¨
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
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)
|
Yes x
|
No ¨
|
Yes ¨
|
No ¨
|
Large
Accelerated Filer
¨
|
Accelerated
Filer
x
|
Non-accelerated
Filer ¨
|
Smaller
reporting
company ¨
|
(Do
not check if a smaller reporting
company)
|
Yes ¨
|
No x
|
Part I:
|
Financial Information
|
Page
|
||
Item
1.
|
Interim
Consolidated Financial Statements
|
|||
Consolidated
Balance Sheets as of September 30, 2009 (Unaudited) and December 31,
2008
|
1-2
|
|||
Consolidated
Statements of Income (Unaudited) for the three months ended September 30,
2009 and 2008
|
3
|
|||
Consolidated
Statements of Income (Unaudited) for the nine months ended September 30,
2009 and 2008
|
4
|
|||
Consolidated
Statements of Stockholders’ Equity (Unaudited) for the nine months ended
September 30, 2009
|
5
|
|||
Consolidated
Statements of Cash Flows (Unaudited) for the nine months ended September
30, 2009 and 2008
|
6-7
|
|||
Notes
to Consolidated Financial Statements (Unaudited)
|
8-12
|
|||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13-19
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
20
|
||
Item
4.
|
Controls
and Procedures
|
20-21
|
||
Part
II:
|
Other
Information
|
|||
Item
1.
|
Legal
Proceedings
|
21
|
||
Item
1A.
|
Risk
Factors
|
21-34
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
34
|
||
Item
3.
|
Defaults
Upon Senior Securities
|
34
|
||
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
34
|
||
Item
5
|
Other
Information
|
34
|
||
Item
6.
|
Exhibits
|
35
|
||
Signatures
|
|
|
36
|
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Real
Estate Investments
|
||||||||
Land
|
$ | 93,816,304 | $ | 87,309,289 | ||||
Buildings
|
220,448,792 | 210,650,491 | ||||||
Property
under development
|
5,571,294 | 13,383,102 | ||||||
319,836,390 | 311,342,882 | |||||||
Less
accumulated depreciation
|
(62,643,160 | ) | (58,502,384 | ) | ||||
Net
Real Estate Investments
|
257,193,230 | 252,840,498 | ||||||
Cash
and Cash Equivalents
|
361,436 | 668,677 | ||||||
Accounts Receivable - Tenants,
net of allowance of $65,000 and $195,000 for possible losses at
September 30, 2009 and December 31, 2008
|
1,029,113 | 964,802 | ||||||
Unamortized
Deferred Expenses
|
||||||||
Financing
costs, net of accumulated amortization of $5,046,357 and $4,838,098 at
September 30, 2009 and December 31, 2008
|
949,206 | 951,745 | ||||||
Leasing
costs, net of accumulated amortization of $824,665 and $775,450 at
September 30, 2009 and December 31, 2008
|
550,925 | 484,781 | ||||||
Other
Assets
|
855,675 | 986,332 | ||||||
$ | 260,939,585 | $ | 256,896,835 |
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Liabilities
and Stockholders’ Equity
|
||||||||
Mortgages
Payable
|
$ | 65,098,472 | $ | 67,623,697 | ||||
Notes
Payable
|
39,950,000 | 32,945,000 | ||||||
Dividends
and Distributions Payable
|
4,348,153 | 4,233,232 | ||||||
Deferred
Revenue
|
10,207,692 | 10,724,854 | ||||||
Accrued
Interest Payable
|
232,053 | 500,796 | ||||||
Accounts
Payable
|
||||||||
Capital
expenditures
|
270,100 | 850,225 | ||||||
Operating
|
640,133 | 1,261,810 | ||||||
Interest
Rate Swap
|
104,868 | — | ||||||
Deferred
Income Taxes
|
705,000 | 705,000 | ||||||
Tenant Deposits
|
86,525 | 70,077 | ||||||
Total Liabilities
|
121,642,996 | 118,914,691 | ||||||
Stockholders’
Equity
|
||||||||
Common
stock, $0.0001 par value; 13,500,000 shares authorized, 8,194,074 and
7,863,930 shares issued and outstanding
|
819 | 786 | ||||||
Excess
stock, $0.0001 par value, 6,500,000 shares authorized, 0 shares issued and
outstanding
|
— | — | ||||||
Series
A junior participating preferred stock, $0.0001 par value, 150,000 shares
