AGREE REALTY CORP - Quarter Report: 2005 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Mark One

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2005

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Agree Realty Corporation

(Exact name of registrant as specified in its charter)

Maryland		38-3148187
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)
31850 Northwestern Highway, Farmington Hills, Michigan		48334
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, included area code: (248) 737-4190

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ		No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ		No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o		No þ

As of November 4, 2005 the Registrant had 7,671,846 shares of common stock, $.0001 par value outstanding.

 

 

Agree Realty Corporation

Form 10-Q

Index

				Page
Part I:		Financial Information
Item 1.		Interim Consolidated Financial Statements
		Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004			3-4
		Consolidated Statements of Income for the nine months ended September 30, 2005 and 2004			5
		Consolidated Statements of Income for the three months ended September 30, 2005 and 2004			6
		Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2005			7
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004			8-9
		Notes to Consolidated Financial Statements			10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			11-19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			20
Item 4.		Controls and Procedures			21
Part II:		Other Information
Item 1.		Legal Proceedings			22
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 3.		Defaults Upon Senior Securities			22
Item 4.		Submission of Matters to a Vote of Security Holders			22
Item 5		Other Information			22
Item 6.		Exhibits			23
Signatures					24
Employment Agreement, dated August 1, 2005
Employment Agreement, dated September 1, 2005
Certification pursuant to Section 302, Richard Agree, CEO
Certification pursuant to Section 302, Kenneth R. Howe, CFO
Certification pursuant to Section 906, Richard Agree, CEO
Certification pursuant to Section 906, Kenneth R. Howe, CFO

Agree Realty Corporation

Consolidated Balance Sheets (Unaudited)

		September 30,				December 31,
		2005				2004
Assets
Real Estate Investments
Land		$	69,114,167			$	69,914,248
Buildings			178,135,823				173,089,019
			247,249,990				243,003,267
Less accumulated depreciation			(42,579,412	)			(39,252,311	)
			204,670,578				203,750,956
Operating property held for sale, net			5,577,567				5,709,040
Property under development			2,446,761				2,104,553
Net real estate investments			212,694,906				211,564,549
Cash and Cash Equivalents			189,894				587,524
Accounts Receivable — Tenants, net of allowance of $20,000 for possible losses for 2005 and 2004			152,892				627,298
Unamortized Deferred Expenses
Financing			889,169				1,003,169
Leasing costs			401,444				258,316
Other Assets			1,401,544				1,661,504
		$	215,729,849			$	215,702,360

See accompanying notes to consolidated financial statements.

Agree Realty Corporation

Consolidated Balance Sheets (Unaudited)

		September 30,				December 31,
		2005				2004
Liabilities and Stockholders’ Equity
Mortgages Payable		$	52,151,161				$53,808,689
Notes Payable			11,200,000				39,200,000
Dividends and Distributions Payable			4,088,262				3,509,083
Deferred Revenue			12,965,892				13,483,054
Accrued Interest Payable			240,969				298,115
Accounts Payable
Operating			360,652				1,441,877
Capital expenditures			418,057				393,711
Tenant Deposits			56,590				60,989
Total Liabilities			81,481,583				112,195,518
Minority Interest			5,800,443				5,874,855
Stockholders’ Equity
Common stock, $.0001 par value; 20,000,000 shares authorized, 7,670,596 and 6,487,846 shares issued and outstanding			768				649
Additional paid-in capital			142,091,685				109,599,965
Deficit			(11,731,356	)			(10,726,663	)
			130,361,097				98,873,951
Less: unearned compensation — restricted stock			(1,913,274	)			(1,241,964	)
Total Stockholders’ Equity			128,447,823				97,631,987
		$	215,729,849			$	215,702,360

See accompanying notes to consolidated financial statements.

