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

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2005

OR

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

For the transition period from                    to                    

Commission File Number 1-12928

Agree Realty Corporation


(Exact name of registrant as specified in its charter)
 
Maryland   38-3148187

(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)
     
     
31850 Northwestern Highway, Farmington Hills, Michigan   48334

(Address of principal executive offices)   (Zip Code)

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

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

Yes                              No
þ                              o

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

Yes                              No
þ                              o

As of May 5, 2005 the Registrant had 7,674,069 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
       
    3  
    5  
    6  
    7  
    8  
    9  
    14  
    15  
       
    16  
    16  
    16  
    16  
    16  
    17  
Signatures
    18  
 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

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Agree Realty Corporation

Consolidated Balance Sheets (Unaudited)


                 
    March 31,     December 31,  
    2005     2004  
 
Assets
               
                 
Real Estate Investments
               
Land
  $ 70,592,068     $ 70,592,068  
Buildings
    180,611,121       180,595,915  
Property under development
    4,161,030       2,104,553  
 
 
    255,364,219       253,292,536  
Less accumulated depreciation
    (42,886,623 )     (41,727,987 )
 
Net Real Estate Investments
    212,477,596       211,564,549  
                 
Cash and Cash Equivalents
    158,883       587,524  
                 
Accounts Receivable - Tenants, net of allowance of $20,000 and $20,000 for possible losses
    416,123       627,298  
                 
Unamortized Deferred Expenses
               
Financing
    965,169       1,003,169  
Leasing costs
    411,184       258,316  
                 
Other Assets
    1,571,342       1,661,504  
 
 
 
  $ 216,000,297     $ 215,702,360  
 

See accompanying notes to consolidated financial statements.

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Agree Realty Corporation

Consolidated Balance Sheets (Unaudited)


                 
    March 31,     December 31,  
    2005     2004  
 
Liabilities and Stockholders’ Equity
               
 
               
Mortgage Payable
  $ 53,246,438     $ 53,808,689  
 
               
Notes Payable
    9,000,000       39,200,000  
 
               
Dividends and Distributions Payable
    4,079,319       3,509,083  
 
               
Deferred Revenue
    13,310,667       13,483,054  
 
               
Accrued Interest Payable
    112,662       298,115  
 
               
Accounts Payable
               
Operating
    834,498       1,441,877  
Capital expenditures
    681,270       393,711  
 
               
Tenant Deposits
    56,990       60,989  
 
 
               
Total Liabilities
    81,321,844       112,195,518  
 
 
               
Minority Interest
    5,848,005       5,874,855  
 
 
               
Stockholders’ Equity
               
Common stock, $.0001 par value; 20,000,000 shares authorized, 7,674,069 and 6,487,846 shares issued and outstanding
    768       649  
Additional paid-in capital
    142,218,705       109,599,965  
Deficit
    (11,185,066 )     (10,726,663 )
 
 
               
 
    131,034,407       98,873,951  
Less: unearned compensation — restricted stock
    (2,203,959 )     (1,241,964 )
 
 
               
Total Stockholders’ Equity
    128,830,448       97,631,987  
 
 
               
 
  $ 216,000,297     $ 215,702,360  
 

See accompanying notes to consolidated financial statements.

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Agree Realty Corporation

Consolidated Statements of Income (Unaudited)


                 
    Three Months Ended     Three Months Ended  
    March 31, 2005     March 31, 2004  
 
Revenues
               
Minimum rents
  $ 7,267,053     $ 6,316,111  
Percentage rents
    24,156       24,761  
Operating cost reimbursements
    804,563       845,775  
Other income
          1,579  
 
 
               
Total Revenues
    8,095,772       7,188,226  
 
 
               
Operating Expenses
               
Real estate taxes
    469,153       452,311  
Property operating expenses
    665,931       685,000  
Land lease payments
    195,465       180,240  
General and administrative
    919,771       632,947  
Depreciation and amortization
    1,186,035       1,068,944  
 
 
               
Total Operating Expenses
    3,436,355       3,019,442  
 
 
               
Income From Continuing Operations
    4,659,417       4,168,784  
 
 
               
Other Income (Expense)
               
Interest expense, net
    (1,054,338 )     (1,103,723 )
Equity in net income of unconsolidated entities
          96,951  
 
 
               