authorized, 0 shares issued and outstanding
|
— | — | ||||||
Additional
paid-in capital
|
147,172,344 | 143,892,158 | ||||||
Deficit
|
(10,830,403 | ) | (11,257,541 | ) | ||||
Accumulated other comprehensive income
(loss)
|
(98,901 | ) | — | |||||
Total
stockholders’ equity—Agree Realty Corporation
|
136,243,859 | 132,635,403 | ||||||
Non-controlling interest
|
3,052,730 | 5,346,741 | ||||||
Total Stockholders’ Equity
|
139,296,589 | 137,982,144 | ||||||
$ | 260,939,585 | $ | 256,896,835 |
Three Months Ended
|
Three Months Ended
|
|||||||
September 30, 2009
|
September 30, 2008
|
|||||||
Revenues
|
||||||||
Minimum
rents
|
$ | 8,596,045 | $ | 8,339,111 | ||||
Operating
cost reimbursements
|
597,632 | 690,265 | ||||||
Other income
|
7,703 | 25 | ||||||
Total Revenues
|
9,201,380 | 9,029,401 | ||||||
Operating
Expenses
|
||||||||
Real
estate taxes
|
472,083 | 466,443 | ||||||
Property
operating expenses
|
410,088 | 393,613 | ||||||
Land
lease payments
|
214,800 | 205,391 | ||||||
General
and administrative
|
1,083,163 | 1,038,759 | ||||||
Depreciation and
amortization
|
1,427,464 | 1,366,011 | ||||||
Total Operating Expenses
|
3,607,598 | 3,470,217 | ||||||
Income
From Operations
|
5,593,782 | 5,559,184 | ||||||
Other
Income (Expense)
|
||||||||
Development
fee income
|
158,430 | - | ||||||
Interest expense, net
|
(1,145,605 | ) | (1,377,472 | ) | ||||
Total
Other Income (Expense)
|
(987,175 | ) | (1,377,472 | ) | ||||
Net
Income
|
4,606,607 | 4,181,712 | ||||||
Less Net Income Attributable to Non-Controlling
Interest
|
(189,412 | ) | (332,928 | ) | ||||
Net Income Attributable to Agree Realty
Corporation
|
$ | 4,417,195 | $ | 3,848,784 | ||||
Earnings Per Share – Basic
|
$ | 0.55 | $ | 0.50 | ||||
Earnings Per Share –
Dilutive
|
$ | 0.55 | $ | 0.50 | ||||
Dividend Declared Per Share
|
$ | 0.51 | $ | 0.50 | ||||
Weighted Average Number of Common Shares
Outstanding – Basic
|
8,040,461 | 7,677,790 | ||||||
Weighted Average Number of Common Shares
Outstanding – Dilutive
|
8,063,717 | 7,690,538 |
Nine Months Ended
|
Nine Months Ended
|
|||||||
September 30, 2009
|
September 30, 2008
|
|||||||
Revenues
|
||||||||
Minimum
rents
|
$ | 25,537,712 | $ | 24,450,878 | ||||
Percentage
rents
|
7,777 | 4,758 | ||||||
Operating
cost reimbursements
|
1,998,940 | 2,127,347 | ||||||
Other income
|
20,236 | 3,274 | ||||||
Total Revenues
|
27,564,665 | 26,586,257 | ||||||
Operating
Expenses
|
||||||||
Real
estate taxes
|
1,439,544 | 1,382,620 | ||||||
Property
operating expenses
|
1,201,066 | 1,347,259 | ||||||
Land
lease payments
|
644,400 | 544,991 | ||||||
General
and administrative
|
3,332,881 | 3,264,609 | ||||||
Depreciation and
amortization
|
4,241,822 | 4,008,729 | ||||||
Total Operating Expenses
|
10,859,713 | 10,548,208 | ||||||
Income
From Operations
|
16,704,952 | 16,038,049 | ||||||
Other
Income (Expense)
|
||||||||
Development
fee income
|
158,430 | - | ||||||
Interest expense, net
|
(3,432,020 | ) | (3,876,525 | ) | ||||
Total Other Income
(Expense)
|
(3,273,590 | ) | (3,876,525 | ) | ||||
Net
Income
|
13,431,362 | 12,161,524 | ||||||
Less Net Income Attributable to Non-Controlling
Interest
|
(763,944 | ) | (967,330 | ) | ||||
Net Income Attributable to Agree Realty
Corporation
|
$ | 12,667,418 | $ | 11,194,194 | ||||
Earnings Per Share – Basic
|
$ | 1.60 | $ | 1.46 | ||||
Earnings Per Share –
Dilutive
|
$ | 1.60 | $ | 1.46 | ||||
Dividend Declared Per Share
|
$ | 1.51 | $ | 1.50 | ||||
Weighted Average Number of Common Shares
Outstanding – Basic
|
7,897,899 | 7,676,787 | ||||||
Weighted Average Number of Common Shares
Outstanding – Dilutive
|
7,909,132 | 7,690,096 |
Additional
|
Accumulated