Agree Realty Corporation

Consolidated Balance Sheets (Unaudited)

		Nine Months Ended				Nine Months Ended
		September 30, 2005				September 30, 2004
Revenues
Minimum rents		$	21,096,534			$	19,153,416
Percentage rents			39,299				21,655
Operating cost reimbursements			2,097,318				2,046,638
Other income			17,636				32,256
Total Revenues			23,250,787				21,253,965
Operating Expenses
Real estate taxes			1,315,800				1,295,235
Property operating expenses			1,434,459				1,351,992
Land lease payments			586,395				540,720
General and administrative			2,665,207				1,983,241
Depreciation and amortization			3,461,429				3,106,901
Total Operating Expenses			9,463,290				8,278,089
Income From Continuing Operations			13,787,497				12,975,876
Other Income (Expense)
Interest expense, net			(3,056,760	)			(3,338,957	)
Gain on sale of asset			6,397				—
Equity in net income of unconsolidated entities			—				216,837
Total Other Expense			(3,050,363	)			(3,122,120	)
Income Before Minority Interest and Discontinued Operations			10,737,134				9,853,756
Minority Interest			(878,644	)			(929,211	)
Income Before Discontinued Operations			9,858,490				8,924,545
Gain on Sale of Asset From Discontinued Operations net of minority interest of $54,427			—				522,741
Income From Discontinued Operations, net of minority interest of $37,060 and $41,718			415,997				400,688
Net Income		$	10,274,487			$	9,847,974
Basic and Diluted Earnings Per Share
Income before discontinued operations		$	1.30			$	1.38
Discontinued operations			.06				.14
Earnings Per Share		$	1.36			$	1.52
Weighted Average Number of Common Shares Outstanding – Basic			7,559,973				6,467,310
Weighted Average Number of Common Shares Outstanding – Dilutive			7,560,318				6,473,919

See accompanying notes to consolidated financial statements.

Agree Realty Corporation

Consolidated Statements of Income (Unaudited)

		Three Months Ended				Three Months Ended
		September 30, 2005				September 30, 2004
Revenues
Minimum rents		$	7,061,614			$	6,739,794
Percentage rents			14,227				(12,181	)
Operating cost reimbursements			613,083				599,547
Other income			1,001				30,414
Total Revenues			7,689,925				7,357,574
Operating Expenses
Real estate taxes			444,107				424,819
Property operating expenses			341,983				349,295
Land lease payments			195,465				180,240
General and administrative			911,515				686,821
Depreciation and amortization			1,167,652				1,059,775
Total Operating Expenses			3,060,722				2,700,950
Income From Continuing Operations			4,629,203				4,656,624
Other Income (Expense)
Interest expense, net			(1,028,876	)			(1,076,442	)
Gain on sale of asset			6,397				—
Equity in net income of unconsolidated entities			—				22,934
Total Other Expense			(1,022,479	)			(1,053,508	)
Income Before Minority Interest and Discontinued Operations			3,606,724				3,603,116
Minority Interest			(291,063	)			(339,774	)
Income Before Discontinued Operations			3,315,661				3,263,342
Gain on Sale of Asset From Discontinued Operations net of minority interest of $54,427			—				522,741
Income From Discontinued Operations, net of minority interest of $12,146 and $11,377			138,365				109,266
Net Income		$	3,454,026			$	3,895,349
Basic and Diluted Earnings Per Share
Income before discontinued operations		$	.43			$	.50
Discontinued operations			.02				.10
Net Income		$	.45			$	.60
Weighted Average Number of Common Shares Outstanding – Basic			7,670,598				6,467,976
Weighted Average Number of Common Shares Outstanding – Dilutive			7,672,290				6,474,278

See accompanying notes to consolidated financial statements.

