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AGREE REALTY CORP - Quarter Report: 2008 March (Form 10-Q)

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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, 2008
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
(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, including 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a smaller reporting company)
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 May 8, 2008, the Registrant had 7,796,846 shares of common stock, $0.0001 par value, outstanding.
 
 

 


 

Agree Realty Corporation
Form 10-Q
Index
             
        Page  
Part I:
  Financial Information        
 
           
Item 1.
  Interim Consolidated Financial Statements (Unaudited)        
 
           
 
  Consolidated Balance Sheets as of March 31, 2008 (Unaudited) and December 31, 2007     1-2  
 
           
 
  Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2008 and 2007     3  
 
           
 
  Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2008     4  
 
           
 
  Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2008 and 2007     5-6  
 
           
 
  Notes to Consolidated Financial Statements (Unaudited)     7-9  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     10-15  
 
           
  Quantitative and Qualitative Disclosures About Market Risk     16  
 
           
  Controls and Procedures     16  
 
           
  Other Information        
 
           
  Legal Proceedings     17  
 
           
  Risk Factors     17  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     17  
 
           
  Defaults Upon Senior Securities     17  
 
           
  Submission of Matters to a Vote of Security Holders     17  
 
           
  Other Information     17  
 
           
  Exhibits     18  
 
           
Signatures     19  
 Certification pursuant to Section 302 of Richard Agree, President & Chief Executive Officer
 Certification pursuant to Section 302 of Kenneth R. Howe, Vice President & Chief Financial Officer
 Certification pursuant to Section 906 of Richard Agree, President & Chief Executive Officer
 Certification pursuant to Section 906 of Kenneth R. Howe, Vice President & Chief Financial Officer

 


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Agree Realty Corporation
Consolidated Balance Sheets
                 
    March 31,     December 31,  
    2008     2007  
    (Unaudited)          
 
 
               
Assets
               
 
               
Real Estate Investments
               
Land
  $ 87,234,289     $ 87,233,715  
Buildings
    200,490,132       197,033,867  
Property under development
    5,425,677       4,806,114  
 
 
               
 
    293,150,098       289,073,696  
Less accumulated depreciation
    (54,510,953 )     (53,250,564 )
 
 
               
Net Real Estate Investments
    238,639,145       235,823,132  
 
               
Cash and Cash Equivalents
    178,746       544,639  
 
               
Accounts Receivable — Tenants, net of allowance of $20,000 for possible losses at March 31, 2008 and December 31, 2007
    643,719       770,365  
 
               
Unamortized Deferred Expenses
               
Financing costs, net of accumulated amortization of $4,703,144 and $4,665,144 at March 31, 2008 and December 31, 2007
    799,033       837,033  
Leasing costs, net of accumulated amortization of $731,479 and $716,679 at March 31, 2008 and December 31, 2007
    515,103       424,002  
 
               
Other Assets
    1,105,929       948,335  
 
 
               
 
  $ 241,881,675     $ 239,347,506  
 
See accompanying notes to consolidated financial statements.

 


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Agree Realty Corporation
Consolidated Balance Sheets
                 
    March 31,   December 31,
    2008   2007
    (Unaudited)    
 
 
               
Liabilities and Stockholders’ Equity
               
 
               
Mortgages Payable
  $ 45,089,631     $ 45,760,168  
 
               
Notes Payable
    40,750,000       36,800,000  
 
               
Dividends and Distributions Payable
    4,213,412       4,211,827  
 
               
Deferred Revenue
    11,242,016       11,414,404  
 
               
Accrued Interest Payable
    324,579       329,171  
 
               
Accounts Payable
               
Capital expenditures
    1,122,482       1,069,734  
Operating
    906,899       1,483,127  
 
               
Deferred Income Taxes
    705,000       705,000  
 
               
Tenant Deposits
    74,379       64,085  
 
 
               
Total Liabilities
    104,428,398       101,837,516  
 
 
               
Minority Interest
    5,868,931       5,896,180  
 
 
               
Stockholders’ Equity
               
Common stock, $0.0001 par value; 20,000,000 shares authorized, 7,796,846 and 7,754,246 shares issued and outstanding
    780       775  
Additional paid-in capital
    142,550,659       142,260,659  
Deficit
    (10,967,093 )     (10,647,624 )
 
 
               
Total Stockholders’ Equity
    131,584,346       131,613,810  
 
 
               
 
  $ 241,881,675     $ 239,347,506  
 
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, 2008     March 31, 2007  
 
Revenues
               
Minimum rents
  $ 7,978,648     $ 7,687,360  
Percentage rents
    4,758       13,679  
Operating cost reimbursements
    782,757       756,350  
Other income
    1,592       6,103  
 