Total Other Expense
    (1,054,338 )     (1,006,772 )
 
 
               
Income Before Minority Interest and Discontinued Operations
    3,605,079       3,162,012  
 
               
Minority Interest
    303,188       298,178  
 
 
               
Income Before Discontinued Operations
    3,301,891       2,863,834  
 
               
Income From Discontinued Operations, net of minority interest of $3,319
          31,882  
 
 
               
Net Income
  $ 3,301,891     $ 2,895,716  
 
 
               
Basic and Diluted Earnings Per Share
               
Income before discontinued operations
  $ .450     $ .445  
Discontinued operations
          .005  
 
 
               
Earnings Per Share
  $ .450     $ .450  
 
 
               
Weighted Average Number of Common Shares Outstanding – Basic
    7,331,526       6,466,971  
 
 
               
Weight Average Number of Common Shares Outstanding — Dilutive
    7,333,083       6,475,222  
 

See accompanying notes to consolidated financial statements.

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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       31,466,654                  
 
                                       
Issuance of shares under Stock Incentive Plan
    40,223       4       1,278,846             (1,124,995 )
 
                                       
Shares redeemed under the stock Incentive Plan
    (4,000 )           (126,760 )            
 
                                       
Vesting of restricted stock
                            163,000  
 
                                       
Dividends declared for the period January 1, 2005 to March 31, 2005
                      (3,760,294 )      
 
                                       
Net income for the period January 1, 2005 to March 31, 2005
                      3,301,891        
 
 
                                       
Balance, March 31, 2005
    7,674,069     $ 768     $ 142,218,705     $ (11,185,066 )   $ (2,203,959 )
 

See accompanying notes to consolidated financial statements.

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Agree Realty Corporation

Consolidated Statements of Cash Flows (Unaudited)


                 
    Three Months Ended     Three Months Ended  
    March 31, 2005     March 31, 2004  
 
Cash Flows From Operating Activities
               
Net income
  $ 3,301,891     $ 2,895,716  
Adjustments to reconcile net income to net cash provided by operating activities
    1,172,287       1,070,802  
Depreciation
    1,172,287       1,070,802  
Amortization
    51,748       50,658  
Stock-based compensation
    163,000       120,000  
Equity in net income of unconsolidated entities
          (96,951 )
Minority interests
    303,188       301,497  
Decrease in accounts receivable
    211,175       196,612  
(Increase) decrease in other assets
    74,623       (118,068 )
Decrease in accounts payable
    (607,379 )     (548,054 )
Decrease in deferred revenue
    (172,387 )      
Decrease in accrued interest
    (185,453 )     (354 )
Increase (decrease) in tenant deposits
    (3,999 )     1,250  
 
 
               
Net Cash Provided By Operating Activities
    4,308,694       3,873,108  
 
 
               
Cash Flows From Investing Activities
               
Acquisition of real estate investments (including capitalized interest of $122,000 in 2005 and $40,000 in 2004)
    (1,390,413 )     (4,952,267 )
Distributions from unconsolidated entities
          96,951  
Decrease in restricted cash
          4,309,914  
 
 
               
Net Cash Used In Investing Activities
    (1,390,413 )     (545,402 )
 
 
               
Cash Flows From Financing Activities
               
Net proceeds from the issuance of common stock
    31,466,769        
Dividends and limited partners’ distributions paid
    (3,520,096 )     (3,447,328 )
Payments of mortgages payable
    (562,251 )     (526,420 )
Line-of-credit proceeds (payments)
    (30,200,000 )     400,000  
Payments of payables for capital expenditures
    (239,856 )     (361,769 )
Redemption of restricted stock
    (126,760 )     (169,680 )
Payment of leasing costs
    (164,728 )     (8,704 )
 
 
               
Net Cash Provided By (Used In) Financing Activities
    (3,346,922 )     (4,113,901 )
 
 
               
Net Decrease In Cash and Cash Equivalents
    (428,641 )     (786,195 )
Cash and Cash Equivalents, beginning of period
    587,524       1,004,090  
 
 
               
Cash and Cash Equivalents, end of period
  $ 158,883     $ 217,895  
 
 
               
Supplemental Disclosure of Cash flow Information
               
Cash paid for interest (net of amounts capitalized)
  $ 1,201,791     $ 1,085,969  
 
 
               
Supplemental Disclosure of Non-Cash Transactions
               
Dividends and limited partners’ distributions declared and unpaid
  $ 4,079,319     $ 3,463,151  
Real estate investments financed with accounts payable
  $ 681,270     $ 174,920  
Shares issued under Stock Incentive Plan
  $ 1,278,850     $ 1,092,343  
 

See accompanying notes to consolidated financial statements.

