ITEM 1. BUSINESS
General
The Company is a self-administered, self-managed real estate investment trust (a"REIT") which develops, acquires, owns and operates properties which are primarily leased to national and regional retail companies under net leases in which the Company may be responsible for certain costs. As of December 31, 2002, the Company owned, either directly or through interests in joint ventures, a portfolio of 48 properties (the "Properties") located in 13 states and containing an aggregate of approximately 3.7 million square feet of gross leasable area. The Properties consist of 14 neighborhood and community shopping centers (the "Community Shopping Centers", 33 free-standing properties and 1 land lease property. The Company independently owns 29 of the free-standing properties and owns the other four through joint ventures (the "Joint Venture Properties"). As of December 31, 2002, approximately 99% of gross leasable area in the portfolio was leased, and approximately 95% of the Company's base rental income was attributable to national and regional retailers. Among such retailers are Borders, Inc. ("Borders") Kmart Corporation ("Kmart") and Walgreen Co. ("Walgreen") which, as of December 31, 2002, collectively represented approximately 65% of the Company's base rental income. See "Major Tenants." The Company developed all 14 of the shopping centers and 29 of the 33 free-standing properties.
During 2002 the Company completed the development of one (1) free-standing Property which added 14,490 square feet of gross leasable area
to the Company's operating portfolio and cost approximately $3.5 million. The Property is leased to Walgreen Co.
During 2002 the Company also leased a parcel of land to Sam's Club, a division of Wal-Mart, Inc ("Sam's Club"). Sam's Club at its expense razed the site of existing buildings and is constructing a 135,000 square foot building.
In November 2002, the Company acquired the interest of its joint venture partner in three (3) Joint Venture Properties and now owns 100% of the properties. The properties are located in Oklahoma City, Oklahoma, Omaha, Nebraska and Indianapolis, Indiana. The cost to acquire the Oklahoma City and Omaha interests was $7,628,622 and was funded using the Company's credit facility. The Indianapolis interest was funded with a fixed rate mortgage in the amount of $1,301,866.
In February 2003 the Company acquired the interest of its joint venture partner in an additional Joint Venture Property and now owns 100% of the property. The property is located in Ann Arbor, Michigan. contains 458,729 square feet of gross leasable area and is leased to Borders Group, Inc. for their headquarters. The cost to acquire the interest in this property was approximately $7,700,000 and was financed with a fixed rate mortgage at a rate of 6.50%.
The Company was formed in December 1993 to continue and expand the retail property business founded in 1971 by its current Chairman of the Board of Directors and President, Richard Agree. Since 1971, the Company and its predecessors have specialized in building properties to suit for national and regional retailers who have signed long-term net leases prior to commencement of construction. The Company believes that this strategy provides it with a generally consistent source of income from primarily national and regional retail tenants in its existing properties and also provides opportunities for development of additional properties at attractive returns on investment, without the lease-up risks inherent in speculative development.
The Company's headquarters are located at 31850 Northwestern Highway, Farmington Hills, MI 48334 and its telephone number is (248) 737-4190. The address of the Company's web site is www.agreerealty.com. The Company's SEC filings can be accessed through this site.
Description of Business
Objectives
The Company's primary objectives are (1) to realize consistent cash flows through the ownership of high quality properties leased primarily to national and regional retailers and (2) to maximize stockholder returns through the development or acquisition of additional properties. The Company intends to achieve these objectives by implementing the growth, operating and financial strategies outlined below.
- - Developing or acquiring each property with the objective of holding it for long-term investment value.
- - Developing or acquiring properties in what the Company considers to be attractive long-term locations. These locations typically have (1) convenient access to transportation arteries with traffic count that is higher than average for the local market; (2) concentrations
of other retail properties; and (3) demographic characteristics which are attractive to the retail tenant which will lease the property.
- - Generally, purchasing land and beginning development of a property only upon the execution of a lease with a national or regional retailer on terms that provide a return on estimated cost which is attractive relative to the Company's cost of capital.
- - Directing all aspects of development, including construction, design, leasing and management. Property management and the majority of the leasing activities are handled directly by Company personnel. The Company believes that this approach to development and management enhances the ability of the Company to develop and maintain assets of high construction quality which are designed, leased and maintained to maximize long-term value and enables it to operate efficiently.
The Company believes that the relationships established by its principals with national and regional retailers as well as the financing relationships its principals have developed with lenders provide it with "first look" opportunities not generally available to its competitors, thereby providing the Company with an advantage in achieving its objectives.
Major Tenants
As of December 31, 2002, approximately 65% of the Company's gross leasable area, including the Joint Venture Properties, was leased to Borders, Kmart and Walgreen and approximately 65% of total annualized base rents was attributable to these tenants. At December 31, 2002, Borders occupied approximately 27% of the Company's gross leasable area, including the Joint Venture Properties, and accounted for approximately 28% of the annualized base rent. At December 31, 2002, Kmart occupied approximately 36% of the Company's gross leasable area, including the Joint Venture Properties, and accounted for approximately 20% of the annualized base rent. At December 31, 2002, Walgreen occupied approximately 5% of the company's gross leasable area, including the Joint Venture Properties, and accounted for approximately 17% of the annualized base rent. No other tenant accounted for more than 10% of gross leasable area or annualized base rent in 2002. The loss of any of these anchor tenants or the inability of any of them to pay rent would have an adverse effect on the Company's business.
On January 22, 2002, Kmart Corporation and 37 of its U.S. subsidiaries filed voluntary petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code. In its filings in the U.S. Bankruptcy Court for the Northern District of Illinois, Kmart indicated that it will reorganize on a fast-track basis and has targeted emergence from chapter 11 in 2003. Kmart has outlined certain strategic, operational and financial initiatives that it intends to continue or implement during the reorganization process. One of its initiatives was to evaluate the performance of every store and terms of every lease in its portfolio, with the objective of closing unprofitable or underperforming stores.
The Company has entered into sixteen (16) leases with Kmart Corporation. Thirteen (13) of the Kmart stores are anchors in the Company's Community Shopping Centers and three (3) Kmart stores are free-standing properties. The Kmart stores are located in five states as follows: Michigan (9), Wisconsin (3), Florida (2), Ohio (1) and
Kentucky (1). All sixteen (16) of the Kmart stores were open and operating as Kmart discount stores as of December 31, 2002.
On March 8, 2002, Kmart announced that it intended to close 284 under-performing stores as part of its initial Chapter 11 financial objectives review. None of the Company's Kmart stores were included in this initial list of stores to be closed. On January 24, 2003, Kmart announced that it intends to close an additional 317 stores and emerge from bankruptcy by April 30, 2003. One (1) of the Company's Kmart stores (a Community Shopping Center store) was included in this list of stores to be closed. The store is located in Lakeland, Florida. It is anticipated that Kmart will vacate the premises during the first quarter 2003. Annual rental from this Kmart of approximately $480,000 and Kmart's contribution for real estate taxes, insurance and common area maintenance of approximately $110,000 will cease on the actual date Kmart vacates the premises. Management believes it may take between six to twelve months to release the Kmart store. Certain tenants in the Lakeland, Florida shopping center have co-tenancy clauses which if the Kmart store closes provide either for their rental payments to be based on gross sales or an option to terminate their lease should a replacement tenant not be obtained. Tenants in other Community Shopping Centers in which Kmart is the anchor tenant, have similar co-tenancy provisions in their leases. In addition the Company has agreed to rent reductions totaling $300,000 per year on two other Kmart leases. The rent reductions are for a five (5) year period. The stores receiving the rent concessions are located in Perrysburg, Ohio and Winter Garden, Florida. There can be no assurance that Kmart will not announce additional store closings in the future which may include some of the Company's stores prior to their emergence from bankruptcy.
