AGREE REALTY CORP - Quarter Report: 2006 March (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 March 31, 2006

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 (State or other jurisdiction of incorporation or organization)		38-3148187 (I.R.S. Employer Identification No.)
31850 Northwestern Highway, Farmington Hills, Michigan (Address of principal executive offices)		48334 (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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer		Accelerated filer		Non-accelerated filer
o		þ		o

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

Yes o		No þ

As of May 5, 2006 the Registrant had 7,706,846 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 March 31, 2006 and December 31, 2005			3-4
		Consolidated Statements of Income for the three months ended March 31, 2006 and 2005			5
		Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2006			6
		Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005			7-8
		Notes to Consolidated Financial Statements			9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			10-16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			17
Item 4.		Controls and Procedures			18
Part II:		Other Information
Item 1.		Legal Proceedings			19
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			19
Item 3.		Defaults Upon Senior Securities			19
Item 4.		Submission of Matters to a Vote of Security Holders			19
Item 5		Other Information			19
Item 6.		Exhibits			20
Signatures					21
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)

		March 31,				December 31,
		2006				2005
Assets
Real Estate Investments
Land		$	73,035,167			$	73,035,167
Buildings			184,799,586				185,032,185
Property under development			495,195				264,913
			258,329,948				258,332,265
Less accumulated depreciation			(44,790,456	)			(43,771,581	)
Net real estate investments			213,539,492				214,560,684
Cash and Cash Equivalents			238,400				5,714,540
Accounts Receivable — Tenants, net of allowance of $20,000 for possible losses for 2006 and 2005			449,149				730,606
Unamortized Deferred Expenses
Financing costs, net of accumulated amortization of $4,375,244 and $4,344,244			821,036				852,036
Leasing costs, net of accumulated amortization of $631,101 and $621,388			389,924				389,354
Other Assets			1,160,100				1,212,387
		$	216,598,101			$	223,459,607

See accompanying notes to consolidated financial statements.

Agree Realty Corporation

Consolidated Balance Sheets (Unaudited)

		March 31,				December 31,
		2006				2005
Liabilities and Stockholders’ Equity
Mortgages Payable		$	50,129,192			$	50,721,920
Notes Payable			12,200,000				17,500,000
Dividends and Distributions Payable			4,093,131				4,089,243
Deferred Revenue			12,621,117				12,793,504
Accrued Interest Payable			270,060				282,080
Accounts Payable
Capital expenditures			120,187				112,687
Operating			727,163				1,300,416
Tenant Deposits			53,157				54,062
Total Liabilities			80,214,007				86,853,912
Minority Interest			5,944,695				5,978,635
Stockholders’ Equity
Common stock, $.0001 par value; 20,000,000 shares authorized, 7,706,846 shares issued and outstanding			772				772
Additional paid-in capital			143,138,497				143,138,497
Deficit			(10,107,132	)			(9,717,471	)
			133,032,137				133,421,798
Less: unearned compensation — restricted stock			(2,592,738	)			(2,794,738	)
Total Stockholders’ Equity			130,439,399				130,627,060
		$	216,598,101			$	223,459,607

See accompanying notes to consolidated financial statements.

Agree Realty Corporation

Consolidated Statements of Income (Unaudited)

		Three Months Ended				Three Months Ended
		March 31, 2006				March 31, 2005
Revenues
Minimum rents		$	7,532,443			$	7,052,209
Percentage rents			14,071				18,704
Operating cost reimbursements			711,625				753,421
Other income			14,359				—
Total Revenues			8,272,498				7,824,334
Operating Expenses
Real estate taxes			440,276				440,428
Property operating expenses			547,128				620,784
Land lease payments			195,465				195,465
General and administrative			1,050,957				919,771
Depreciation and amortization			1,202,313				1,138,939
Total Operating Expenses			3,436,139				3,315,387
Income From Continuing Operations			4,836,359				4,508,947
Other (Expense)
Interest expense, net			(1,153,567	)			(1,054,338	)
Income Before Minority Interest and Discontinued Operations			3,682,792				3,454,609
Minority Interest			(296,098	)			(290,533	)
Income Before Discontinued Operations			3,386,694				3,164,076
Income From Discontinued Operations, net of minority interest of $12,655 in 2005			—				137,815
Net Income		$	3,386,694			$	3,301,891
Basic and Diluted Earnings Per Share
Income before discontinued operations		$	.45			$	.43
Discontinued operations			—				.02
Earnings Per Share — Basic		$	.45			$	.45
Earnings Per Share — Diluted		$	.44			$	.45
Weighted Average Number of Common Shares Outstanding — Basic			7,605,496				7,331,526
Weighted Average Number of Common Shares Outstanding — Dilutive			7,652,469				7,333,083

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, 2006			7,706,846			$	772			$	143,138,497			$	(9,717,471	)		$	(2,794,738	)
Vesting of restricted stock			—				—				—				—				202,000
Dividends declared for the period January 1, 2006 to March 31, 2006			—				—				—				(3,776,355	)			—
Net income for the period January 1, 2006 to March 31, 2006			—				—				—				3,386,694				—
Balance, March 31, 2006			7,706,846			$	772			$	143,138,497			$	(10,107,132	)		$	(2,592,738	)

See accompanying notes to consolidated financial statements.