Total Revenues
    8,767,755       8,463,492  
 
Operating Expenses
               
Real estate taxes
    465,313       457,361  
Property operating expenses
    594,378       510,447  
Land lease payments
    168,550       170,050  
General and administrative
    1,095,695       996,263  
Depreciation and amortization
    1,295,266       1,234,186  
 
 
               
Total Operating Expenses
    3,619,202       3,368,307  
 
 
               
Income From Operations
    5,148,553       5,095,185  
 
               
Other (Expense)
               
Interest expense, net
    (1,260,076 )     (1,176,639 )
 
 
               
Income Before Minority Interest
    3,888,477       3,918,546  
 
               
Minority Interest
    (309,525 )     (313,487 )
 
 
               
Net Income
  $ 3,578,952     $ 3,605,059  
 
 
               
Earnings Per Share — Basic
  $ 0.47     $ 0.47  
 
 
               
Earnings Per Share — Dilutive
  $ 0.47     $ 0.47  
 
 
               
Dividend Declared Per Share
  $ 0.50     $ 0.49  
 
 
               
Weighted Average Number of Common Shares Outstanding — Basic
    7,669,992       7,643,026  
 
Weighted Average Number of Common Shares Outstanding — Dilutive
    7,673,858       7,685,616  
 
See accompanying notes to consolidated financial statements.

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Agree Realty Corporation
Consolidated Statements of Stockholders’ Equity (Unaudited)
                                 
                    Additional    
    Common Stock   Paid-In    
    Shares   Amount   Capital   Deficit
 
 
Balance, January 1, 2008
    7,754,246     $ 775     $ 142,260,659     $ (10,647,624 )
 
Issuance of shares under the Equity Incentive Plan
    42,600       5              
 
Vesting of restricted stock
                290,000        
 
Dividends declared for the period January 1, 2008 to March 31, 2008
                      (3,898,423 )
 
Net income for the period January 1, 2008 to March 31, 2008
                      3,578,952  
 
 
Balance, March 31, 2008
    7,796,846     $ 780     $ 142,550,659     $ (10,967,095 )
 
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, 2008     March 31, 2007  
 
 
Cash Flows From Operating Activities
               
Net income
  $ 3,578,952     $ 3,605,059  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation
    1,278,359       1,220,048  
Amortization
    54,907       60,138  
Stock-based compensation
    290,000       244,730  
Minority interests
    309,525       313,487  
Decrease in accounts receivable
    126,646       354,405  
Increase in other assets
    (177,674 )     (285,377 )
Decrease in accounts payable
    (576,228 )     (448,816 )
Decrease in deferred revenue
    (172,388 )     (172,387 )
Increase (decrease) in accrued interest
    (4,592 )     62,423  
Increase in tenant deposits
    10,294        
 
 
Net Cash Provided By Operating Activities
    4,717,801       4,953,710  
 
 
Cash Flows From Investing Activities
               
Acquisition of real estate investments (including capitalized interest of $138,000 in 2008 and $105,000 in 2007)
    (2,953,920 )     (2,346,146 )
 
               
 
 
Net Cash Used In Investing Activities
    (2,953,920 )     (2,346,146 )
 
 
Cash Flows From Financing Activities
               
Payments of mortgages payable
    (670,537 )     (570,812 )
Dividends and limited partners’ distributions paid
    (4,233,602 )     (4,132,076 )
Line-of-credit net borrowings
    3,950,000       2,575,000  
Repayments of capital expenditure payables
    (1,069,734 )     (766,3446 )
Payments of leasing costs
    (105,901 )     (8,716 )
 
 
Net Cash Used In Financing Activities
    (2,129,774 )     (2,902,982 )
 
 
Net Decrease In Cash and Cash Equivalents
    (365,893 )     (295,418 )
Cash and Cash Equivalents, beginning of period
    544,639       463,730  
 
 
Cash and Cash Equivalents, end of period
  $ 178,746     $ 168,312  
 

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Agree Realty Corporation
Consolidated Statements of Cash Flows (Unaudited)
                 
    Three Months Ended     Three Months Ended  
    March 31, 2008     March 31, 2007  
 
 
Supplemental Disclosure of Cash Flow Information
               
Cash paid for interest (net of amounts capitalized)
  $ 1,226,667     $ 1,068,216  
 
 
Supplemental Disclosure of Non-Cash Transactions
               
Dividends and limited partners’ distributions declared and unpaid
  $ 4,213,412     $ 4,107,512  
Real estate investments financed with accounts payable
  $ 1,122,482     $ 370,310  
 