Financing Strategy
As of December 31, 2002, the Company's ratio of indebtedness to market capitalization was approximately 57%. The Company intends to maintain a ratio of total debt (including construction and acquisition financing) to market capitalization of 65% or less. The Company plans to begin construction of additional pre-leased developments and may acquire additional properties, all of which will initially be financed by its Credit Facility and Line of Credit (each as hereinafter defined). Management intends to periodically refinance short-term construction and acquisition financing with long-term debt and / or equity in order to reduce its ratio of total debt to market capitalization. Nevertheless, the Company may operate with debt levels or ratios that are in excess of 50% for extended periods of time prior to the completion of this long-term financing process.
The Company may from time to time re-evaluate its borrowing policies in light of then current economic conditions, relative costs of debt and equity capital, market value of properties, growth and acquisition opportunities and other factors. There is no contractual limit on the Company's ratio of debt to total market capitalization and, accordingly, the Company may modify its borrowing policy and may increase or decrease its ratio of debt to market capitalization without stockholder approval.
Tax Status
The Company has operated and intends to operate in a manner to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). In order to maintain
qualification as a REIT, the Company must, among other things, distribute at least 90% of its real estate investment trust income and meet certain other asset and income tests. Additionally, the Company's charter limits ownership of the Company, directly or constructively, by any single person to 9.8% of the total number of outstanding shares, subject to certain exceptions. As a REIT, the Company is not subject to federal income tax with respect to that portion of its income that meets certain criteria and is distributed annually to the stockholders.
Competition
The Company faces competition in seeking properties for acquisition and tenants who will lease space in these properties from insurance companies, credit companies, pension funds, private individuals, investment companies and other REITs, many of which have greater financial and other resources than the Company. There can be no assurance that the Company will be able to successfully compete with such entities in its development, acquisition and leasing activities in the future.
Potential Environmental Risks
Investments in real property create a potential for environmental liability on the part of the owner or operator of such real property. If hazardous substances are discovered on or emanating from a property, the owner or operator of the property (including the Company) may be held strictly liable for all costs and liabilities relating to such hazardous substances. The Company has had a Phase I environmental study (which involves inspection without soil sampling or ground water analysis) conducted on each Property by independent environmental consultants. Furthermore, the Company has adopted a policy of conducting a Phase I environmental study on each property it acquires and if necessary conducting additional investigation as warranted.
The Company conducted a Phase I environmental study on the Property it developed in 2002. The results of these Phase I studies required the Company to perform a Limited Phase II environmental site assessment (which involves soil sampling or ground water analysis). The results of the Phase II environmental study conducted on the Property indicated that no further action was required by the Company. In addition, the Company has no knowledge of any hazardous substances existing on any of its Properties in violation of any applicable laws; however, no assurance can be given that such substances are not located on any of the Properties. The Company carries no insurance coverage for the types of environmental risks described above.
The Company believes that it is in compliance, in all material respects, with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. The Company has not been notified by any governmental authority of any noncompliance, liability or other claim in connection with any of the Properties.
Employees
As of March 15, 2003, the Company employed eight persons. Employee responsibilities include accounting, construction, leasing, property coordination and administrative functions for the Properties. The Company's employees are not covered by a collective bargaining
agreement, and the Company considers its employee relations to be satisfactory.
Financial Information About Industry Segments
The Company is in the business of development, acquisition and management of shopping centers and free-standing properties. The Company considers its activities to consist of a single industry segment. See the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report on Form 10-K for certain information required in Item 1.
ITEM 2.
ITEM 2. PROPERTIES
The Properties consist of 14 Community Shopping Centers, 33 free-standing properties and 1 land lease property. As of December 31, 2002, approximately 99% of the Gross Leasable Area ("GLA") in the portfolio was leased, and approximately 95% of the Company's base rental income was attributable to, national and regional retailers. Among such retailers are Borders, Kmart and Walgreen which, at December 31, 2002, collectively represented approximately 65% of current base rental income.
A substantial portion of the Company's income consists of rent received under net leases. Most of the leases provide for the payment of fixed base rentals monthly in advance and for the payment by tenants of a pro rata share of the real estate taxes, insurance, utilities and common area maintenance of the shopping center as well as payment to the Company of a percentage of such tenant's sales. The Company received percentage rents of $247,994 and $413,058 for 2002 and 2001, respectively such amounts represented 1.0% and 1.7% respectively of the Company's total revenue. Included in those amounts were percentage rents from Kmart of $162,419 and $235,894 for 2002 and 2001, respectively. Leases with Borders do not contain percentage rent provisions. Leases with Walgreen do contain percentage rent provisions; however no percentage rent was received from Walgreen. A majority of the leases require the Company to make roof and structural repairs, as needed. The Company's management places a strong emphasis on sound construction and maintenance on its properties.
LOCATION OF PROPERTIES IN THE PORTFOLIO
LOCATION OF PROPERTIES IN THE PORTFOLIO (CONTINUED)
- ---------- (1) Includes Joint Venture Properties in which the Company owns interests ranging from 8% to 15%
ANNUALIZED BASE RENT OF THE COMPANY'S PROPERTIES
The following is a breakdown of base rents in place at December 31, 2002 for each type of retail tenant:
- ---------
(1) Includes the Company's share of annualized base rent for each of the Joint Venture Properties.
(2) Includes the following national tenants: Kmart, Borders, Walgreen, Wal-Mart, Fashion Bug, Winn Dixie, Rite Aid, JC Penney, Avco Financial, GNC Group, Radio Shack, Sam Goody, Super Value, Maurices, Payless Shoes, Kash N Karry, Blockbuster Video, Family Dollar, H&R Block, Sally Beauty, Jo Ann Fabrics, Staples, Best Buy, Dollar Tree, TGI Friday's, Circuit City and Pier 1 Imports.
(3) Includes the following regional tenants: Roundy's Foods, Dunham's Sports, Christopher Banks, Beal's Outlet Stores and Hollywood Video.
COMMUNITY SHOPPING CENTERS
Fourteen (14) of the Company's properties are Community Shopping Centers ranging in size from 20,000 to 241,458 square feet of gross leasable area. The centers are located in 5 states as follows: Florida (2), Illinois (1), Kentucky (1), Michigan (7) and Wisconsin (3). The location, general character and primary occupancy information with respect to the Community Shopping Centers at December 31, 2002 are set forth below: The option to extend the lease beyond its initial term is only at the option of the tenant.
SUMMARY OF COMMUNITY SHOPPING CENTERS AT DECEMBER 31, 2002
SUMMARY OF COMMUNITY SHOPPING CENTERS AT DECEMBER 31, 2002 (CONTINUED)
SUMMARY OF COMMUNITY SHOPPING CENTERS AT DECEMBER 31, 2002 (CONTINUED)
(1) Total annualized base rents of the Company as of December 31, 2002
(2) Calculated as total annualized base rents, divided by gross leasable area actually leased as of December 31, 2002
(3) Roundy's has sub-leased the space it leases at Iron Mountain Plaza (35,285 square feet, rented at a rate of $5.87 per square foot) and leases but does not currently occupy, the 35,896 square feet it leases at Charlevoix Commons at a rate of $5.97 per square foot. Both of these leases expire in 2011 (assuming they are not extended by Roundy's). Winn Dixie leases but does not currently occupy, the 33,617 square feet it leases at Capital Plaza. This lease expires in 2010 and is rented at a rate of $4.06 per square foot. JC Penney Co. leases but does not currently occupy, the 22,204 square feet it leases at Ironwood Commons. This lease expires in 2006 and rented at a rate of $3.75 per square foot.
(4) All community shopping centers except Capital Plaza (which is subject to a long-term ground lease expiring in 2053 from a third party) are wholly-owned by the Company.