Agree Realty Corporation

Consolidated Statement of Stockholders’ Equity (Unaudited)

																		Unearned
										Additional								Compensation -
		Common Stock								Paid-In								Restricted
		Shares				Amount				Capital				Deficit				Stock
Balance, January 1, 2005			6,487,846			$	649			$	109,599,965			$	(10,726,663	)		$	(1,241,964	)
Issuance of common stock, net of Issuance costs			1,150,000				115				31,456,414				—				—
Issuance of shares under Stock Incentive Plan			36,750				4				1,162,066				—				(1,162,070	)
Shares redeemed under the Stock Incentive Plan			(4,000	)			—				(126,760	)			—				—
Vesting of restricted stock			—				—				—				—				490,760
Dividends declared for the period January 1, 2005 to September 30, 2005			—				—				—				(11,279,180	)			—
Net income for the period January 1, 2005 to September 30, 2005			—				—				—				10,274,487				—
Balance, September 30, 2005			7,670,596			$	768			$	142,091,685			$	(11,731,356	)		$	(1,913,274	)

See accompanying notes to consolidated financial statements.

Agree Realty Corporation

Consolidated Statement of Cash Flows (Unaudited)

		Nine Months Ended				Nine Months Ended
		September 30, 2005				September 30, 2004
Cash Flows From Operating Activities
Net income		$	10,274,487			$	9,847,974
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation			3,560,786				3,242,077
Amortization			155,931				153,451
Stock-based compensation			490,760				427,175
Equity in net income of unconsolidated entities			—				(216,837	)
Minority interests			915,704				1,025,356
Gain on sale of assets			(6,397	)			(577,168	)
Decrease in accounts receivable			474,406				506,800
Decrease (Increase) in other assets			208,995				(364,578	)
Decrease in accounts payable			(1,081,225	)			(999,653	)
Decrease in deferred revenue			(517,162	)			(134,130	)
Increase (decrease) in accrued interest			(57,146	)			40,901
Increase (decrease) in tenant deposits			(4,399	)			16,347
Net Cash Provided By Operating Activities			14,414,740				12,967,715
Cash Flows From Investing Activities
Acquisition of real estate investments (including capitalized interest of $390,000 in 2005 and $183,000 in 2004)			(5,397,651	)			(15,197,360	)
Distributions from unconsolidated entities			—				216,837
Decrease in restricted cash			—				4,309,914
Net proceeds from the sale of assets			1,176,263				2,046,493
Net Cash Used In Investing Activities			(4,221,388	)			(8,624,116	)
Cash Flows From Financing Activities
Net proceeds from the issuance of common stock			31,456,414				—
Payments of mortgages payable			(1,657,528	)			(1,605,618	)
Dividends and limited partners’ distributions paid			(11,690,002	)			(10,373,785	)
Line-of-credit net borrowings (payments)			(28,000,000	)			7,400,000
Repayments of capital expenditure payables			(393,711	)			(361,769	)
Redemption of restricted stock			(126,760	)			(169,680	)
Payment of leasing costs			(179,395	)			(20,693	)
Net Cash (Used In) Financing Activities			(10,590,982	)			(5,131,545	)
Net Decrease In Cash and Cash Equivalents			(397,630	)			(787,946	)
Cash and Cash Equivalents, beginning of period			587,524				1,004,090
Cash and Cash Equivalents, end of period		$	189,894			$	216,144

Agree Realty Corporation

Consolidated Statement of Cash Flows (Unaudited)

		Nine Months Ended				Nine Months Ended
		September 30, 2005				September 30, 2004
Supplemental Disclosure of Cash flow Information
Cash paid for interest (net of amounts capitalized)		$	2,999,907			$	3,204,600
Supplemental Disclosure of Non-Cash Transactions
Dividends and limited partners’ distributions declared and unpaid		$	4,088,262			$	3,500,079
Shares issued under Stock Incentive Plan		$	1,162,070			$	1,159,518
Real estate investments financed with accounts payable		$	418,057			$	555,123

See accompanying notes to consolidated financial statements.