Agree Realty Corporation

Consolidated Statement of Cash Flows (Unaudited)

		Three Months Ended				Three Months Ended
		March 31, 2006				March 31, 2005
Cash Flows From Operating Activities
Net income		$	3,386,694			$	3,301,891
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation			1,190,712				1,172,287
Amortization			42,601				51,748
Stock-based compensation			202,000				163,000
Minority interests			296,098				303,188
Decrease in accounts receivable			281,457				211,175
Decrease in other assets			35,159				74,623
Decrease in accounts payable			(573,253	)			(607,379	)
Decrease in deferred revenue			(172,387	)			(172,387	)
Decrease in accrued interest			(12,020	)			(185,453	)
Decrease in tenant deposits			(905	)			(3,999	)
Net Cash Provided By Operating Activities			4,676,156				4,308,694
Cash Flows From Investing Activities
Acquisition of real estate investments (including capitalized interest of $23,000 in 2006 and $122,000 in 2005)			(34,093	)			(1,390,413	)
Net Cash Used In Investing Activities			(34,093	)			(1,390,413	)
Cash Flows From Financing Activities
Net proceeds from the issuance of common stock			—				31,466,769
Payments of mortgages payable			(592,728	)			(562,251	)
Dividends and limited partners’ distributions paid			(4,102,505	)			(3,520,096	)
Line-of-credit net borrowings (payments)			(5,300,000	)			(30,200,000	)
Repayments of capital expenditure payables			(112,687	)			(239,856	)
Redemption of restricted stock			—				(126,760	)
Payment of leasing costs			(10,283	)			(164,728	)
Net Cash Used In Financing Activities			(10,118,203	)			(3,346,922	)
Net Decrease In Cash and Cash Equivalents			(5,476,140	)			(428,641	)
Cash and Cash Equivalents, beginning of period			5,714,540				587,524
Cash and Cash Equivalents, end of period		$	238,400			$	158,883

Agree Realty Corporation

Consolidated Statement of Cash Flows (Unaudited)

		Three Months Ended				Three Months Ended
		March 31, 2006				March 31, 2005
Supplemental Disclosure of Cash flow Information
Cash paid for interest (net of amounts capitalized)		$	1,134,682			$	1,201,791
Supplemental Disclosure of Non-Cash Transactions
Dividends and limited partners’ distributions declared and unpaid		$	4,093,131			$	4,079,319
Shares issued under Stock Incentive Plan		$	—			$	1,278,850
Real estate investments financed with accounts payable		$	120,187			$	681,270

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 ended March 31, 2006 and 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, 2005 has been derived from the audited consolidated financial statements at that date. Operating results for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006, 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, 2005.
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		During November 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 presented as discontinued operations in our Consolidated Statements of Income The aggregate revenues from this property were $271,438 for the three months ended March 31, 2005. The aggregate expenses for this property were $133,623, including minority interest charge of $12,655, for the three months ended March 31, 2005.
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, 2005.

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 91.96% interest as of March 31, 2006. 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 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. The Company adopted this statement in the first quarter of 2006. The impact of adopting SFAS No. 123 (R) did not have a material impact on the Company’s financial position or results of operations.

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 also requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, but does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of SFAS No. 154. The Company adopted this statement in the first quarter of 2006. The impact of adopting SFAS No. 154 did not have a material impact on the Company’s financial position or results of operations.

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.

Agree Realty Corporation

Part I

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 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 Three Months Ended March 31, 2006 to Three Months Ended March 31, 2005

Minimum rental income increased $480,000, or 7%, to $7,532,000 in 2006, compared to $7,052,000 in 2005. The increase was the result of an increase of $439,000 from the development and acquisition of six properties in 2005 and net rental increases of $41,000 from existing tenants.

Percentage rental income decreased $5,000, to $14,000 in 2006 compared to $19,000 in 2005. The decrease was the result of decreased tenant sales.

Operating Cost Reimbursements decreased $41,000, or 6%, to $712,000 in 2006, compared to $753,000 in 2005. Operating cost reimbursements decreased due to the decrease in property operating expenses as explained below.

Other income increased $14,000, to $14,000 in 2006, compared to $-0- in 2005. The increase was primarily the result of management fee and other income of $8,000 and $6,000 respectively in 2006. There was no such income in 2005.

Real estate taxes remained constant at $440,000 for 2006 and 2005.

Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) decreased ($74,000), or 12%, to $547,000 in 2006 compared to $621,000 in 2005. The net decrease was the result of increased shopping center maintenance costs of $46,000; a decrease in snow removal costs of ($86,000); a decrease in utility costs of ($1,000); and a decrease in insurance costs of ($33,000) in 2006 versus 2005.

Land lease payments remained constant at $195,000 in 2006 and 2005.