FREE-STANDING PROPERTIES
Thirty-three (33) of the Properties are free-standing properties which at December 31, 2002 were net leased to Borders (18), Circuit City Stores (1), Kmart (3) and Walgreen (11). These Properties contain, in the aggregate, approximately 1,174,858 square feet of gross leasable area or approximately 34% of the Company's total gross leasable area. The free-standing Properties range in size from 13,686 to 458,729 square feet of gross leasable area and are located in the following states: California (1), Florida (3), Indiana (1), Kansas (2), Maryland (2), Michigan (15), Nebraska (2), Ohio (2), Oklahoma (4) and Pennsylvania (1). Included in the Company's retail Properties are four Joint Venture Properties in which the Company owns interests ranging from 8% to 15% and 29 wholly-owned Properties. The Company's 29 wholly owned free-standing Properties provide $12,065,459, or approximately 49% of the total annualized base rent at an average base rent per square foot of $15.29. The Company (or the joint ventures in which the Company has an interest) owns each of the thirty-three (33) free-standing properties in fee, except as indicated below. The location and general occupancy information with respect to the wholly-owned free-standing properties are set forth in the following table:
WHOLLY-OWNED FREE STANDING PROPERTIES
WHOLLY-OWNED FREE STANDING PROPERTIES (CONTINUED)
(1) These properties are subject to long-term ground leases where a third party owns the underlying land and has leased the land to the Company to construct or operate three free-standing Properties. The Company pays rent for the use of the land and generally is responsible for all costs and expenses associated with the building and improvements. At the end of the lease terms, as extended (Aventura, FL 2036, Lawrence, KS 2027 and Petoskey, MI 2049), the land together with all improvements revert to the land owner. The Company has an option to purchase the Lawrence property during the period October 1, 2006 to September 30, 2016 and to purchase the Petoskey property after August 7, 2019.
(2) At the expiration of tenant's initial lease term, each tenant has an option, subject to certain requirements, to extend its lease for an additional period of time.
JOINT VENTURE PROPERTIES
During 1996, seven free-standing Properties which are leased to Borders, including Borders' current corporate headquarters, its former headquarters building and Properties operated as Borders Books and Music were developed or acquired directly by seven limited liability companies which the Company identifies as Joint Ventures in its periodic reports, but which are accounted for as partnerships by the Company. In November 2002 the Company acquired the interest of its Joint Venture partner in three of the Joint Venture Properties. The acquired properties are located in Oklahoma City, OK, Omaha, NE and Indianapolis, IN and are now Wholly-Owned Free Standing Properties. The remaining four Properties are owned by a separate limited liability company that is owned jointly by the Company and an affiliate of Borders (the "Joint Ventures"). The Company's economic interest in the Joint Ventures ranges from 8% to 15%. The financing for the development of the Joint Venture Properties was provided through a financing facility established by Borders and its affiliates (the "Borders Financing Facility").
The leases on the four properties between Borders and each of the Joint Ventures has a term expiring June 20, 2004, unless the Borders Financing Facility is extended or earlier terminated. At any time during the term of the lease, Borders has the right to refinance the Properties or to purchase the Properties for various percentages of
total project costs, provided that, prior to such refinancing or purchase, the Company may elect to provide alternative financing for the Properties or purchase the Properties and purchase the interest of the Borders' affiliate in the Joint Venture. In the event the Company elects to provide financing or to purchase the Properties, and is subsequently unable to obtain the requisite financing, or in the event that the Company defaults in its development obligations to the Joint Venture, Borders may purchase the Properties. If the Company provides refinancing or purchases the Properties, the Company will be required to acquire the interest of the Borders' affiliate in the Joint Ventures, and Borders and the Joint Ventures will enter into a new lease providing for a term of 20 years, with four five-year extension options.
Under certain circumstances, the Company may elect to allow Borders to place long-term financing on such Properties, in which case, the Company will maintain its current interest in the Joint Venture and become the sole equity member of the entity which owns such Property. In such a circumstance, the Company will own the Property subject to a first mortgage loan which could exceed 90% of the Property's estimated value, and lease payments received by the Company would be adjusted to reflect Borders' financing.
The Company's investment in the four Joint Venture Properties currently yields approximately $530,000 annualized base rent. Under certain circumstances relating to refinancing of such assets, the rents paid pursuant to such leases are subject to adjustment. The following table provides additional information on the Joint Venture Properties.
JOINT VENTURE PROPERTIES
LAND LEASE PROPERTY
The Company leases a parcel of land (12.68 acres) located in Roseville, Michigan to Sam's Real Estate Business Trust, a division of Wal-Mart, Inc. The lease expires in 2022 and can be extended at the option of the tenant for twelve additional five year periods. The Tenant at its sole cost and expense has razed the site of existing buildings and is constructing a 135,000 square foot building.
MAJOR TENANTS
The following table sets forth certain information with respect to the Company's major tenants:
(1) Includes the Company's percentage of base rent for each of the Joint Venture Properties
Borders Group, Inc., ("BGI), is a FORTUNE 500 company that trades on the New York Stock Exchange under the symbol BGP. The Company is a leading global retailer of books, music, movies and other information and entertainment items. Headquartered in Ann Arbor, Michigan BGI, operates over 400 Borders Books and Music stores in the United States, as well as 29 international Borders stores, approximately 800 Waldenbooks locations and 37 United Kingdom based Books etc. stores. BGI employs more than 32,000 people worldwide and posted revenues of approximately $3.4 billion in 2001. The Company derived approximately 28% of its base rental income for the year ended December 31, 2002 from, and approximately 34% of the Company's future minimum rentals are attributable to, Borders.
Sixteen of the Properties are anchored by Kmart a retailer that will operate over 1,500 stores after the store closings announced in January 2003 take place. Kmart's principal business is general merchandise retailing through a chain of department stores. The Company derived approximately 20% of its base rental income for the year ended December 31, 2002 from, and approximately 18% of the Company's future minimum rentals are attributable to, Kmart. On January 22, 2002 Kmart Corporation and 37 of its U.S. subsidiaries filed voluntary petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code. In two announcements Kmart has said that it will close 610 stores. As of March 15, 2003 only one of the Company's Kmart stores will be closed as a result of the store closing announcements.
Walgreen is a leader of the U.S. chain drugstore industry and trades on the New York Stock Exchange under the symbol WAG. It operates over 3,950 stores in 43 states and Puerto Rico and posted revenues of approximately $28.7 billion for the year ended August 31, 2002, reported net earnings of approximately $1.0 billion for the same period and total assets of approximately $9.8 billion as of August 31, 2002. The Company derived approximately 17% of its base rental income for the year ended December 31, 2002 from, and approximately 25% of the Company's future minimum rentals are attributable to, Walgreen.
Additional information regarding Borders, Kmart or Walgreen may be found in their respective public filings. These filings can be accessed at www.sec.gov.
LEASE EXPIRATIONS
The following table shows lease expirations for the next 10 years for the Company's Community Shopping Centers, wholly-owned free-standing Properties and Land Lease Property, assuming that none of the tenants exercise renewal options.
Two Kmart leases expire in 2003, one of which the Company expects the tenant to extend for an additional five year period, and the other Kmart lease (Lakeland Florida) will be terminated by Kmart and no other Kmart leases expire pursuant to lease terms prior to 2008.
The Company has made preliminary contact with the tenants whose leases expire in 2003. Eleven (11) tenants, at their option have the right to extend their lease term; six (6) tenants' leases expire in 2003 and with the exception of one Kmart lease the Company expects to negotiate lease extensions; and two (2) tenants have month to month lease arrangements. Of the 16 leases that expired in 2002, eleven (11) tenants extended their lease term; four (4) tenants elected not to extend their lease (two of which were subsequently re-leased to new tenants and two are currently for lease); and one (1) tenant elected a month to month option.
Leases on the four Joint Venture Properties are for an initial term through June 20, 2004. In the event a refinancing of any of these Properties is consummated, Borders is required to enter into a twenty year net lease with a fixed lease rate.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved in any litigation nor, to management's knowledge, is any litigation threatened against the Company, except for routine litigation arising in the ordinary course of business which is expected to be covered by the Company's liability insurance.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of 2002.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under the symbol "ADC". The following table sets forth the high and low sales prices of the Company's Common Stock, as reported on the New York Stock Exchange Composite Tape, and the dividends declared per share of Common Stock by the Company for each calendar quarter in the last two fiscal years. Dividends were paid in the periods immediately subsequent to the periods in which such dividends were declared.