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Agree Realty Corporation

Notes to Consolidated Financial Statements


1. Basis of Presentation

The accompanying unaudited consolidated financial statements for the fiscal quarter ended March 31, 2005 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 three months ended March 31, 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 the Company’s 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 the Company 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 the Company’s Consolidated Statements of Income.

The revenues from this property were $58,467 for the three months ended March 31, 2004. The expenses for this property were $26,585 including minority interest charges of $3,319, for the three months ended March 31, 2004.

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.

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Agree Realty Corporation

Part I


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

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 the Company’s acquisition and development projects will fail to perform as expected; financing risks, such as the inability to obtain debt or equity financing on favorable terms; the level and volatility of interest rates; loss or bankruptcy of one or more of the Company’s major retail tenants; and failure of the Company’s properties to generate additional income to offset increases in operating expenses. 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 our 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 March 31, 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 under 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 elsewhere in this Form 10-Q.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standards (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).

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Agree Realty Corporation

Part I


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 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 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.

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 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 Three Months Ended March 31, 2005 to Three Months Ended March 31, 2004

Minimum rental income increased $951,000, or 15%, to $7,267,000 in 2005, compared to $6,316,000 in 2004. The increase was the result of an increase of $370,000 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 $344,000 from the development and acquisition of five properties in 2004, an increase of $64,000 from the settlement of our rent dispute with Borders and rental increases of $173,000 from existing properties.

Percentage rental income remained relatively constant at $24,000 in 2005 and $25,000 in 2004.

Operating cost reimbursements decreased $(41,000), or 5%, to $805,000 in 2005, compared to $846,000 in 2004. Operating cost reimbursement decreased due to the decrease in the reimbursable property operating expenses as explained below and income recognized from an adjustment to the bad debt reserve of $50,000 in 2004.

Other income remained relatively constant at $-0- in 2005 and $2,000 in 2004.

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Agree Realty Corporation

Part I


Real estate taxes increased $17,000, or 4%, to $469,000 in 2005 compared to $452,000 in 2004. The increase is the result of general assessment adjustments.

Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) decreased $19,000, or 14%, to $666,000 in 2005 compared to $685,000 in 2004. The decrease was the result of increased shopping center maintenance of $8,000; decreased snow removal costs of ($33,000); an increase in utility costs of $4,000; and an increase in insurance costs of $2,000 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 $287,000, or 45%, to $920,000 in 2005 compared to $633,000 in 2004. The increase was the result of increased compensation related expenses as a result of salary increases and the addition of two employees of $83,000, increased contracted services to investigate Florida development opportunities of $191,000 and increased property management related expenses of $13,000. General and administrative expenses as a percentage of rental income increased from 9.9% for 2004 to 12.6% for 2005.

Depreciation and amortization increased $117,000, or 11%, to $1,186,000 in 2005 compared to $1,069,000 in 2004. The increase was the result of the development and acquisition of five properties in 2004 and the acquisition of the joint venture partner’s interest in two joint venture properties in 2004.

Interest expense decreased $50,000, or 4%, to $1,054,000 in 2005, from $1,104,000 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.

Equity in net income of unconsolidated entities totaled $97,000 in 2004. There was no income from unconsolidated entities in 2005 since we acquired the interest of our joint venture partner’s interest in our final two joint venture properties in 2004.

The Company’s income before minority interest and discontinued operations increased $443,000, or 14%, to $3,605,000 in 2005, from $3,162,000 in 2004 as a result of the foregoing factors.

Liquidity and Capital Resources

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

During the quarter ended March 31, 2005, we declared a quarterly dividend of $.49 per share. The dividend was paid on April 14, 2005 to holders of record on March 31, 2005.