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 three months ended March 31, 2008 and 2007 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 2007 has been derived from the audited consolidated financial statements at that date. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or for any other interim period. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
 
   
2. Stock Based Compensation
  On January 1, 2006, Agree Realty Corporation (the “Company”) adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (R), “Share-Based Payments” (“SFAS 123R”), under the modified prospective method. Under the modified prospective method, compensation cost is recognized for all awards granted after the adoption of this standard and for the unvested portion of previously granted awards that are outstanding as of the adoption date. In accordance with SFAS 123R, the Company estimates the fair value of restricted stock and stock option grants at the date of grant and amortizes those amounts into expense on a straight line basis or amount vested, if greater, over the appropriate vesting period.
 
   
 
  As of March 31, 2008, there was $3,376,482 of total unrecognized compensation costs related to the outstanding restricted shares, which is expected to be recognized over a weighted average period of 3.58 years. The Company used a 0% discount factor and forfeiture rate for determining the fair value of restricted stock. The forfeiture rate was based on historical results and trends and the Company does not consider discount rates to be material.
 
   
 
  The holder of a restricted share award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a shareholder of the Company, including the right to vote the shares and the right to receive dividends on the shares.
                 
            Weighted  
            Average  
    Shares     Grant Date  
    Outstanding     Fair Value  
Unvested restricted shares at December 31, 2007
    96,450     $ 24.89  
Restricted shares granted
    42,600       29.71  
Restricted shares vested
    (18,750 )     26.29  
Restricted shares forfeited
           
 
           
Unvested restricted shares at March 31, 2008
    120,300     $ 30.82  
 
           

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Agree Realty Corporation
     
3. 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 SFAS No. 128 “Earnings per Share.”
 
 
  The following is a reconciliation of the denominator of the basic net earnings per common share computation to the denominator of the diluted net earnings per common share computation for each of the periods presented:
                 
    Three Months Ended March 31,  
    2008     2007  
Weighted average number of common shares outstanding
    7,790,292       7,750,496  
Unvested restricted stock
    (120,300 )     (107,470 )
 
           
Weighted average number of common shares outstanding used in basic earnings per share
    7,669,992       7,643,026  
 
           
 
               
Weighted average number of common shares outstanding used in basic earnings per share
    7,669,992       7,643,026  
Effect of dilutive securities:
               
Restricted stock
    3,866       42,590  
Common stock options
           
 
           
Weighted average number of common shares outstanding used in diluted earnings per share
    7,673,858       7,685,616  
 
           
     
4. Recent Accounting Pronouncements
  In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), an amendment to Accounting Research Board No. 51. SFAS No. 160’s objective is to improve the relevance, comparability and transparency of financial information that a reporting entity provides in its consolidated financial statements. The key aspects of SFAS No. 160 are (i) the minority interests in subsidiaries should be presented in the consolidated balance sheet within equity of the consolidated group, separate from the parent’s shareholders’ equity, (ii) acquisitions or dispositions of noncontrolling interests in a subsidiary that do not result in a change of control should be accounted for as equity transactions, (iii) a parent recognizes a gain or loss in net income when a subsidiary is deconsolidated, measured using the fair value of the non-controlling equity investment, (iv) the acquirer should attribute net income and each component of other comprehensive income between controlling and noncontrolling interests based on any contractual arrangements or relative ownership interests, and (v) a reconciliation of beginning to ending total equity is required for both controlling and noncontrolling interests. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. We are currently evaluating the provisions for SFAS No. 160 to determine the potential impact, if any, the adoption will have on our financial position and results of operations.
 
   
 
  In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141”). SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment for certain specific acquisition related items including: (1) expensing acquisition related costs as incurred; (2) valuing noncontrolling interests at fair value at the acquisition date; and (3) expensing restructuring costs associated with an acquired business. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) is to be

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Agree Realty Corporation
     
 
  applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. We expect SFAS No. 141(R) will have an impact on our accounting for future business combinations once adopted, but we are still currently assessing the impact it will have on our consolidated results of operations and financial position.
 
   
 
  In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. It clarifies (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No.133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact SFAS No. 161 will have on our financial position and results of operations.
 