At December 31, 2002, there were 4,448,531 shares of the Company's Common Stock issued and outstanding which were held by approximately 225 stockholders of record. The stockholders of record do not reflect persons or entities who held their shares in nominee or "street" name.
The Company intends to continue to declare quarterly dividends to its stockholders. However, distributions by the Company are determined by the Board of Directors and will depend on a number of factors, including the amount of funds from operations, the financial and other condition of its Properties, its capital requirements, the annual distribution requirements under the provisions of the Code applicable to REITs and such other factors as the Board of Directors deems relevant.
During the year ended December 31, 2002, there were no sales of unregistered securities by the Company, except the grant, under the Company's 1994 Stock Incentive Plan (the "Plan"), of 37,662 shares of restricted stock to certain employees of the Company. The transfer restrictions on such shares lapse in equal annual installments over a five-year period from the date of the grant, but the holder thereof is entitled to receive dividends on all such shares from the date of the grant. On January 1, 2002 the Company redeemed 6,000 shares of restricted stock previously issued under the Plan.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the Company on a historical basis and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and all of the financial statements and notes thereto included elsewhere in this Form 10-K. The balance sheet data for the periods ended December 31, 1998 through December 31, 2002 and operating data for each of the periods presented were derived from the audited financial statements of the Company.
(In thousands, except per share information)
(1) Property expense includes real estate taxes, property maintenance, insurance, utilities and land lease expense. (2) Other income is composed of development fee income, gain on land sales, and equity in net income of unconsolidated entities. (3) Net income per share has been computed by dividing the net income by the weighted average number of shares of Common Stock outstanding. The per share amounts shown are presented in accordance with SFAS No. 128 "Earnings per Share". The Company's basic and diluted earnings per share are the same
ITEM 7.
ITEM 7. 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 in April 1994. 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 86.85% interest as of December 31, 2002. The Company is operating so as to qualify as a real estate investment trust ("REIT") for federal income tax purposes.
The Company has entered into sixteen (16) leases with Kmart Corporation. Thirteen (13) of the Kmart stores are anchors in the Company's Community Shopping Centers and three (3) Kmart stores are free-standing properties. Kmart Corporation and 37 of its U.S. subsidiaries filed voluntary petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code. Kmart has outlined certain strategic, operational and financial initiatives that it intends to continue or implement during the reorganization process. One of its initiatives was to evaluate the performance of every store and terms of every lease in its portfolio, with the objective of closing unprofitable or underperforming stores.
The Kmart stores in the Company's Portfolio provide 20% of the Company's Annual Base Rent as of December 31, 2002. Nine of the Kmart stores paid percentage rent in addition to their minimum rent during 2002. As of December 31, 2002 all Kmart stores in the Company's Portfolio were open and operating as Kmart discount stores; however the Company has been notified by Kmart that it intends to close one Company store during the first quarter of 2003.
On March 8, 2002, Kmart announced that it intended to close 284 under-performing stores as part of its initial Chapter 11 financial objectives review. None of the Company's Kmart stores was included in this initial list of stores to be closed. On January 24, 2003, Kmart announced that it intends to close an additional 317 stores and emerge from bankruptcy by April 30, 2003. One (1) of the Company's Kmart stores (a Community Shopping Center store) was included in this list of stores to be closed. The Store is located in Lakeland, Florida. It is anticipated that Kmart will vacate the premises during the first quarter of 2003. Annual rental from this Kmart of approximately $480,000 and Kmart's contribution for real estate taxes, insurance and common area maintenance of approximately $110,000 will cease on the actual date Kmart vacates the premises. Management believes it will take between six to twelve months to release the Kmart store. Certain tenants in the Lakeland, Florida shopping center have co-tenancy clauses which if the Kmart store closes, provide either for their rental payments to be based on gross sales or an option to terminate their lease should a replacement tenant not be obtained. Tenants in other Community Shopping Centers in which Kmart is the anchor tenant, have similar co-tenancy provisions in their leases. In addition the Company has agreed to rent reduction totaling $300,000 per year on two other Kmart leases. The rent reductions are for a five (5) year period. The stores receiving the rent concessions are located in Perrysburg, Ohio and Winter Garden, Florida. There can be no assurance that Kmart will not announce
additional store closings in the future which may include some of the Company's stores prior to their emergence from bankruptcy. The following should be read in conjunction with the Consolidated Financial Statements of Agree Realty Corporation, including the respective notes thereto, which are included elsewhere in this Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS superceded Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The provisions of SFAS 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively.
The Company adopted this standard on January 1, 2002. The adoption had no impact on its results of operations and financial position.
CRITICAL ACCOUNTING POLICIES
In the course of developing and evaluating accounting polices and procedures, the Company used estimates, assumptions and judgments to determine the most appropriate methods to be applied. Such processes are used in determining capitalization of costs related to real estate investments, potential impairment of real estate investments, operating cost reimbursements, and taxable income.
Real estate assets are stated at cost less accumulated depreciation. All costs related to planning, development and construction of buildings prior to the date they become operational, including interest and real estate taxes during the construction period, are capitalized for financial reporting purposes and recorded as "Property under development" until construction has been completed. Subsequent to completion of construction, expenditures for property maintenance are charged to operations as incurred, while significant renovations are capitalized. Depreciation of the buildings is recorded on the straight-line method using an estimated useful life of forty years.
In determining the fair value of real estate investments, we consider future cash flow projections on a property by property basis, current interest rates and current market conditions of the geographical location of each property.
Substantially all of the Company's leases contain provisions requiring tenants to pay as additional rent a proportionate share of operating expenses (Operating Cost Reimbursements) such as real estate taxes, repairs and maintenance, insurance, etc. The related revenue from tenant billings is recognized in the same period the expense is recorded.
The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with the Company's 1994 tax year. As a result, the Company is not subject to federal income taxes to the extent that is distributes annually at lease 90% of its taxable income to its shareholders and satisfies certain other requirements defined in the Code. Accordingly, no provision was made for federal income taxes in the accompanying consolidated financial statements.
COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001
Minimum rental income increased $1,121,000, or 5%, to $22,843,000 in 2002, compared to $21,722,000 in 2001. The increase was the result of the development of two Properties in 2001, one Property in 2002 and the acquisition of the joint venture partner's interest in three Joint Venture Properties in 2002 - $655,000; the receipt of three lease terminations payments in 2002 - $269,000; and rental rate increases during 2002 - $196,000.
Percentage rental income decreased $165,000, or 40%, to $248,000 in 2002, compared to $413,000 in 2001. The decrease was the result of the elimination of a tenant's percentage rent provision in exchange for an increase in their base rental income ($128,000); a decrease in percentage rent received from Kmart ($73,000); and an increase in percentage rent received from other tenants $36,000.
Operating cost reimbursements, which represents additional rent required by substantially all of the Company's leases to cover the tenants' proportionate share of property operating expenses, increased $271,000, or 11%, to $2,724,000 in 2002, compared to $2,453,000 in 2001. Operating cost reimbursement increased due to the increase in the reimbursable property operating expenses as explained below.
Management fees and other income decreased $32,000, or 77%, to $9,000 in 2002, compared to $41,000 in 2001. The decrease was the result of the terminations in September 2001 and February 2002 of the management agreements between the Company and two properties it previously managed but did not own.
Real estate taxes increased $14,000, or 1%, to $1,766,000 in 2002 compared to $1,752,000 in 2001. The increase is the result of general assessment increases on the Properties.
Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) increased $314,000, or 22%, to $1,747,000 in 2002 compared to $1,433,000 in 2001. The increase was the result of additional shopping center maintenance of $93,000; increased snow removal costs of $134,000; a decrease in utility costs of ($4,000); and an increase in insurance costs of $91,000 in 2002 versus 2001.
Land lease payments remained constant at $739,000 for 2002 and 2001.
General and administrative expenses increased $255,000, or 15%, to $2,012,000 in 2002 compared to $1,757,000 in 2001. The increase was primarily the result of an increase in compensation related expenses related to the addition of an employee and normal compensation
increases. General and administrative expenses as a percentage of rental income increased from 7.9% for 2001 to 8.7% for 2002.
Depreciation and amortization increased $93,000, or 2%, to $3,938,000 in 2002 compared to $3,845,000 in 2001. The increase was the result of indebtedness incurred to develop three Properties in 2001 and 2002 and to acquire the joint venture partner's interest in three Joint Venture Properties in 2002.
Interest expense decreased $524,000, or 8%, to $6,196,000 in 2002, from $6,720,000 in 2001. The decrease in interest expense was the result of decreased interest rates on variable rate notes payable.
Equity in net income of unconsolidated entities decreased $21,000 to $674,000 in 2002 compared to $694,000 in 2001 as a result of the acquisition of the joint venture partner's interest in three Joint Venture Properties in November 2002. The tenants are responsible for all operating expenses.
The Company recognized a gain on the sale of an asset in the amount of $219,000 in 2001. There was no such gain in 2002.
The Company's income before minority interest increased $805,000, or 9%, to $10,100,000 in 2002, from $9,295,000 in 2001 as a result of the foregoing factors.
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
Minimum rental income increased $858,000, or 4%, to $21,722,000 in 2001, compared to $20,864,000 in 2000. The increase was primarily the result of the development of three Properties in 2000 and two Properties in 2001.
Percentage rental income increased $112,000, or 37%, to $413,000 in 2001, compared to $301,000 in 2000. The increase was the result of increased tenant sales.
Operating cost reimbursements, decreased $69,000, or 3%, to $2,453,000 in 2001, compared to $2,522,000 in 2000. Operating cost reimbursement decreased due to the decrease in the reimbursable property operating expenses and a potential bad debt charge of $50,000 relating to amounts due from Kmart.
Management fees and other income decreased $2,000, or 5%, to $41,000 in 2001, compared to $43,000 in 2000. The decrease was the result of the termination in September 2001 of a management agreement between the Company and one property is previously managed but did not own.
Real estate taxes increased $25,000, or 1%, to $1,752,000 in 2001 compared to $1,727,000 in 2000. The increase is the result of general assessment increases on the Properties.
Property operating expenses increased $69,000, or 5%, to $1,433,000 in 2001 compared to $1,364,000 in 2000. The increase was the result of additional property expenses and major roof repairs of $166,000; decreased snow removal costs of ($164,000); an increase in shopping
center maintenance costs of $54,000; an increase in utility costs of $4,000; and an increase in insurance costs of $9,000 in 2001 versus 2000.
Land lease payments increased $54,000, or 8%, to $739,000 in 2001 compared to $685,000 in 2000 as a result of the Company leasing land for its Petoskey, Michigan development completed in 2000.
General and administrative expenses increased $200,000, or 13%, to $1,757,000 in 2001 compared to $1,557,000 in 2000. The increase was primarily the result of an increase in compensation related expenses and general increases in professional fees. General and administrative expenses as a percentage of rental income increased from 7.4% for 2000 to 7.9% for 2001.
Depreciation and amortization increased $155,000, or 4%, to $3,845,000 in 2001 compared to $3,690,000 in 2000. The increase was the result of the development of five Properties in 2000 and 2001.
Interest expense decreased $325,000, or 5%, to $6,720,000 in 2001, from $7,045,000 in 2000. The decrease in interest expense was the result of decreased interest rates on variable rate notes payable.
Equity in net income of unconsolidated entities increased $172,000 to $694,000 in 2001 compared to $522,000 in 2000 as a result of depreciation expense no longer being allocated to the Company pursuant to the joint venture agreements in which the Company holds interests in properties ranging from 8% to 20%. The tenants are responsible for all operating expenses.
The Company recognized a gain on the sale of an asset in the amount of $219,000 in 2001. There was no such gain in 2000.
The Company's income before minority interest increased $1,110,000, or 14%, to $9,295,000 in 2001, from $8,186,000 in 2000 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 computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as the primary indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. In addition, our method of calculating FFO may not be comparable to the methods used by other REITS and, accordingly, may be different from similarly titled measures reported by other companies.
The following table illustrates the calculation of FFO for the years ended December 31, 2002, 2001 and 2000:
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal demands for liquidity are distributions to its stockholders, debt service, development of new properties and future property acquisitions.
During the quarter ended December 31, 2002, the Company declared a quarterly dividend of $.46 per share. The dividend was paid on January 6, 2003 to holders of record on December 20, 2002.
As of December 31, 2002, the Company had total mortgage indebtedness of $71,588,863 with a weighted average interest rate of 6.94%. Future scheduled annual maturities of mortgages payable for the years ending December 31 are as follows: 2003 - $2,272,069; 2004 - $2,508,601; 2005 - $30,823,905; 2006 - $1,817,738; 2007 - $1,946,430. The 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 Credit Facility matures in August 2003 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 lender's prime rate, 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 Properties which are not otherwise encumbered and properties to be acquired or developed. As of December 31, 2002, $36,758,232 was outstanding under the Credit Facility bearing a weighted average interest rate of 2.94%.
The Company also has in place a $5 million line of credit (the "Line of Credit"), which matures on April 30, 2003, and which the Company expects to renew for an additional 12-month period. The Line of Credit bears interest at the lender'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 December 31, 2002, $1,325,000 was outstanding under the Line of Credit bearing a weighted average interest rate of 3.75%.
One of the Company's wholly-owned subsidiaries has obtained construction financing of approximately $4,350,000 to fund the development of a retail property. The note requires quarterly interest payments, based on a weighted average interest rate based on LIBOR, computed by the lender. The notes mature on June 20, 2004 and are secured by the underlying land and buildings. As of December 31, 2002, $4,002,873 was outstanding under this note, bearing an interest rate of 3.70%.
The Company has received funding from an unaffiliated third party for the construction of certain of its Properties. Advances under this arrangement bear no interest. The advances are secured by the specific land and buildings being developed. As of December 31, 2002, $1,609,440 was outstanding under this arrangement.
The Company has one development project under construction that will add an additional 13,560 square feet of GLA to the Company's portfolio. The project was completed during the first quarter of 2003. Additional Company funding required for this project is estimated to be $1,300,000 and will come from the Credit Facility.
The Company intends to meet its short-term liquidity requirements, including capital expenditures related to the leasing and improvement of the Properties, through its cash flow provided by operations and the Line of Credit. Management believes that adequate cash flow will be available to fund the Company's operations and pay dividends in accordance with REIT requirements. The Company 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 believes that these financing sources will enable the Company to generate funds sufficient to meet both its short-term and long-term capital needs.
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 rations, which are in excess of 50% for extended periods of time prior to such refinancing.
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.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its borrowing activities. There is inherent roll over risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's future financing requirements.
The Company's interest rate risk is monitored using a variety of techniques. The table below presents the principal payments (in thousands) and the weighted average interest rates on remaining debt, by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.
The fair value (in thousands) is estimated at $71,600, $5,612 and $38,083 for fixed rate debt, construction loans and variable rate debt, respectively.
The table above incorporates those exposures that exist as of December 31, 2002, it does not consider those exposures or positions, which could arise after that date. As a result, the Company's ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period and interest rates.
The Company does not enter into financial instruments transactions for trading or other speculative purposes or to manage interest rate exposure.
A 10% adverse change in interest rates on the portion of the Company's debt bearing interest at variable rates would result in an increase in interest expense of approximately $115,000.