Other
|
|||||||||||||||||||||||
Common Stock
|
Paid-In
|
Non-Controlling
|
Comprehensive
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Interest
|
Deficit
|
Income (loss)
|
|||||||||||||||||||
Balance,
January 1, 2009
|
7,863,930 | $ | 786 | $ | 143,892,158 | $ | 5,346,741 | $ | (11,257,541 | ) | $ | — | ||||||||||||
Issuance
of shares under the Equity Incentive Plan
|
72,350 | 7 | — | — | — | — | ||||||||||||||||||
Conversion
of OP Units
|
257,794 | 26 | 2,398,186 | (2,398,186 | ) | — | — | |||||||||||||||||
Vesting
of restricted stock
|
— | — | 882,000 | — | — | — | ||||||||||||||||||
Dividends
and distributions declared for the period January 1, 2009 to September 30,
2009
|
— | — | — | (653,802 | ) | (12,240,280 | ) | — | ||||||||||||||||
Other
comprehensive loss
|
— | — | — | (5,967 | ) | — | (98,901 | ) | ||||||||||||||||
Net
income for the period January 1, 2009 to September 30,
2009
|
— | — | — | 763,944 | 12,667,418 | — | ||||||||||||||||||
Balance, September
30, 2009
|
8,194,074 | $ | 819 | $ | 147,172,344 | $ | 3,052,730 | $ | (10,830,403 | ) | $ | (98,901 | ) |
Nine Months Ended
|
Nine Months Ended
|
|||||||
September 30, 2009
|
September 30, 2008
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
income
|
$ | 13,431,362 | $ | 12,161,524 | ||||
Adjustments
to reconcile net income to net cash provided by operating
Activities
|
||||||||
Depreciation
|
4,192,607 | 3,960,514 | ||||||
Amortization
|
257,474 | 177,215 | ||||||
Stock-based
compensation
|
882,000 | 855,737 | ||||||
(Increase)
decrease in accounts receivable
|
(64,311 | ) | 17,671 | |||||
Decrease
in other assets
|
78,826 | 137,342 | ||||||
Decrease
in accounts payable
|
(621,677 | ) | (1,142,753 | ) | ||||
Decrease
in deferred revenue
|
(517,163 | ) | (517,164 | ) | ||||
(Decrease)
increase in accrued interest
|
(268,743 | ) | (33,966 | ) | ||||
Increase in tenant deposits
|
16,448 | 5,991 | ||||||
Net Cash Provided By Operating
Activities
|
17,386,823 | 15,622,111 | ||||||
Cash
Flows From Investing Activities
|
||||||||
Acquisition
of real estate investments (including capitalized interest of $171,079 in
2009 and $393,517 in 2008)
|
(8,223,409 | ) | (17,001,026 | ) | ||||
Net Cash Used In Investing
Activities
|
(8,223,409 | ) | (17,001,026 | ) | ||||
Cash
Flows From Financing Activities
|
||||||||
Mortgage
proceeds
|
- | 24,800,000 | ||||||
Payments
of mortgages payable
|
(2,525,225 | ) | (2,045,236 | ) | ||||
Dividends
and limited partners’ distributions paid
|
(12,779,126 | ) | (12,686,548 | ) | ||||
Line-of-credit
net borrowings (repayments)
|
7,005,000 | (7,600,000 | ) | |||||
Repayments
of capital expenditure payables
|
(850,225 | ) | (1,069,734 | ) | ||||
Payments
of financing costs
|
(205,720 | ) | (286,602 | ) | ||||
Payments of leasing costs
|
(115,359 | ) | (118,587 | ) | ||||
Net Cash Used In Financing
Activities
|
(9,470,655 | ) | 993,293 | |||||
Net
Decrease In Cash and Cash Equivalents
|
(307,241 | ) | (385,622 | ) | ||||
Cash and Cash
Equivalents, beginning of
period
|
668,677 | 544,639 | ||||||
Cash and Cash
Equivalents, end of
period
|
$ | 361,436 | $ | 159,017 |
Nine Months Ended
|
Nine Months Ended
|
|||||||
September 30, 2009
|
Septebmer30, 2008
|
|||||||
Supplemental
Disclosure of Cash Flow Information
|
||||||||
Cash paid for interest (net of amounts
capitalized)
|
$ | 3,486,260 | $ | 3,781,932 | ||||
Supplemental
Disclosure of Non-Cash Transactions
|
||||||||
Dividends
and limited partners’ distributions declared and unpaid
|
$ | 4,348,153 | $ | 4,230,962 | ||||
Conversion
of OP Units
|
$ | 2,398,186 | — | |||||
Real estate investments financed with accounts
payable
|
$ | 270,100 | $ | 638,872 |
1.