   
 
  In December 2007, the FASB ratified EITF Issue No. 07-06, “Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause” (“EITF 07-06”). EITF 07-06 requires companies to determine whether the terms of the buy-sell clause indicate that the seller has transferred the usual risks and rewards of ownership and does not have substantial continuing involvement pursuant to SFAS 66. It clarifies that a buy-sell clause, in and of itself, does not constitute a prohibited form of continuing involvement that would preclude partial sales treatment under SFAS 66, but should be evaluated in consideration of all the relevant facts and circumstances. EITF 07-06 is effective for fiscal years beginning after December 15, 2007. We do not expect EITF 07-06 to have a material impact on our financial position and results of operations.

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Agree Realty Corporation
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 (the “Exchange Act”). These forward-looking statements represent our expectations, plans and beliefs concerning future events and may be identified by terminology such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions. Although the forward-looking statements made in this report are based on good faith beliefs, reasonable assumptions and our best judgment reflecting current information, certain factors could cause actual results to differ materially from such forward—looking statements, including but 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; a failure of our properties to generate additional income to offset increases in operating expenses; and other factors discussed elsewhere in this report and our other filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended December 31, 2007. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Except as required by law, we assume no obligation to update these forward—looking statements, even if new information becomes available in the future.
Overview
Agree Realty Corporation is a fully-integrated, self-administered and self-managed real estate investment trust (“REIT”) focused primarily on the ownership, development, acquisition and management of retail properties net leased to national tenants. We were formed in December 1993 to continue and expand the business founded in 1971 by our current President and Chairman, Richard Agree. We specialize in developing retail properties for national tenants who have executed long-term net leases prior to the commencement of construction. As of March 31, 2008, approximately 88% of our annualized base rent was derived from national tenants. All of our freestanding property tenants and the majority of our community shopping center tenants have triple-net leases, which require the tenant to be responsible for property operating expenses, including property taxes, insurance and maintenance. We believe this strategy provides a generally consistent source of income and cash for distributions.
As of March 31, 2008, our portfolio consisted of 65 properties, located in 16 states containing an aggregate of approximately 3.4 million square feet of gross leasable area (“GLA”). As of March 31, 2008, our portfolio included 53 freestanding net leased properties and 12 community shopping centers that were 99.6% leased in aggregate. As of March 31, 2008, approximately 66% of our annualized base rent was derived from our top three tenants: Borders Group, Inc. — 30%; Walgreen Co. (“Walgreens”) — 24% and Kmart Corporation — 12%. During the period April 1, 2008 to December 31, 2010 we have 46 leases that are scheduled to expire assuming that none of the tenants exercise renewal options or terminate their leases prior to the contractual expiration date. These leases represent 512,783 square feet of gross leasable area and $2,924,572 of annualized base rent.
We expect to continue to grow our asset base primarily through the development of retail properties that are pre-leased on a long-term basis to national tenants. We focus on development because we believe, based on the historical returns we have been able to achieve, it generally provides us a higher return on investment than the acquisition of similarly located properties and does not entail the risks associated with speculative development. Since our initial public offering in 1994, we have developed 52 of our 65 properties, including 40 of our 53 freestanding properties and all 12 of our community shopping centers. As of March 31, 2008, the properties that we developed accounted for 83.4% of our annualized base rent. We expect to continue to expand our tenant relationships and diversify our tenant base to include other quality national tenants.

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Agree Realty Corporation
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 92.05% and 92.01% interest as of March 31, 2008 and December 31, 2007, respectively. We are operating so as to qualify as a REIT for federal income tax purposes.
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.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), an amendment to Accounting Research Board No. 51. SFAS No. 160’s objective is to improve the relevance, comparability and transparency of financial information that a reporting entity provides in its consolidated financial statements. The key aspects of SFAS No. 160 are (i) the minority interests in subsidiaries should be presented in the consolidated balance sheet within equity of the consolidated group, separate from the parent’s shareholders’ equity, (ii) acquisitions or dispositions of noncontrolling interests in a subsidiary that do not result in a change of control should be accounted for as equity transactions, (iii) a parent recognizes a gain or loss in net income when a subsidiary is deconsolidated, measured using the fair value of the non-controlling equity investment, (iv) the acquirer should attribute net income and each component of other comprehensive income between controlling and noncontrolling interests based on any contractual arrangements or relative ownership interests, and (v) a reconciliation of beginning to ending total equity is required for both controlling and noncontrolling interests. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. We are currently evaluating the provisions for SFAS No. 160 to determine the potential impact, if any, the adoption will have on our financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141”). SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141(R) will change the accounting treatment for certain specific acquisition related items including: (1) expensing acquisition related costs as incurred; (2) valuing noncontrolling interests at fair value at the acquisition date; and (3) expensing restructuring costs associated with an acquired business. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. We expect SFAS No. 141(R) will have an impact on our accounting for future business combinations once adopted, but we are still currently assessing the impact it will have on the consolidated results of operations and financial position.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. It clarifies (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No.133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact SFAS No. 161 will have on our financial position and results of operations.
In December 2007, the FASB ratified EITF Issue No. 07-06, “Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause” (“EITF 07-06”). EITF 07-06 requires companies to determine whether the terms of the buy-sell clause indicate that the seller has transferred the usual risks and rewards of ownership and does not have substantial continuing involvement pursuant to SFAS 66. It clarifies that a buy-sell clause, in and of itself, does not constitute a prohibited form of continuing involvement that would preclude partial sales treatment under SFAS 66, but should be evaluated in consideration of all the relevant