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed in the Index to Financial Statements and Financial Statement Schedules appearing on Page of this Form 10-K and are included in this Form 10-K following page.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the Company's last two fiscal years, there have been no changes in the independent accountants nor disagreements with such accountants as to accounting and financial disclosures of the type required to be disclosed in this Item 9.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to its Annual Meeting of Stockholders to be held on May 5, 2003.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Form 10-K with respect to its Annual Meeting of Stockholders to be held on May 5, 2003.
The following table summarizes the equity compensation plans under which the Company's common stock may be issued as of December 31, 2002.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its Annual Meeting of Stockholders to be held on May 5, 2003.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its Annual Meeting of Stockholders to be held on May 5, 2003.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Vice-President, Finance have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing of this annual report. Based on that evaluation, the Chief Executive Officer and Vice-President, Finance have concluded that our current disclosure controls and procedures are effective and timely, providing them with material information relating to that required to be disclosed in the reports we file or submit under the Exchange Act.
Changes in Internal Controls
There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. We are not aware of any significant deficiencies or material weaknesses, therefore no corrective actions were taken.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report
(1) (2) The financial statements indicated by Part II, Item 8, Financial Statements and Supplementary Data.
(b) Reports on Form 8-K
No reports on form 8-K were filed by the Company during the quarter ending December 31, 2002
(c) 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)
4.1 Rights Agreement by and between Agree Realty Corporation and BankBoston, N.A. as Rights Agent Dated as of December 7, 1998 (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on December 7, 1998)
10.1 Loan Modification Agreement, dated April 22, 1994, by and among Shawano Plaza, Plymouth Commons, Chippewa Commons and Nationwide Life Insurance Company (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K"))
10.2 Loan Modification Agreement, dated April 22, 1994, by and among Rapids Associates, Marshall Plaza Phase Two, Petoskey Town Center, Charlevoix Commons and Nationwide Life Insurance Company (incorporated by reference to Exhibit 10.2 to the 1996 Form 10-K)
10.3 First Amended and Restated Agreement of Limited Partnership of Agree Limited Partnership, dated as of April 22, 1994, by and among the Company, Richard Agree, Edward Rosenberg and Joel Weiner (incorporated by reference to Exhibit 10.6 to the 1996 Form 10-K)
10.4 Amended and Restated Registration Rights Agreement, dated July 8, 1994 by and among the Company, Richard Agree, Edward Rosenberg and Joel Weiner (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994)
10.5 + 1994 Stock Incentive Plan of the Company (incorporated by reference to Exhibit 10.8 to the 1996 Form 10-K)
10.6 Management Agreement, dated April 22, 1994, by and among Mt Pleasant Shopping Center, Angola Plaza, Shiloh Plaza and the Company (incorporated by reference to Exhibit 10.9 to the 1996 Form 10-K)
10.7 Contribution Agreement, dated as of April 21, 1994, by and among the Company, Richard Agree, Edward Rosenberg and the co-partnerships named therein (incorporated by reference to Exhibit 10.10 to the 1996 Form 10-K)
10.8 + Agree Realty Corporation Profit Sharing Plan (incorporated by reference to Exhibit 10.13 to the 1996 Form 10-K) 10.9 Business Loan Agreement, dated as of September 21, 1995, by and between Agree Limited Partnership and Michigan National Bank (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"))
10.10 Line of Credit Agreement by and among Agree Limited Partnership, the Company, the lenders parties thereto, and Michigan National Bank as Agent (incorporated by reference to Exhibit 10.10 to the 1995 Form 10-K)
10.11 First amendment to $50 million line-of-credit agreement dated August 7, 1997 among Agree Realty Corporation and Michigan National Bank, as agent (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 1997 (the "September 1997 Form 10-Q"))
10.12 First amendment to $5 million business loan agreement dated September 21, 1997 between Agree Limited Partnership and Michigan National Bank (incorporated by reference to Exhibit 10.2 to the September 1997 Form 10-Q)
10.13 Second amendment to $50 million line-of-credit agreement dated November 17, 1997 among Agree Realty Corporation and Michigan National Bank, as agent (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
10.14 Second amendment to amended and restated $5 million business Loan agreement dated October 19, 1998 between Agree Limited Partnership and Michigan National Bank (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998)
10.15 + Employment Agreement, dated July 1, 1999, by and between the Company, and Richard Agree (incorporated by reference to exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ending June 30, 1999 (the "June 1999 Form 10-Q))
10.16 + Employment Agreement, dated July 1, 1999, by and between the Company, and Kenneth R. Howe (incorporated by reference to exhibit 10.6 to the June 1999 Form 10-Q)
10.17 Third amendment to amended and restated $5 million business Loan agreement dated December 19, 1999 between Agree Limited Partnership and Michigan National Bank (incorporated by reference to exhibit 10.17 to the 1999 Form 10-K)
10.18 Assumption Agreement, Mortgage Modification and Amended and Restated Mortgage and Security Agreement, dated as of March 31, 1999 by Agree Limited Partnership to and in favor of Nationwide Life Insurance Company (incorporated by reference to exhibit 10.1 to the June 1999 Form 10-Q)
10.19 Project Loan Agreement dated as of April 30, 1999 between Wilmington Trust Company not in its individual capacity, but solely as Owner Trustee and Agree - Columbia Crossing Project L.L.C. (incorporated by reference to exhibit 10.2 to the June 1999 Form 10-Q)
10.20 Project Loan Agreement dated as of June 11, 1999 between Wilmington Trust Company not in its individual capacity, but solely as Owner Trustee and Agree - Milestone Center Project L.L.C. (incorporated by reference to exhibit 10.3 to the June 1999 Form 10-Q)
10.21 Trust Mortgage dated as of June 27, 1999 from Agree Facility No. 1, L.L.C. as Grantor to Manufacturers and Traders Trust Company (incorporated by reference to exhibit 10.4 to the June 1999 Form 10-Q)
10.22 + Employment Agreement, dated January 10, 2000, by and between the Company, and David J. Prueter (incorporated by reference to exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2000
10.23 Third amendment to $50 million line-of-credit agreement dated August 7, 2000 among Agree Realty Corporation and Michigan National Bank, as agent (incorporated by reference To exhibit 10.1 to the Company's Quarterly report on Form 10-Q for the period ended September 30, 2000)
10.24 Fourth amendment to amended and restated $5 million business Loan agreement dated February 19, 2001 between Agree Limited Partnership and Michigan National Bank (incorporated by reference to exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K"))
10.25 Mortgage dated as of December 20, 2001, by Agree Limited Partnership to and in favor of Nationwide Life Insurance Company (incorporated by reference to exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 from 10-K))
10.26 Fifth amendment to amended and restated $5 million business Loan agreement dated April 30, 2002 between Agree Limited Partnership and Standard Federal Bank (incorporated by reference to exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002 (the "June 2002 Form 10-Q"))
10.27 Project Loan Agreement dated as of April 30, 2002 between Royal Identify Company (together with its successors and assigns) and Lawrence Store No. 203 L.L.C. (together with its permitted successors and assigns) (incorporated by reference to exhibit 10.2 to the June 2002 Form 10-Q)
10.28 * Project Loan Agreement dated as of November 25, 2002 between Wilmington Trust Company, not in its individual capacity, but solely as Owner Trustee, and Indianapolis Store No. 16 L.L.C.
21.1 * Subsidiaries of Agree Realty Corporation
23 * Consent of BDO Seidman, LLP
99.1 * Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Richard Agree, Chief Executive Officer
99.2 * Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kenneth R. Howe, Chief Financial Officer
- -------------------------------------------------------------------------------
* Filed herewith
+ Management contract or compensatory plan or arrangement
SIGNATURES
PURSUANT to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AGREE REALTY CORPORATION
By: /s/ Richard Agree --------------------------------- Name: Richard Agree President and Chairman of the Board of Directors Date: March 22, 2003
PURSUANT to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 22nd day of March 2003.