Agree Realty Corporation

Notes to Consolidated Financial Statements

1.		Basis of Presentation		The accompanying unaudited consolidated financial statements for the three months and nine months ended September 30, 2005 and 2004 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date. Operating results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005, or for any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.
2.		Earnings Per Share		Earnings per share has been computed by dividing the net income by the weighted average number of common shares outstanding. The per share amounts reflected in the consolidated statements of income are presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 Earnings per Share.
3.		Discontinued Operations		In August 2004, we completed the sale of a single tenant property for approximately $2.2 million. The property was leased to Kmart Corporation and was located in Perrysburg, Ohio. The results of operations for this property is presented as discontinued operations in our Consolidated Statements of Income.
				During October 2005, we completed the sale of a shopping center for approximately $8.8 million. The shopping center was anchored by Kmart Corporation and Roundy’s Foods and was located in Iron Mountain, Michigan. The results of operations for this property are also presented as discontinued operations in our Consolidated Statements of Income.
				The aggregate revenues from these properties were $785,308 and $876,717 for the nine months ended September 30, 2005 and 2004. The aggregate expenses for these properties were $369,311 and $476,029, including minority interest charges of $37,060 and $41,718, for the nine months ended September 30, 2005 and 2004 respectively.
				The aggregate revenues from these properties were $256,835 and $269,454 for the three months ended September 30, 2005 and 2004. The aggregate expenses for these properties were $118,470 and $160,188, including minority interest charges of $12,146 and $11,377 for the three months ended September 30, 2005 and 2004 respectively.
4.		Equity Transactions		On January 25, 2005, we completed an offering of 1,000,000 shares of common stock at $28.28 per share; on February 7, 2005 the underwriter exercised its over allotment option for an additional 150,000 shares at the same per share price (collectively, the 2005 Offering). The net proceeds from the 2005 Offering of approximately $31.5 million were used to repay amounts outstanding under our credit facility.

Agree Realty Corporation

Part I

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Management has included herein certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. When used, statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions, are intended to identify forward-looking statements. Such statements are, by their nature, subject to certain risks and uncertainties. Risks and other factors that might cause future results to differ from the statements include, but are not limited to, the effect of economic and market conditions; risks that our acquisition and development projects will fail to perform as expected; financing risks, such as the inability to obtain debt or equity financing on favorable terms; the level and volatility of interest rates; loss or bankruptcy of one or more of our major retail tenants; and failure of our properties to generate additional income to offset increases in operating expenses. For a description of the specific risks associated with the operation of our business, please see our Form 10-K for the fiscal year ended December 31, 2004.

Overview

We were established to continue to operate and expand the retail property business of our predecessor. We commenced operations in April 1994. Our assets are held by, and all operations are conducted through, Agree Limited Partnership (the “Operating Partnership”), of which Agree Realty Corporation is the sole general partner and held a 91.93% interest as of September 30, 2005. We are operating so as to qualify as a real estate investment trust (REIT) for federal income tax purposes.

On January 25, 2005, we completed an offering of 1,000,000 shares of common stock at $28.28 per share. On February 7, 2005, the underwriter exercised its over allotment option for an additional 150,000 shares at the same per share price (collectively, the 2005 Offering). The net proceeds from the 2005 Offering of approximately $31.5 million were used to repay amounts outstanding our credit facility.

The following should be read in conjunction with the Consolidated Financial Statements of Agree Realty Corporation, including the respective notes thereto, which are included in this Form 10-Q.

Agree Realty Corporation

Part I

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 123 (R), to expand and clarify SFAS No. 123 in several areas. The Statement requires companies to measure the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. The cost is recognized over the requisite service period (usually the vesting period) for the estimated number of instruments where service is expected to be rendered. This statement is effective for the interim reporting periods beginning after December 15, 2005. We do not expect that our financial statements will be materially impacted by SFAS No. 123 (R).

Critical Accounting Policies

In the course of developing and evaluating accounting policies and procedures, we use estimates, assumptions and judgments to determine the most appropriate methods to be applied. Such processes are used in determining revenue recognition, capitalization of costs related to real estate investments, potential impairment of real estate investments, operating cost reimbursements, and taxable income.