Basis of Presentation
|
The
accompanying unaudited consolidated financial statements of Agree Realty
Corporation (the “Company”) for the nine months ended September 30, 2009
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 audited 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, 2008 has
been derived from the audited consolidated financial statements at that
date. Operating results for the nine months ended September 30, 2009
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009 or for any other interim period. For
further information, refer to the audited consolidated financial
statements and footnotes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2008.
We
have evaluated subsequent events since September 30, 2009 and up to
the time of the filing of this quarterly report on Form 10-Q on November
4, 2009.
|
|
2. Stock
Based Compensation
|
The
Company estimates the fair value of restricted stock and stock
option grants at the date of grant and amortizes those amounts into
expense on a straight line basis or amount vested, if greater, over the
appropriate vesting period.
|
|
As
of September 30, 2009, there was $2,715,465 unrecognized compensation
costs related to the outstanding restricted shares, which is expected to
be recognized over a weighted average period of 3.07 years. The
Company used a 0% discount factor and forfeiture rate for determining the
fair value of restricted stock. The forfeiture rate was based
on historical results and trends.
The
holder of a restricted share award is generally entitled at all times on
and after the date of issuance of the restricted shares to exercise the
rights of a shareholder of the Company, including the right to vote the
shares and the right to receive dividends on the
shares.
|
Shares
Outstanding
|
Weighted
Average
Grant Date
Fair Value
|
|||||||
Unvested
restricted shares at January 1, 2009
|
104,050 | $ | 30.57 | |||||
Restricted
shares granted
|
72,350 | 15.36 | ||||||
Restricted
shares vested
|
(23,700 | ) | 29.88 | |||||
Restricted
shares forfeited
|
— | — | ||||||
Unvested
restricted shares at September 30, 2009
|
152,700 | $ | 23.47 |
3. Earnings
Per Share
|
Earnings
per share has been computed by dividing the net income attributable to
Agree Realty Corporation by the weighted average number of common shares
outstanding.
The
following is a reconciliation of the denominator of the basic net earnings
per common share computation to the denominator of the diluted net
earnings per common share computation for each of the periods
presented:
|
Three Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Weighted
average number of common shares outstanding
|
8,193,161 | 7,795,560 | ||||||
Unvested
restricted stock
|
(152,700 | ) | (117,770 | ) | ||||
Weighted
average number of common shares outstanding used in basic earnings per
share
|
8,040,461 | 7,677,790 | ||||||
Weighted
average number of common shares outstanding used in basic earnings per
share
|
8,040,461 | 7,677,790 | ||||||
Effect
of dilutive securities:
|
||||||||
Restricted
stock
|
23,256 | 12,748 | ||||||
Common
stock options
|
— | — | ||||||
Weighted
average number of common shares outstanding used in diluted earnings per
share
|
8,063,717 | 7,690,538 |
Nine Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Weighted
average number of common shares outstanding
|
8,050,599 | 7,794,557 | ||||||
Unvested
restricted stock
|
(152,700 | ) | (117,770 | ) | ||||
Weighted
average number of common shares outstanding used in basic earnings per
share
|
7,897,899 | 7,676,787 | ||||||
Weighted
average number of common shares outstanding used in basic earnings per
share
|
7,897,899 | 7,676,787 | ||||||
Effect
of dilutive securities:
|
||||||||
Restricted
stock
|
11,233 | 13,309 | ||||||
Common
stock options
|
— | — | ||||||
Weighted
average number of common shares outstanding used in diluted earnings per
share
|
7,909,132 | 7,690,096 |
4. Derivative
Instruments and Hedging Activity
|
On
January 2, 2009, the Company entered into an interest rate swap agreement
for a notional amount of $24,501,280, effective on January 2, 2009 and
ending on July 1, 2013. The notional amount decreases over the term to
match the outstanding balance of the hedge borrowing. The Company entered
into this derivative instrument to hedge against the risk of changes in
future cash flows related to changes in interest rates on $24,501,280 of
the total variable-rate borrowings outstanding. Under the terms of the
interest rate swap agreement, the Company will receive from the
counterparty interest on the notional amount based on 1.5% plus one-month
LIBOR and will pay to the counterparty a fixed rate of 3.744%. This swap
effectively converted $24,501,280 of variable-rate borrowings to
fixed-rate borrowings beginning on January 2, 2009 and through July 1,
2013.