As of March 31, 2005, we had total mortgage indebtedness of $53,246,438 with a weighted average interest rate of 6.63%. Future scheduled annual maturities of mortgages payable for the years ending March 31 are as follows: 2006 — $2,225,942; 2007 — $2,495,525; 2008 — $2,660,733; 2009 - $2,827,257; 2010 — $3,019,799. The mortgage debt is all fixed rate, self-amortizing debt.

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Agree Realty Corporation

Part I


In addition, the Operating Partnership has in place a $50 million credit facility with Standard Federal Bank, as the agent (Credit Facility), which is guaranteed by the Company. 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 lender’s prime rate, at the 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 the properties which are not otherwise encumbered and properties to be acquired or developed. As of March 31, 2005, $9,000,000 was outstanding under the Credit Facility bearing a weighted average interest rate of 3.91%.

We also have in place a $5 million line of credit (Line of Credit), which matures on June 30, 2005, and which we expect 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 our option. The purpose of the Line of Credit is to provide working capital and fund land options and start-up costs associated with new projects. As of March 31, 2005 there were $-0- outstanding under the Line of Credit.

The following table outlines our contractual obligations (in thousands) as of March 31, 2005.

                                         
    Total     Yr 1     2-3 Yrs     4-5 Yrs     Over 5 Yrs  
 
Mortgages Payable
    53,246     $ 2,226     $ 5,157     $ 5,847     $ 40,016  
 
                                       
Notes Payable
    9,000             300       8,700        
 
                                       
Land Lease Obligation
    14,692       782       1,564       1,575       10,771  
 
                                       
Other Long-Term Liabilities
                             
 
 
                                       
Total
  $ 76,938     $ 3,008     $ 7,021     $ 16,122     $ 50,787  
     

We have three development projects under construction that will add an additional 44,199 square feet of GLA to our portfolio. The projects are expected to be completed during the second and third quarters of 2005. Additional funding required for the projects is estimated to be $3,500,000 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.

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Agree Realty Corporation

Part I


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 Line of Credit. We will periodically refinance short-term construction and acquisition financing with long-term debt and / or equity. Upon completion of refinancing, we intend to lower the ratio of total debt to market capitalization to 50% or less. Nevertheless, we 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.

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 an investor 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.

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Part I


The following tables illustrate the calculation of FFO for the three months ended March 31, 2005 and 2004:

                 
Three Months Ended March 31,   2005     2004  
 
Net income
  $ 3,301,891     $ 2,895,716  
Depreciation of real estate assets
    1,160,524       1,062,211  
Amortization of leasing costs
    11,860       10,770  
Minority interests
    303,188       301,497  
 
 
               
Funds from Operations
  $ 4,777,463     $ 4,270,194  
 
 
               
Weighted Average Shares and OP Units Outstanding
    8,006,630       7,148,769  
 

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are 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.

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 March 31,              
    2006     2007     2008     2009     2010     Thereafter     Total  
Fixed rate debt
    2,226       2,496       2,661       2,827       3,020       40,016       53,246  
Average interest rate
    6.63       6.63       6.63       6.63       6.63       6.63        
 
                                                       
Variable rate debt
          60       240       8,700                   9,000  
Average interest rate
    3.91       3.91       3.91       3.91       3.91              

The fair value (in thousands) is estimated at $54,000 and $9,000 for fixed rate debt and variable rate debt, respectively.

The table above incorporates those exposures that exist as of March 31, 2005; it does not consider those exposures or positions, 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.

The Company does not enter into financial instruments transactions for trading or other speculative purposes or to manage interest rate exposure.

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Part I


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 $35,000.

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 March 31, 2005, we had nine 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, 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.

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Agree Realty Corporation

Part II


Other Information

Item 1. Legal Proceedings

     None

Item 2. Changes in Securities

     None

Item 3. Defaults Upon Senior Securities

     None

Item 4. Submission of Matters to a Vote of Security Holders

     None

Item 5. Other Information

     None

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Part II


Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits

   3.1   Articles of Incorporation and Articles of Amendment of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-11 (Registration Statement No. 33-73858, as amended (“Agree S-11”))
 
   3.2   Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Agree S-11)
 
  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

     (b) Reports on Form 8-K

On April 26, 2005, the Company furnished an 8-K disclosing its first quarter 2005 results of operations and financial condition.

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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: May 5, 2004
 

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Exhibit Index

     
No.   Description
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”))
 
   
3.3
  Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Agree S-11)
 
   
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