By: /s/ Richard Agree By: /s/ Farris G. Kalil ------------------------------ ---------------------------- Richard Agree Farris G. Kalil President and Chairman of the Director Board of Directors (Principal Executive Officer)
By: /s/ Michael Rotchford --------------------------- Michael Rotchford Director By: /s/ Kenneth R. Howe ------------------------------ Kenneth R. Howe Vice President, Finance By: /s/ Ellis G. Wachs and Secretary --------------------------- (Principal Financial and Ellis G. Wachs Accounting Officer) Director
By: /s/ Gene Silverman --------------------------- Gene Silverman Director
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard Agree, certify that:
1. I have reviewed this annual report on Form 10-K of Agree Realty Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 22, 2003 /s/ Richard Agree - --------------------------- -----------------
Name: Richard Agree Title: President and Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth R. Howe, certify that:
1. I have reviewed this annual report on Form 10-K of Agree Realty Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 22, 2003 /s/ Kenneth R. Howe - --------------------------- -------------------
Name: Kenneth R. Howe Title: Vice President, Finance
AGREE REALTY CORPORATION
INDEX
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows
NOTES TO FINANCIAL STATEMENTS
SCHEDULE III - Real Estate and Accumulated Depreciation
F - 1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Owners of Agree Realty Corporation Farmington Hills, Michigan
We have audited the accompanying consolidated balance sheets of Agree Realty Corporation (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. We have also audited the schedule listed in the accompanying index. These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and the schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and the schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Agree Realty Corporation at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan February 13, 2003
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AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY Agree Realty Corporation (the "Company") is a self-administered, self-managed real estate investment trust, which develops, acquires, owns and operates properties, which are primarily leased to national and regional retail companies under net leases. At December 31, 2002, the Company's properties are comprised of fourteen shopping centers, twenty-nine single tenant retail facilities and one land lease property located in thirteen states. In addition, the Company owns joint venture interests ranging from 8% to 15% in four free-standing retail properties. During the year ended December 31, 2002, approximately 95% of the Company's base rental revenues were received from national and regional tenants under long-term leases, including approximately 28% from Borders, Inc., 20% from Kmart Corporation, and 17% from Walgreen Co.
2. SUMMARY OF SIGNIFICANT PRINCIPLES OF CONSOLIDATION ACCOUNTING POLICIES The consolidated financial statements of Agree Realty Corporation include the accounts of the Company, its majority-owned partnership, Agree Limited Partnership (the "Operating Partnership"), and its wholly-owned subsidiaries. The Company controlled, as the sole general partner, 86.85% and 86.77% of the Operating Partnership as of December 31, 2002 and 2001, respectively. All material intercompany accounts and transactions are eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of (1) assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and (2) revenues and expenses during the reporting period. Actual results could differ from those estimates.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, which consist of cash, cash equivalents, receivables, notes payable, accounts payable and long-term debt, approximate their fair values.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as real estate investments are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. No impairment loss recognition has been required through December 31, 2002.
REAL ESTATE INVESTMENTS
Real estate assets are stated at cost less accumulated depreciation. All costs related to planning, development and construction of buildings prior to the date they become operational, including interest and real estate taxes during the construction period, are capitalized for financial reporting purposes and recorded as "Property under development" until construction has been completed. As of December 31, 2002, the cost to complete the properties under development is approximately $1,330,000.
Subsequent to completion of construction, expenditures for property maintenance are charged to operations as incurred, while significant renovations are capitalized. Depreciation of the buildings is recorded on the straight-line method using an estimated useful life of forty years.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and money market accounts.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTS RECEIVABLE - TENANTS
Accounts receivable from tenants reflect primarily reimbursement of specified common area expenses. The Company determines its allowance for uncollectible accounts based on historical trends, existing economic conditions, and known financial position of its tenants. Tenant accounts receivable are written-off by the Company only when receipt is remote.
INVESTMENTS IN UNCONSOLIDATED ENTITIES
The Company uses the equity method of accounting for investments in non-majority owned entities where the Company has the ability to exercise significant influence over operating and financial policies.
The Company's initial investment is recorded at cost, and the carrying amount of the investment is (a) increased by the Company's share of the investees' earnings (as defined in the limited liability company agreements), and (b) reduced by distributions paid from the investees to the Company.
UNAMORTIZED DEFERRED EXPENSES
Deferred expenses are stated net of total accumulated amortization. The nature and treatment of these capitalized costs are as follows: (1) financing costs, consisting of expenditures incurred to obtain long-term financing, are being amortized using the interest method over the term of the related loan, and (2) leasing costs, which are amortized on a straight-line basis over the term of the related lease.
OTHER ASSETS
The Company records prepaid expenses, deposits and miscellaneous receivables as "other assets" in the accompanying balance sheets.
ACCOUNTS PAYABLE - CAPITAL EXPENDITURES
Included in accounts payable are amounts related to the construction of buildings. Due to the nature of these expenditures, they are reflected in the statements of cash flows as a financing activity.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MINORITY INTEREST
This amount represents the limited partners' interest ("OP Units") of 13.15% and 13.23% (convertible into 673,547 shares) in the Operating Partnership as of December 31, 2002 and 2001, respectively.
REVENUE RECOGNITION
Minimum rental income attributable to leases is recorded when due from tenants. Certain leases provide for additional percentage rents based on tenants' sales volume. These percentage rents are recognized as received by the Company. In addition, leases for certain tenants contain rent escalations and/or free rent during the first several months of the lease term; however, such amounts are not material.
OPERATING COST REIMBURSEMENT
Substantially all of the Company's leases contain provisions requiring tenants to pay as additional rent a proportionate share of operating expenses such as real estate taxes, repairs and maintenance, insurance, etc. The related revenue from tenant billings is recognized in the same period the expense is recorded.
INCOME TAXES
The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and began operating as such on April 22, 1994. As a result, the Company is not subject to federal income taxes to the extent that it distributes annually at least 90% of its taxable income to its shareholders and satisfies certain other requirements defined in the Code. Accordingly, no provision was made for federal income taxes in the accompanying consolidated financial statements.
STOCK OPTIONS
The Company has elected to adopt the recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) using the prospective method beginning January 1, 2003. SFAS 123 establishes a fair value based method of accounting for stock-based compensation plans under which employees receive shares of stock or other equity instruments of the Company or the Company incurs liabilities to employees in amounts based on the price of its stock. The Company does not believe that the adoption of the recognition
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provisions will have any impact on the financial position or results of operations of the Company.
DIVIDENDS
The Company declared dividends of $1.84 per share during the years ended December 31, 2002, 2001, and 2000; the dividends have been reflected for federal income tax purposes as follows:
The aggregate federal income tax basis of Real Estate Investments is approximately $18.3 million less than the financial statement basis.
EARNINGS PER SHARE
Earnings per share reflected in the consolidated statements of operations are presented for all periods in accordance with SFAS No. 128, "Earnings per Share". In connection therewith, any conversion of OP Units to common stock would have no effect on the earnings per share calculation since the allocation of earnings to an OP Unit is equivalent to earnings allocated to a share of common stock.
The following table sets forth the computation of basic and diluted earnings per share:
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options to purchase shares of common stock were outstanding (see Note 9) but were not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common shares and, therefore, any additional shares would be anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS superceded Statement of Financial Accounting Standards No 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transaction. The provisions of SFAS 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively.
The Company adopted this standard on January 1, 2002. The adoption had no impact on its results of operations and financial position.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MORTGAGES PAYABLE Mortgages payable consisted of the following:
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future scheduled annual maturities of mortgages payable for years ending December 31 are as follows: 2003 - $2,272,069; 2004 - $2,508,601; 2005 - $30,823,905; 2006 - $1,817,738; 2007 - $1,946,430; and $32,220,120 thereafter.