Companies
are required to recognize all derivative instruments as either assets or
liabilities at fair value on the balance sheet. The Company has designated
this derivative instrument as a cash flow hedge. As such, changes in the
fair value of the derivative instrument are recorded as a component of
other comprehensive income (loss) (“OCI”) for the three and nine months
ended September 30, 2009 to the extent of effectiveness. The ineffective
portion of the change in fair value of the derivative instrument is
recognized in interest expense. For the three and nine month
periods ending September 30, 2009, the Company has determined this
derivative instrument to be an effective hedge.
|
|
The
Company does not use derivative instruments for trading or other
speculative purposes and we did not have any other derivative instruments
or hedging activities as of September 30,
2009.
|
5. Fair
Value of Financial Instruments
|
Certain
of our assets and liabilities are disclosed at fair value. Fair value is
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. In determining fair value, the Company uses
various valuation methods including the market, income and cost
approaches. The assumptions used in the application of these
valuation methods are developed from the perspective of market
participants, pricing the asset or liability. Inputs used in
the valuation methods can be either readily observable, market
corroborated, or generally unobservable inputs. Whenever
possible the Company attempts to utilize valuation methods that maximize
the uses of observable inputs and minimizes the use of unobservable
inputs. Based on the operability of the inputs used in the
valuation methods the Company is required to provide the following
information according to the fair value hierarchy. The fair
value hierarchy ranks the quality and reliability of the information used
to determine fair values. Assets and liabilities measured,
reported and/or disclosed at fair value will be classified and disclosed
in one of the following three categories:
Level
1 – Quoted market prices in active markets for identical assets or
liabilities.
Level
2 – Observable market based inputs or unobservable inputs that are
corroborated by market data.
Level
3 – Unobservable inputs that are not corroborated by market
data.
The
table below sets forth our fair value hierarchy for liabilities measured
or disclosed at fair value as of September 30,
2009.
|
Level
1
|
Level
2
|
Level
3
|
||||||||||
Liability:
|
||||||||||||
Interest
rate swap
|
$ | — | $ | 104,868 | $ | — | ||||||
Fixed
rate mortgage
|
$ | — | $ | — | $ | 40,102,571 | ||||||
Variable
rate mortgage
|
$ | — | $ | — | $ | 21,750,388 | ||||||
Variable
rate debt
|
$ | — | $ | 39,950,000 | $ | — |
The
carrying amounts of the Company’s short-term financial instruments, which
consist of cash, cash equivalents, receivables, and accounts payable,
approximate their fair values. The fair value of the interest rate swap
was derived using estimates to settle the interest rate swap agreement,
which is based on the net present value of expected future cash flows on
each leg of the swap utilizing market-based inputs and discount rates
reflecting the risks involved. The fair value of fixed and
variable rate mortgages was derived using the present value of future
mortgage payments based on estimated current market interest
rates. The fair value of variable rate debt is estimated to be
equal to the face value of the debt because the interest rates are
floating and is considered to approximate fair value.
|
||
6. Recent
Accounting Pronouncements
|
In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
“Accounting Standards Update 2009-01 “Topic 105-Generally Accepted
Accounting Principles amendments based on Statement of Financial
Accounting Standards No. 168-The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles” (“ASU
2009-01”), “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles – a replacement of FASB Statement No. 162”
(“SFAS 168”). ASU 2009-01, or the FASB Accounting Standards
Codification (“Codification”), will become the source of authoritative
U.S. generally accepted accounting principles (“GAAP”) recognized by the
FASB to be applied by nongovernmental entities. On the
effective date of ASU 2009-01, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative. ASU 2009-01 is
effective for financial statements issued for interim and annual periods
ending after September 15, 2009. The adoption of the standard
did not have a material impact on our consolidated financial position,
results of operations, or cash
flows.
|
7. Total
Comprehensive Income (Loss)
|
The
following is a reconciliation of net income to comprehensive income
attributable to Agree Realty Corporation for the three and nine months
ended September 30, 2009.