Minimum rental income attributable to leases is recorded when due from tenants. Certain leases provide for additional percentage rents based on tenants’ sales volumes. These percentage rents are recognized when determinable by us. 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.

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 our 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.

Agree Realty Corporation

Part I

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the Code), commencing with our 1994 tax year. As a result, we are not subject to federal income taxes to the extent that we distribute annually at least 90% of our REIT taxable income to our stockholders and satisfy certain other requirements defined in the Code. Accordingly, no provision was made for federal income taxes in the accompanying consolidated financial statements.

Comparison of Nine Months Ended September 30, 2005 to Nine Months Ended September 30, 2004

Minimum rental income increased $1,944,000, or 10%, to $21,097,000 in 2005, compared to $19,153,000 in 2004. The increase was the result of an increase of $931,000 due to additional rent resulting from the acquisition of our joint venture partner’s interest in two joint venture properties in 2004, an increase of $853,000 from the development and acquisition of five properties in 2004 and 2 properties in 2005, an increase of $64,000 from the settlement of our rent dispute with Borders and rental increases of $96,000 from new and existing tenants.

Percentage rental income increased $17,000, or 81%, to $39,000 in 2005, compared to $22,000 in 2004. The increase was the result of increased tenant sales.

Operating Cost Reimbursements increased $50,000, or 2%, to $2,097,000 in 2005, compared to $2,047,000 in 2004. Operating cost reimbursements increased due to the increase in real estate taxes and property operating expenses as explained below.

Other income decreased $14,000, to $18,000 in 2005, compared to $32,000 in 2004. The decrease was the result of signage sold at one of our properties in 2004. No signage was sold in 2005.

Real estate taxes increased $21,000, or 2%, to $1,316,000 in 2005, compared to $1,295,000 in 2004. The increase is the result of general assessment adjustments.

Property operating expenses (shopping center maintenance, insurance and utilities) increased $82,000, or 6%, to $1,434,000 in 2005 compared to $1,352,000 in 2004. The increase was the result of decreased snow removal costs of ($5,000); an increase in shopping center maintenance costs of $65,000; an increase in utility costs of $15,000; and an increase in insurance costs of $7,000 in 2005 versus 2004.

Land lease payments increased $45,000, or 8%, to $586,000 in 2005 compared to $541,000 for 2004. The increase is the result of the scheduled lease increase at our Aventura, Florida property.

Agree Realty Corporation

Part I

General and administrative expenses increased by $682,000, or 34%, to $2,665,000 in 2005, compared to $1,983,000 in 2004. The increase was the result of increased compensation related expenses as a result of salary increases and the addition of three employees of $325,000, increased contracted services to investigate development opportunities of $278,000 and increased property related expenses of $79,000. General and administrative expenses as a percentage of total rental income increased from 10.3% for 2004 to 12.3% for 2005.

Depreciation and amortization increased $354,000, or 11%, to $3,461,000 in 2005, compared to $3,107,000 in 2004. The increase was the result of the development and acquisition of five properties in 2004, two properties in 2005 and the acquisition of the joint venture partner’s interest in two joint venture properties in 2004.

Interest expense decreased $282,000, or 8%, to $3,057,000 in 2005, from $3,339,000 in 2004. The decrease in interest expense resulted from decreased borrowings as a result of the reduction in outstanding indebtedness from the application of the net proceeds of the 2005 Offering.

We sold a parcel of land and recognized a gain on the sale of $6,000 in 2005. There were no sale of assets in 2004

Equity in net income of unconsolidated entities totaled $217,000 in 2004. There was no income from unconsolidated entities in 2005 since we acquired the interest of our joint venture partner in our final two joint ventures in 2004.

Our income before minority interest and discontinued operations increased $883,000, or 9%, to $10,737,000 in 2005 from $9,854,000 in 2004 as a result of the foregoing factors.