4. CONSTRUCTION LOANS The Company's wholly-owned subsidiaries have obtained construction financing totalling approximately $4,350,000 in 2002 and $16,100,000 in 2001, which is available to fund the development of four retail properties. Quarterly interest payments are made based on LIBOR. The notes matures on June 20, 2004 and are secured by the related land and building. The Company owed $4,002,873 and $14,896,962 for these loans at December 31, 2002 and 2001 with a weighted average interest rate of 3.70% and 2.77%, respectively.
The Company has also received funding from an unaffiliated third party for certain of its single tenant retail properties. Borrowings under this arrangement bear no interest. The advances are secured by the specific land and buildings being developed. The Company owed $1,609,440 and $1,663,240 for these advances as of December 31, 2002 and 2001, respectively.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE The Operating Partnership has in place a $50 million line-of-credit agreement, which is guaranteed by the Company. The agreement expires in August 2003 and can be extended, solely at the option of the Operating Partnership, 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, 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. At December 31, 2002 and 2001, $36,758,232 and $18,158,232, respectively, was outstanding under this facility with a weighted average interest rate of 2.94% and 3.23%, respectively.
In addition, the Company maintains a $5,000,000 line-of-credit agreement with a bank. Monthly interest payments are required, either 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. At December 31, 2002 and 2001, $1,325,000 and $1,800,000, respectively, was outstanding under this agreement with a weighted average interest rate of 3.75% and 3.85%, respectively.
6. DIVIDENDS AND On December 9, 2002 the Company declared a dividend DISTRIBUTIONS of $.46 per share for the quarter ended December 31, PAYABLE 2002. The holders of OP Units were entitled to an equal distribution per OP Unit held as of December 31, 2002. The dividends and distributions payable are recorded as liabilities in the Company's balance sheet at December 31, 2002. The dividend has been reflected as a reduction of stockholders' equity and the distribution has been reflected as a reduction of the limited partners' minority interest. These amounts were paid on January 6, 2003.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. MINORITY INTEREST The following summarizes the changes in minority interest since January 1, 2000:
8. RELATED PARTY During 2001 and 2000, the Company managed certain TRANSACTIONS additional properties, which are owned by certain officers and directors of the Company, but are not included in the consolidated financial statements. Income related to these activities is reflected as "Management fees and other" in the accompanying consolidated statements of income.
9. STOCK INCENTIVE PLAN The Company has established a stock incentive plan (the "Plan") under which options were granted in April 1994. The options, which have an exercise price equal to the initial public offering price ($19.50/share), can be exercised in increments of 25% on each anniversary of the date of the grant, and expire upon employment termination. All 23,275 options outstanding were exercisable at December 31, 2002 and 2001. No options were exercised or granted during 2002, 2001 or 2000.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. UNEARNED As part of the Company's stock incentive plan, COMPENSATION- restricted common shares are granted to certain RESTRICTED STOCK employees. On the date of the award, the Company increases unearned compensation - restricted stock on the balance sheet by the stock price multiplied by the number of shares awarded. The restricted shares vest and are charged to expense in increments of 20% per year for five years. Plan participants are entitled to receive the quarterly dividends on their respective restricted shares. The following table summarizes the restricted shares for the years ended December 31, 2002, 2001 and 2000:
11. PROFIT-SHARING PLAN The Company has a discretionary profit-sharing plan whereby it contributes to the plan such amounts as the Board of Directors of the Company determines. The participants in the plan cannot make any contributions to the plan. Contributions to the plan are allocated to the employees based on their percentage of compensation to the total compensation of all employees for the plan year. Participants in the plan become fully vested after six years of service. No contributions were made to the plan in 2002, 2001 or 2000.
12. RENTAL INCOME The Company leases premises in its properties to tenants pursuant to lease agreements, which provide for terms ranging generally from 5 to 25 years. The majority of leases provide for additional rents based on tenants' sales volume.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2002, the future minimum revenues for the next five years from rental property under the terms of all noncancellable tenant leases, assuming no new or renegotiated leases are executed for such premises, are as follows (in thousands):
Of these future minimum rentals, approximately 34% of the total is attributable to Borders, Inc., approximately 25% of the total is attributable to Walgreen and approximately 18% is attributable to Kmart Corporation. Borders is a major operator of book superstores in the United States, Walgreen operates in the national drugstore chain industry and Kmart's principal business is general merchandise retailing through a chain of discount department stores. The loss of any of these anchor tenants or the inability of any of them to pay rent could have an adverse effect on the Company's business.
On January 22, 2002 Kmart Corporation and 37 of its U.S. subsidiaries filed voluntary petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code. In its filings in the U.S. Bankruptcy Court for the Northern District of Illinois, Kmart indicated that it will reorganize on a fast-track basis. Kmart has outlined certain strategic, operational and financial initiatives that it intends to continue or implement during the reorganization process. One of its initiatives is to evaluate the performance of every store and terms of every lease in its portfolio, with the objective of closing unprofitable or under performing stores. On March 8, 2002, Kmart announced that it would close 284 under-performing stores as part of its initial Chapter 11 financial objectives review. On January 24, 2003, Kmart announced that it intends to close an additional 326 stores and emerge from bankruptcy by April 30, 2003.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has entered into sixteen (16) leases with Kmart Corporation. Thirteen (13) of the Kmart stores are anchors in the Company's Community Shopping Centers and three (3) Kmart stores are free-standing properties. The Kmart stores are located in five states as follows: Michigan (9), Wisconsin (3), Florida (2), Ohio (1) and Kentucky (1). At December 31, 2002, all sixteen (16) of the Kmart stores were open and operating as Kmart discount stores; however, the Company has been notified by Kmart Corporation that it intends to terminate one of the Company's leases and vacate the store located in Lakeland, Florida during the first quarter of 2003. Annual rental from Kmart of approximately $480,000 and Kmart's contribution for real estate taxes, insurance and common area maintenance of approximately $110,000 will cease on the actual date Kmart vacates the premises. In addition, the Company has agreed to rent reductions totaling $300,000 per year on two Kmart leases. The rent reductions are for a five (5) year period. The stores receiving the rent concessions are located in Ohio and Florida. There can be no assurance that Kmart won't announce additional store closings in the future, which may include some of the Company's stores.
13. LEASE COMMITMENTS The Company has entered into certain land lease agreements for four of its properties. As of December 31, 2002, future annual lease commitments under these agreements are as follows:
14. SUBSEQUENT EVENT During February 2003, the Company purchased the interest of its joint venture partner in a single tenant property located in Ann Arbor, Michigan. The cost of the acquisition was approximately $7,700,000 and was financed with a twenty year mortgage at a rate of 6.50%.
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AGREE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INTERIM RESULTS The following summary represents the unaudited (UNAUDITED) results of operations of the Company, expressed in thousands except per share amounts, for the periods from January 1, 2001 through December 31, 2002:
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SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002
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SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002
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AGREE REALTY CORPORATION
NOTES TO SCHEDULE III DECEMBER 31, 2002
1) RECONCILIATION OF REAL ESTATE PROPERTIES
The following table reconciles the Real Estate Properties from January 1, 2000 to December 31, 2002:
2) RECONCILIATION OF ACCUMULATED DEPRECIATION
The following table reconciles the accumulated depreciation from January 1, 2000 to December 31, 2002:
3) TAX BASIS OF BUILDINGS AND IMPROVEMENTS
The aggregate cost of Building and Improvements for federal income tax purposes is approximately $1,249,000 less than the cost basis used for financial statement purposes.
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Exhibit Index
No. Description
10.28 Project Loan Agreement dated as of November 25, 2002 between Wilmington Trust Company, not in its individual capacity, but solely as Owner Trustee, and Indianapolis Store No. 16 L.L.C.
21.1 Subsidiaries of Agree Realty Corporation
23 Consent of BDO Seidman, LLP
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Richard Agree, Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kenneth R. Howe, Chief Financial Officer