|
Three months ended
September 30, 2009
|
Nine months ended
September 30, 2009
|
|||||||
Net
income
|
$ | 4,606,607 | $ | 13,431,362 | ||||
Other
comprehensive income (loss)
|
121,914 | (104,868 | ) | |||||
Total
comprehensive income before non-controlling interest
|
4,728,521 | 13,326,494 | ||||||
Less: non-controlling
interest
|
189,412 | 763,944 | ||||||
Total
comprehensive income after non-controlling interest
|
4,539,109 | 12,562,550 | ||||||
Add: non-controlling
interest of comprehensive loss
|
8,797 | 5,967 | ||||||
Comprehensive
income attributable to Agree Realty Corporation
|
$ | 4,547,906 | $ | 12,568,517 |
For
the three and nine months ended September 30, 2008, total comprehensive
income and net income were
equal.
|
8. Costs
and Estimated Earnings on Uncompleted Contracts
|
For
contracts where the Company does not retain ownership of real property
developed and received fee income for managing the development project,
the Company uses the percentage of completion accounting
method. Under this approach, income is recognized based on the
status of the uncompleted contracts and the current estimates of costs to
complete. The percentage of completion is determined by the
relationship of costs incurred to the total estimated costs of the
contract. Provisions are made for estimated loses on
uncompleted contracts in the period in which such losses are
determined. Changes in job performance, job conditions, and
estimated profitability including those arising from contract penalty
provisions and final contract settlements, may result in revisions to
costs and income. Such revisions are recognized in the period
in which they are determined. Claims for additional
compensation due the Company are recognized in contract revenues when
realization is probable and the amount can be reliably
estimated.
|
Nine
months
ended
September
30, 2009
|
||||
Cost
incurred on uncompleted contracts
|
$ | 201,570 | ||
Estimated
earnings
|
158,430 | |||
Earned
revenue
|
360,000 | |||
Less
billings to date
|
- | |||
Total
|
$ | 360,000 |
Total
unbilled receivable at September 30, 2009 is $360,000 and is included in
accounts receivable – tenants on the consolidated balance
sheet.
|
||
9. Notes
Payable
|
The
Operating Partnership has in place the $55 million Credit Facility with
Bank of America, as the agent, which is guaranteed by us. The
Credit Facility was extended in January 2009 and now matures in November
2011. Advances under the Credit Facility bear interest within a
range of one-month to twelve-month LIBOR plus 100 basis points to 150
basis points or the lender’s prime rate, at the Company’s option, based on
certain factors such as the ratio of our indebtedness to the capital value
of our properties. The Credit Facility generally is used to
fund property acquisitions and development activities. As of
September 30, 2009, $37,500,000 was outstanding under the Credit Facility
bearing a weighted average interest rate of 1.25%.
The
Company also has in place our $5 million Line of Credit that was extended
in October 2009 and now matures in November 2011. The Line of
Credit bears interest at the lender’s prime rate less 75 basis points or
150 basis points in excess of the one-month to twelve-month LIBOR rate, at
the Company’s option. The purpose of the Line of Credit is
generally to provide working capital and fund land options and start-up
costs associated with new projects. As of September 30, 2009,
$2,450,000 was outstanding under the Line of Credit bearing a weighted
average interest rate of
2.50%.