Comparison of Three Months Ended September 30, 2005 to Three Months Ended September 30, 2004

Minimum rental income increased $322,000, or 5%, to $7,062,000 in 2005, compared to $6,740,000 in 2004. The increase was the result of an increase of $190,000 due to additional rent resulting from the acquisition of our joint venture partner’s interest in two joint venture properties in 2004, an increase of $305,000 from the development and acquisition of three properties in 2004 and two properties in 2005 and rental decreases of ($173,000) from new and existing tenants.

Percentage rental income increased $26,000, to $14,000 in 2005 compared to ($12,000) in 2004. The increase was the result of increased tenant sales.

Agree Realty Corporation

Part I

Operating Cost Reimbursements increased $13,000, or 2%, to $613,000 in 2005, compared to $600,000 in 2004. Operating cost reimbursements increased due to the increase in property operating expenses as explained below.

Other income decreased $29,000, to $1,000 in 2005, compared to $30,000 in 2004. The decrease was primarily the result of the sale of signage in 2004 with no such income in 2005.

Real estate taxes increased $19,000, or 5%, to $444,000 in 2005, compared to $425,000 in 2004. The increase is the result of general assessment adjustments.

Property operating expenses (shopping center maintenance, insurance and utilities) decreased ($7,000), or 2%, to $342,000 in 2005 compared to $349,000 in 2004. The decrease was the result of decreased shopping center maintenance costs of ($16,000); an increase in utility costs of $6,000; and an increase in insurance costs of $3,000 in 2005 versus 2004.

Land lease payments increased $15,000, or 8%, to $195,000 in 2005 compared to $180,000 for 2004. The increase is the result of the scheduled lease increase at our Aventura, Florida property.

General and administrative expenses increased by $225,000, or 33%, to $912,000 in 2005, compared to $687,000 in 2004. The increase was the result of increased compensation related expenses as a result of salary increases and the addition of three employees of $184,000, increased contracted services to investigate Florida development opportunities of $4,000 and increased property related expenses of $37,000. General and administrative expenses as a percentage of total rental income increased from 10.2% for 2004 to 12.0% for 2005.

Depreciation and amortization increased $108,000, or 10%, to $1,168,000 in 2005, compared to $1,060,000 in 2004. The increase was the result of the development and acquisition of three properties in 2004 and two properties in 2005 and the acquisition of the joint venture partner’s interest in two joint venture properties in 2004.

Interest expense decreased $47,000, or 4%, to $1,029,000 in 2005, from $1,076,000 in 2004. The decrease in interest expense resulted from decreased borrowings as a result of the reduction in outstanding indebtedness from the application of the net proceeds of the 2005 Offering.

We sold a parcel of land and recognized a gain on the sale of $6,000 in 2005. There were no sales of assets in 2004.

Agree Realty Corporation

Part I

Equity in net income of unconsolidated entities totaled $23,000 in 2004. There was no income from unconsolidated entities in 2005 since we acquired the interest of our joint venture partner in our final two joint ventures in 2004.

Our income before minority interest and discontinued operations increased $4,000, to $3,607,000 in 2005 from $3,603,000 in 2004 as a result of the foregoing factors.

Liquidity and Capital Resources

Our principal demands for liquidity are distributions to our stockholders, debt repayment, development of new properties and future property acquisitions.

During the quarter ended September 30, 2005, we declared a quarterly dividend of $.49 per share. The dividend was paid on October 13, 2005, to holders of record on September 30, 2005.

As of September 30, 2005, we had total mortgage indebtedness of $52,151,161 with a weighted average interest rate of 6.63%. Future scheduled annual maturities of mortgages payable for the years ending September 30 are as follows: 2006 — $2,357,881; 2007 — $2,579,091; 2008 - $2,740,300; 2009 — $2,921,939; and 2010 — $3,120,947. This mortgage debt is all fixed rate debt.