Agree Realty Corporation

Part I

General and administrative expenses increased by $131,000, or 14%, to $1,051,000 in 2006, compared to $920,000 in 2005. The increase was the result of increased compensation related expenses as a result of salary increases, the value of employee stock awards and increased cost for hospitalization insurance of $127,000; a decrease in contracted services to investigate development opportunities of ($139,000); an increase in auditing costs as a result of Sarbanes-Oxley compliance of $68,000 and increased property related expenses of $75,000. General and administrative expenses as a percentage of total rental income increased from 13.0% for 2005 to 13.9% for 2006.

Depreciation and amortization increased $63,000, or 6%, to $1,202,000 in 2006, compared to $1,139,000 in 2005. The increase was the result of the development and acquisition of six properties in 2005.

Interest expense increased $100,000, or 9%, to $1,154,000 in 2006, from $1,054,000 in 2005. The increase in interest expense resulted from increased borrowings to fund the development and acquisition of six properties in 2005.

Our income before minority interest and discontinued operations increased $228,000, or 7%, to $3,683,000 in 2006 from $3,455,000 in 2005 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 March 31, 2006, we declared a quarterly dividend of $.49 per share. The dividend was paid on April 13, 2006, to holders of record on March 31, 2006.

As of March 31, 2006, we had total mortgage indebtedness of $50,129,192 with a weighted average interest rate of 6.64%. Future scheduled annual maturities of mortgages payable for the years ending March 31, are as follows: 2007 — $2,408,759; 2008 — $2,630,803; 2009 — $2,795,481; 2010 - $2,986,064; and 2011 — $3,189,677. 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 at our option 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 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 March 31, 2006 $12,000,000 was outstanding under the credit facility bearing a weighted average interest rate of 5.97%.

13

Agree Realty Corporation

Part I

We also have in place a $5 million line of credit, which matures on June 30, 2006 and which we expect to extend for an additional one year 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 to the Company and fund land options and start-up costs associated with new projects. As of March 31, 2006, $200,000 was outstanding under the line of credit bearing a weighted average interest rate of 7.00%.

The following table outlines our contractual obligations (in thousands) as of March 31, 2006.

		Total				Yr 1				2-3 Yrs				4-5 Yrs				Over 5 Yrs
Mortgages Payable		$	50,129			$	2,409			$	5,426			$	6,176			$	36,118
Notes Payable			12,200				280				644				11,276				—
Land Lease Obligation			13,439				768				1,535				1,547				9,589
Interest Payments on Mortgages And Notes Payable			28,613				3,919				7,439				5,674				11,581
Other Long-Term Liabilities			—				—				—				—				—
Total		$	104,381			$	7,376			$	15,044			$	24,673			$	57,288

We have one development project under construction that will add an additional 14,820 square feet of GLA to our portfolio. The project is expected to be completed during the third quarter of 2006. Additional funding required to complete the project is estimated to be $2,300,000 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.

14

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 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.

Agree Realty Corporation

Part I

The following tables illustrate the calculation of FFO for the three months ended March 31, 2006 and 2005:

Three Months Ended March 31,		2006				2005
Net income		$	3,386,694			$	3,301,891
Depreciation of real estate assets			1,177,360				1,160,524
Amortization of leasing costs			9,713				11,860
Minority interest			296,098				303,188
Funds from Operations		$	4,869,865			$	4,777,463
Weighted Average Shares and OP Units Outstanding — Dilutive			8,326,016				8,006,630

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 March 31,
		2007				2008				2009				2010				2011				Thereafter				Total
Fixed rate debt			2,409				2,631				2,795				2,986				3,190				36,118				50,129
Average interest rate			6.64				6.64				6.64				6.64				6.64				6.64				—
Variable rate debt			280				322				322				11,276				—				—				12,200
Average interest rate			7.00				5.97				5.97				5.97				—				—				—

The fair value (in thousands) is estimated at $50,150 and $12,200 for fixed rate debt and variable rate debt, respectively

The table above incorporates those exposures that exist as of March 31, 2006; 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 $73,000.

Agree Realty Corporation

Part I

ITEM 4. CONTROLS AND PROCEDURES

At December 31, 2005 management identified the following material weaknesses in our internal controls:

	•		We lack segregation of duties in the period-end financial reporting process. Our Chief Financial Officer (CFO) is the only employee with any significant knowledge of generally accepted accounting principles. The CFO is also the sole employee in charge of the general ledger (including the preparation of routine and non-routine journal entries and journal entries involving accounting estimates), the preparation of accounting reconciliations, the selection of accounting principles, and the preparation of interim and annual financial statements (including report combinations, consolidation entries and footnote disclosures) in accordance with generally accepted accounting principles.
	•		We lack the expertise and resources to ensure complete application of generally accepted accounting principles to non-routine transactions. As a result of this material weakness, we recorded adjustments to our December 31, 2005 consolidated financial statements prior to the issuance of the statements. These adjustments affected other assets, unearned compensation, equity and general and administrative expenses.

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 March 31, 2006, and due to the material weaknesses 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 closing process.

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)
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: May 5, 2006

EXHIBIT INDEX

EXHIBIT NO.		DESCRIPTION
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