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Total
|
Oct 1, 2009 –
Sep 30, 2010
|
Oct 1, 2010 –
Sep 30, 2012
|
Oct 1, 2012 –
Sep 30, 2014
|
Thereafter
|
||||||||||||||||
Mortgages
Payable
|
$ | 65,098 | $ | 3,566 | $ | 7,867 | $ | 30,524 | $ | 23,141 | ||||||||||
Notes
Payable
|
39,950 | — | 39,950 | — | — | |||||||||||||||
Land
Lease Obligation
|
13,975 | 891 | 1,813 | 1,813 | 9,458 | |||||||||||||||
Estimated
Interest Payments on Mortgages and Notes Payable
|
20,105 | 4,050 | 7,088 | 4,384 | 4,583 | |||||||||||||||
Other
Long-Term Liabilities
|
— | — | — | — | — | |||||||||||||||
Total
|
$ | 139,128 | $ | 8,507 | $ | 56,718 | $ | 36,721 | $ | 37,182 |
Three Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$ | 4,606,607 | $ | 4,181,712 | ||||
Depreciation
of real estate assets
|
1,393,346 | 1,335,135 | ||||||
Amortization
of leasing costs
|
16,646 | 14,770 | ||||||
Funds
from Operations
|
$ | 6,016,599 | $ | 5,531,617 | ||||
Weighted
Average Shares and Operating Partnership Units Outstanding –
Dilutive
|
8,411,336 | 8,364,085 |
Nine Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$ | 13,431,362 | $ | 12,161,524 | ||||
Depreciation
of real estate assets
|
4,140,776 | 3,911,541 | ||||||
Amortization
of leasing costs
|
49,215 | 44,770 | ||||||
Funds
from Operations
|
$ | 17,621,353 | $ | 16,117,835 | ||||
Weighted
Average Shares and Operating Partnership Units Outstanding –
Dilutive
|
8,394,619 | 8,363,643 |
Year
ended September 30,
|
||||||||||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
Fixed
rate mortgage
|
$ | 3,086 | $ | 3,297 | $ | 3,521 | $ | 3,762 | $ | 4,018 | $ | 23,141 | $ | 40,825 | ||||||||||||||
Average
interest rate
|
6.64 | % | 6.64 | % | 6.64 | % | 6.64 | % | 6.64 | % | 6.64 | % | — | |||||||||||||||
Variable
rate mortgage
|
$ | 480 | $ | 509 | $ | 540 | $ | 22,744 | — | — | $ | 24,273 | ||||||||||||||||
Average
interest rate
|
3.74 | % | 3.74 | % | 3.74 | % | 3.74 | % | — | — | — | |||||||||||||||||
Other
variable rate debt
|
— | $ | 39,950 | — | — | — | $ | 39,950 | ||||||||||||||||||||
Average
interest rate
|
— | 1.33 | % | — | — | — | — |
|
·
|
We
lack segregation of duties in the period-end financial reporting
process. Our chief financial officer and director of finance
are the only employees with any significant knowledge of generally
accepted accounting principles. The chief financial officer and
the director of accounting are the only employees in charge of the general
ledger (including the preparation of routine and non-routine journal
entries and journal entries involving accounting estimates), the
preparation of accounting reconciliations, the selection of accounting
principles, and the preparation of interim and annual financial statements
(including report combinations, consolidation entries and footnote
disclosures) in accordance with generally accepted accounting
principles.
|
|
·
|
approximately
30% of our annualized base rent was from Walgreen
Co.;
|
|
·
|
approximately
29% of our annualized base rent was from Borders Group, Inc.;
and
|
|
·
|
approximately
11%, of our annualized base rent was from Kmart
Corporation.
|
|
·
|
We
will not exercise sole decision-making authority regarding the joint
venture’s business and assets and, thus, we may not be able to take
actions that we believe are in our company’s best
interests.
|
|
·
|
We
may be required to accept liability for obligations of the joint venture
(such as recourse carve-outs on mortgage loans) beyond our economic
interest.
|
|
·
|
Our
returns on joint venture assets may be adversely affected if the assets
are not held for the long-term.
|
|
·
|
changes
in general or local economic
conditions;
|
|
·
|
the
attractiveness of our properties to potential
tenants;
|
|
·
|
changes
in supply of or demand for similar or competing properties in an
area;
|
|
·
|
bankruptcies,
financial difficulties or lease defaults by our
tenants;
|
|
·
|
changes
in operating costs and expense and our ability to control
rents;
|
|
·
|
our
ability to lease properties at favorable rental
rates;
|
|
·
|
our
ability to sell a property when we desire to do so at a favorable
price;
|
|
·
|
unanticipated
changes in costs associated with known adverse environmental conditions or
retained liabilities for such
conditions;
|
|
·
|
changes
in or increased costs of compliance with governmental rules, regulations
and fiscal policies, including changes in tax, real estate, environmental
and zoning laws, and our potential liability thereunder;
and
|
|
·
|
unanticipated
expenditures to comply with the Americans with Disabilities Act and other
similar regulations.
|
|
·
|
As
owner we may have to pay for property damage and for investigation and
clean-up costs incurred in connection with the
contamination.
|
|
·
|
The
law may impose clean-up responsibility and liability regardless of whether
the owner or operator knew of or caused the
contamination.
|
|
·
|
Even
if more than one person is responsible for the contamination, each person
who shares legal liability under environmental laws may be held
responsible for all of the clean-up
costs.
|
|
·
|
Governmental
entities and third parties may sue the owner or operator of a contaminated
site for damages and costs.
