificate from such Secretary of State, and (ii) with respect
to Borrower, the agreement of limited partnership of Borrower, as amended,
modified or supplemented to the date hereof, certified to be true, correct
and complete by a general partner of Borrower, together with a copy of the
certificate of limited partnership of Borrower, as amended, modified or
supplemented to the date hereof, certified to be true, correct and complete
by the appropriate Secretary of State.
3. Certified Resolutions. Bank shall have received a certificate
of the secretary or assistant secretary of Guarantor and dated the date
hereof, certifying (i) the names and true signatures of the incumbent
officers of Guarantor authorized to sign the applicable Second Amendment
documents and (ii) the resolutions of Guarantor's board of directors
approving and authorizing the execution, delivery and performance of all
Second Amendment documents executed by Guarantor.
4. Additional Matters. Bank shall have received such other
certificates, opinions, documents and instruments relating to the Second
Amendment transaction as may have been reasonably requested by Bank, and all
corporate and other proceedings and all other documents and all legal matters
in connection with the Second Amendment transaction shall be satisfactory in
form and substance to Bank.
D. AMENDMENT AND AFFIRMATION OF LOAN DOCUMENTS.
1. Affirmation of Loan Documents. Borrower and Guarantor
acknowledge and affirm that (i) the Restated Agreement, as amended by the
Second Amendment, the Mortgages, the Assignments and the Guaranty are
enforceable against the Borrower and Guarantor, as applicable, and remain in
full force and effect and shall be unamended, unchanged and unmodified,
except as specifically set forth in the Second Amendment; and (ii) the
Collateral and the Guaranty shall continue to secure and/or guaranty the
repayment of the Obligations, whether or not the Obligations were
contemplated by
<PAGE>
Borrower, Guarantor or Bank at the time of the execution of the Restated
Agreement and the Related Documents, as amended hereby.
E. MISCELLANEOUS.
1. Section Titles. The section titles contained in this Second
Amendment shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreement between the parties.
2. Parties. Whenever in this Second Amendment reference is made to
any of the parties hereto, such reference shall be deemed to include,
wherever applicable, a reference to the successors and assigns of the
Borrower, Guarantor and Bank.
3. References. Any reference to the Restated Agreement contained
in any notice, request, certificate, or other document executed concurrently
with or after the execution and delivery of this Second Amendment shall be
deemed to include this Second Amendment unless the context shall otherwise
require.
4. Continued Effectiveness. Notwithstanding anything contained
herein, the terms of this Second Amendment are not intended to and do not
serve to effect a novation as to the Restated Agreement. The parties hereto
expressly do not intend to extinguish the Restated Agreement; instead, it is
the express intention of the parties hereto to reaffirm Borrower's
Obligations created under the Restated Agreement, as amended by this Second
Amendment.
5. Counterparts. This Second Amendment may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument.
6. Release of Claims; Limitation of Liability. In consideration of
Bank entering into this Second Amendment, Borrower and Guarantor do each
hereby release and discharge Bank of and from any and all claims, harm,
injury, and damage of any and every kind, known or unknown, legal or
equitable, which Borrower or Guarantor have against Bank through the date of
this Second Amendment. Borrower and Guarantor confirm to Bank that they have
reviewed the effect of this release with competent legal counsel of their
choice, or have been afforded the opportunity to do so, prior to execution of
this Second Amendment and each acknowledge and agree that Bank is relying
upon this release in entering into this Second Amendment. No claim may be
made by Borrower, Guarantor, or any other Person against Bank or the
affiliates, directors, officers, employees, attorneys or Bank of any of such
Persons for any special, indirect, consequential or punitive damages in
respect of any claim for breach of contract or any other theory of liability
arising out of or related to the transactions contemplated by the Agreement
or any other transactions, or any act, omission or event occurring in
connection therewith; and Borrower and Guarantor
<PAGE>
hereby waive, release and agree not to sue upon any claim for any such
damages, whether or not accrued and whether or not known or suspected to
exist in its favor.
7. Entire Agreement. This Second Amendment, the exhibits attached
hereto, and the other Second Amendment documents represent the entire
agreement between the parties hereto relating to the Second Amendment and may
not be altered or modified in any respect, except upon the execution by the
parties hereto of a written document or instrument so providing.
IN WITNESS WHEREOF, this Second Amendment has been duly executed
as of the day and year first above written.
AGREE LIMITED PARTNERSHIP,
a Delaware limited partnership
By: AGREE REALTY CORPORATION,
its sole general partner, a Maryland
corporation
By: /s/ Richard Agree
-------------------------------
Name: Richard Agree
Title: President
MICHIGAN NATIONAL BANK,
a national banking association
By:
-------------------------------
Name: Sheila E. Maples
Title: Vice President
AGREEMENT OF GUARANTOR
By executing this Second Amendment the undersigned "Guarantor"
agrees that the Indebtedness of Borrower is and, notwithstanding this Second
Amendment, will continue to be guaranteed to Bank in accordance with the
terms of the Amended and Restated Guaranty made September 30, 1996
("Guaranty") and executed and delivered by Guarantor to Bank, without limit.
In addition, Guarantor: (1) acknowledges and agrees that the Guarantor has
completely read and understands this Second Amendment; (2) consents to all of
the provisions of this Second Amendment relating to Borrower; (3)
acknowledges and agrees that the Guaranty continues in full force and effect;
(4) acknowledges receipt of good and lawful consideration for execution of
the Guaranty and this Second Amendment; (5) agrees promptly to furnish such
Financial Statements to Bank concerning the Guarantor as Bank shall
reasonably request; (6) agrees to all of those portions of this Second
Amendment which apply to Guarantor; (7) acknowledges and agrees that this
Second Amendment has
<PAGE>
been freely executed without duress and after an opportunity was provided to
Guarantor for review of this Second Amendment by competent legal counsel of
Guarantor's choice; and (8) acknowledges that the Bank has provided Guarantor
with a copy of this Second Amendment and such other Related Documents as
Guarantor has requested.
GUARANTOR:
AGREE REALTY CORPORATION,
a Maryland corporation
By: /s/ Richard A. Agree
------------------------------
Richard A. Agree
Its: President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> $ 666,331
<SECURITIES> 0
<RECEIVABLES> 337,866
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 162,484,283
<DEPRECIATION> 22,216,629
<TOTAL-ASSETS> 146,233,037
<CURRENT-LIABILITIES> 0
<BONDS> 82,150,333
<COMMON> 435
0
0
<OTHER-SE> 54,105,629
<TOTAL-LIABILITY-AND-EQUITY> 146,233,037
<SALES> 14,410,218
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 5,310,021
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,796,523
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,767,030
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
</TABLE>