In addition, the operating partnership has in place a $50 million credit facility with LaSalle Bank, as the agent (Credit Facility), which we guarantee. The credit facility matures in November 2006 and can be extended for an additional three years. During the three year extension period, we will have no further ability to borrow under this facility and will be required to repay a portion of the unpaid principal on a quarterly basis. 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 our option, 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 our properties which are not otherwise encumbered and properties to be acquired or developed. As of September 30, 2005 $9,000,000 was outstanding under the credit facility bearing a weighted average interest rate of 4.95%.

We also have in place a $5 million line of credit, which matures on June 30, 2006. 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 our option. The purpose of the line of credit is to provide working capital to the Company and fund land options and start-up costs associated with new projects. As of September 30, 2005, $2,200,000 was outstanding under the line of credit bearing a weighted average interest rate of 6.25%.

Agree Realty Corporation

Part I

The following table outlines our contractual obligations (in thousands) as of September 30, 2005.

		Total				Yr 1				2-3 Yrs				4-5 Yrs				Over 5 Yrs
Mortgages Payable		$	52,151			$	2,358			$	5,319			$	6,043			$	38,431
Notes Payable			11,200				2,200				482				8,518				—
Land Lease Obligation			13,761				782				1,564				1,575				9,840
Other Long-Term Liabilities			—				—				—				—				—
Total		$	77,112			$	5,340			$	7,365			$	16,136			$	48,271

We have one development project under construction that will add an additional 14,559 square feet of GLA to our portfolio. The project is expected to be completed during the fourth quarter of 2005. Additional funding required to complete the project is estimated to be $313,000 and will come from the credit facility.

We intend to meet our short-term liquidity requirements, including capital expenditures related to the leasing and improvement of the properties, through cash flow provided by operations and the line of credit. We believe that adequate cash flow will be available to fund our operations and pay dividends in accordance with REIT requirements. We may obtain additional funds for future development or acquisitions through other borrowings or the issuance of additional shares of common stock. We intend to incur additional debt in a manner consistent with our policy of maintaining a ratio of total debt (including construction and acquisition financing) to total market capitalization of 65% or less. We believe that these financing sources will enable us to generate funds sufficient to meet both our short-term and long-term capital needs.

We plan to begin construction of additional pre-leased developments and may acquire additional properties, which will initially be financed by the credit facility and lien of credit. We will periodically refinance short-term construction and acquisition financing with long-term debt and / or equity.

Agree Realty Corporation

Part I

Inflation

Our leases generally contain provisions designed to mitigate the adverse impact of inflation on net income. These provisions include clauses enabling the us to pass through to tenants certain operating costs, including real estate taxes, common area maintenance, utilities and insurance, thereby reducing the our exposure to increases in costs and operating expenses resulting from inflation. Certain of our leases contain clauses enabling us 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 us to seek increased rents upon re-lease at market rates if rents are below the then existing market rates.

Funds from Operations

We consider Funds from Operations (FFO) to be a useful supplemental measure to evaluate our operating performance because, by excluding gains or losses on dispositions and excluding depreciation FFO can help one compare the operating performance of our real estate between periods or compare such performance to that of different companies. Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income by itself as the primary measure of our operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictable over time. Since real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that uses historical cost accounting is insufficient by itself.

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 should not be considered as an alternative to net income as the primary indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. While we adhere to the NAREIT definition of FFO in making our calculation 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.

Agree Realty Corporation

Part I

The following tables illustrate the calculation of FFO for the nine months and three months ended September 30, 2005 and 2004:

Nine Months Ended September 30,		2005				2004
Net income		$	10,274,487			$	9,847,974
Depreciation of real estate assets			3,521,149				3,215,509
Amortization of leasing costs			36,267				33,788
Gain on sale of fixed asset			(6,397	)			(577,168	)
Minority interest			915,704				1,025,356
Funds from Operations		$	14,741,210			$	13,545,459
Weighted Average Shares and OP Units Outstanding — Dilutive			8,233,865				7,147,466

Three Months Ended September 30,		2005				2004
Net income		$	3,454,026			$	3,895,349
Depreciation of real estate assets			1,185,378				1,088,888
Amortization of leasing costs			12,089				11,804
Gain on sale of fixed asset			(6,397	)			(577,168	)
Minority interest			303,209				405,578
Funds from Operations		$	4,948,305			$	4,824,451
Weighted Average Shares and OP Units Outstanding – Dilutive			8,345,837				7,147,825

Agree Realty Corporation

Part I

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate risk primarily through 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 our future financing requirements.