|
|
·
|
“business
combination” provisions that, subject to limitations, prohibit certain
business combinations between us and an “interested stockholder” (defined
generally as any person who beneficially owns 10% or more of the voting
power of our shares or an affiliate thereof) for five years after the most
recent date on which the stockholder becomes an interested stockholder and
thereafter would require the recommendation of our board of directors and
impose special appraisal rights and special stockholder voting
requirements on these combinations;
and
|
|
·
|
“control
share” provisions that provide that “control shares” of our company
(defined as shares which, when aggregated with other shares controlled by
the stockholder, entitle the stockholder to exercise one of three
increasing ranges of voting power in electing directors) acquired in a
“control share acquisition” (defined as the direct or indirect acquisition
of ownership or control of “control shares”) have no voting rights except
to the extent approved by our stockholders by the affirmative vote of at
least two-thirds of all the votes entitled to be cast on the matter,
excluding all interested shares.
|
|
·
|
change
our investment and financing policies and our policies with respect to
certain other activities, including our growth, debt capitalization,
distributions, REIT status and investment and operating
policies;
|
|
·
|
within
the limits provided in our charter, prevent the ownership, transfer and/or
accumulation of shares in order to protect our status as a REIT or for any
other reason deemed to be in the best interests of us and our
stockholders;
|
|
·
|
issue
additional shares without obtaining stockholder approval, which could
dilute the ownership of our then-current
stockholders;
|
|
·
|
amend
our charter to increase or decrease the aggregate number of shares of
stock or the number of shares of stock of any class or series, without
obtaining stockholder approval;
|
|
·
|
classify
or reclassify any unissued shares of our common stock or preferred stock
and set the preferences, rights and other terms of such classified or
reclassified shares, without obtaining stockholder
approval;
|
|
·
|
employ
and compensate affiliates;
|
|
·
|
direct
our resources toward investments that do not ultimately appreciate over
time;
|
|
·
|
change
creditworthiness standards with respect to third-party tenants;
and
|
|
·
|
determine
that it is no longer in our best interests to attempt to qualify, or to
continue to qualify, as a REIT.
|
|
·
|
our
financial condition and operating performance and the performance of other
similar companies;
|
|
·
|
actual
or anticipated variations in our quarterly results of
operations;
|
|
·
|
the
extent of investor interest in our company, real estate generally or
commercial real estate
specifically;
|
|
·
|
the
reputation of REITs generally and the attractiveness of their equity
securities in comparison to other equity securities, including securities
issued by other real estate companies, and fixed income
securities;
|
|
·
|
changes
in expectations of future financial performance or changes in estimates of
securities analysts;
|
|
·
|
fluctuations
in stock market prices and volumes;
and
|
|
·
|
announcements
by us or our competitors of acquisitions, investments or strategic
alliances.
|
|
·
|
We
would not be allowed a deduction for dividends paid to stockholders in
computing our taxable income and would be subject to federal income tax at
regular corporate rates.
|
|
·
|
We
could be subject to the federal alternative minimum tax and possibly
increased state and local taxes.
|
|
·
|
Unless
we are entitled to relief under statutory provisions, we could not elect
to be treated as a REIT for four taxable years following the year in which
we were disqualified.
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
|
ITEM
5.
|
OTHER
INFORMATION
|
|
ITEM
6.
|
EXHIBITS
|
|
3.1
|
Articles
of Incorporation and Articles of Amendment (incorporated by reference to
Exhibit 3.1 to our Registration Statement on Form S-11 (Registration
Statement No. 33-73858, as amended)
|
|
3.2
|
Articles
Supplementary, establishing the terms of the Series A Preferred Stock
(incorporated by reference to Exhibit 3.1 to our Form 8-K filed on
December 9, 2008)
|
|
3.3
|
Articles
Supplementary, classifying additional shares of Common Stock and Excess
Stock (incorporated by reference to Exhibit 3.2 to our Form 8-K filed on
December 9, 2008)
|
|
3.4
|
Bylaws
(incorporated by reference to Exhibit 3.2 to our Annual Report on Form
10-K for the year ended December 31,
2006)
|
|
*10.1
|
Amendment
to the Third Amended and Restated Line of Credit Agreement, dated April
25, 2008, by and between Agree Realty Corporation, Agree Limited
Partnership and LaSalle Bank Midwest National Association, individually
and as agent for the lenders and together with Fifth Third
Bank.
|
|
*31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Richard
Agree, Chief Executive Officer and Chairman of the Board of
Directors
|
|
*31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Kenneth R.
Howe, Vice President, Finance and
Secretary
|
|
*32.1
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Richard Agree,
Chief Executive Officer and Chairman of the Board of
Directors
|
|
*32.2
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kenneth R.
Howe, Vice President, Finance and
Secretary
|