Our 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.

		Year ended September 30,
		2006				2007				2008				2009				2010				Thereafter				Total
Fixed rate debt			2,358				2,579				2,740				2,922				3,121				38,431				52,151
Average interest rate			6.63				6.63				6.63				6.63				6.63				6.63
Variable rate debt			2,200				241				241				8,518				—				—				11,200
Average interest rate			6.25				4.95				4.95				4.95				—				—				—

The fair value (in thousands) is estimated at $52,200 and $11,200 for fixed rate debt and variable rate debt, respectively

The table above incorporates those exposures that exist as of September 30, 2005; it does not consider those exposures or position, which could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period and interest rates.

We do 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 our debt bearing interest at variable rates would result in an increase in interest expense of approximately $67,000.

Agree Realty Corporation

Part I

ITEM 4. CONTROLS AND PROCEDURES

At December 31, 2004 management identified a material weakness in our internal controls regarding the segregation of duties resulting from the fact that we do not have an accounting staff sufficient to enable us to comply with acceptable internal controls under Section 404 of the Sarbanes-Oxley Act of 2002. At September 30, 2005, we had ten employees, one of which (our Chief Financial Officer) was engaged full time in the period-end financial reporting process. Our audit committee has engaged an independent third party consultant to perform periodic reviews of our financial reporting process to help mitigate the material weakness in our internal controls.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), as of the end of the period covered by this report.

Based on this evaluation as of September 30, 2005, and due to the material weakness in our internal control over financial reporting as described above, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. There was no change in our internal control over financial reporting during the most recently completed fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Our audit committee has engaged independent third party consultants to perform periodic reviews of our financial reporting process to help mitigate the material weakness in our internal controls.

Agree Realty Corporation

Part II

Other Information

Item 1.		Legal Proceedings None

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds None

Item 3.		Defaults Upon Senior Securities None

Item 4.		Submission of Matters to a Vote of Security Holders None

Item 5.		Other Information None

Agree Realty Corporation

Part II

Item 6.     Exhibits

3.1		Articles of Incorporation and Articles of Amendment of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-11 (Registration Statement No. 33-73858, as amended (“Agree S-11”))

3.2		Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Agree S-11)

10.1		Employment Agreement , dated August 1, 2005, by and between the Company and Charles Carter

10.2		Employment Agreement dated September 1, 2005, by and between the Company and Vicky Umphryes

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Richard Agree, Chief Executive Officer

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Kenneth R. Howe, Chief Financial Officer

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Richard Agree, Chief Executive Officer

32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kenneth R. Howe, Chief Financial Officer

Agree Realty Corporation

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has fully caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Agree Realty Corporation
/s/ RICHARD AGREE
Richard Agree
President and Chief Executive Officer

/s/ KENNETH R. HOWE   Kenneth R. Howe
Vice-President — Finance and Secretary
(Principal Financial Officer)

Date: November 4, 2005

INDEX TO EXHIBITS

Exhibit Number		Exhibit
10.1		Employment Agreement , dated August 1, 2005, by and between the Company and Charles Carter
10.2		Employment Agreement dated September 1, 2005, by and between the Company and Vicky Umphryes
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Richard Agree, Chief Executive Officer
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Kenneth R. Howe, Chief Financial Officer
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Richard Agree, Chief Executive Officer
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kenneth R. Howe, Chief Financial Officer