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facts and circumstances. EITF 07-06 is effective for fiscal years beginning after December 15, 2007. We do not expect EITF 07-06 to have a material impact on our financial position and results of operations.
Critical Accounting Policies
Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments. For example, significant estimates and assumptions have been made with respect to 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 the completion of construction, expenditures for property maintenance are charged to operations as incurred, while significant renovations are capitalized. Depreciation of the buildings is recorded in accordance with the straight-line method using an estimated useful life of 40 years.
We evaluate real estate for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value.
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.
In October 2007, we established a taxable REIT subsidiary pursuant to the provisions of the REIT Modernization Act. Our TRS is able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations. As a result, certain activities of the Company which occur within its TRS entity are subject to federal and state income taxes. As of March 31, 2008, the Company had accrued a deferred income tax amount of $705,000.
Comparison of Three Months Ended March 31, 2008 to Three Months Ended March 31, 2007
Minimum rental income increased $292,000, or 4%, to $7,979,000 in 2008, compared to $7,687,000 in 2007. The increase was the result of the development of a Walgreens drug store in Livonia, Michigan in June 2007, the development of a Walgreens drug store in Barnesville, Georgia in October 2007, the development of a parcel of land located in East Lansing, Michigan in November 2007, the development of a parcel of land located in Plainfield, Indiana, in November 2007 and the development of a Walgreens drug store and a bank land lease in Macomb Township, Michigan in March 2008. Our revenue increase from these developments amounted to $365,000. In addition, rental income from our Big Rapids, Michigan shopping center decreased by $67,000 as a result of redevelopment activities.

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Percentage rents decreased $9,000, to $5,000 in 2008, compared to $14,000 in 2007. The decrease was primarily the result of decreased tenant sales.
Operating cost reimbursements increased $27,000, or 3%, to $783,000 in 2008, compared to $756,000 in 2007. Operating cost reimbursements increased due to the increase in property operating expenses as explained below and a higher recovery ratio.
Other income decreased $4,000, to $2,000 in 2008, compared to $6,000 in 2007.
Real estate taxes increased $8,000, or 2%, to $465,000 in 2008, compared to $457,000 in 2007. The increase was the result of general assessment adjustments.
Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) increased $84,000, or 16%, to $594,000 in 2008 compared to $510,000 in 2007. The net increase was the result of: an increase in shopping center maintenance costs of $16,000; an increase in snow removal costs of $68,000; an increase in utility costs of $2,000; and a decrease in insurance costs of ($2,000) in 2008 versus 2007.
Land lease payments remained relatively constant at $169,000 for 2008 and $170,000 for 2007.
General and administrative expenses increased by $99,000, or 10%, to $1,096,000 in 2008, compared to $996,000 in 2007. The increase was the result of increased compensation related expenses as a result of: an increase in salaries and the value of employee stock awards of $71,000; an increase in legal and auditing costs of $19,000; and an increase in property related expenses of $9,000. General and administrative expenses as a percentage of total rental income (minimum and percentage rents) increased from 12.9% for 2007 to 13.7% for 2008.
Depreciation and amortization increased $61,000, or 5%, to $1,295,000 in 2008, compared to $1,234,000 in 2007. The increase was the result of the development of four properties in 2007 and one property in 2008.
Interest expense increased $83,000, or 7%, to $1,260,000 in 2008, compared to $1,177,000 in 2007. The increase in interest expense resulted from increased borrowings to fund the development of the four properties in 2007 and the development of one property in 2008.
Our income before minority interest decreased $31,000, or 1%, to $3,888,000 in 2008 from $3,919,000 in 2007 as a result of the foregoing factors.
Liquidity and Capital Resources
Our principal demands for liquidity are operations, distributions to our stockholders, debt repayment, development of new properties, redevelopment of existing properties and future property acquisitions. 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 and the Credit Facility. We believe that adequate cash flow will be available to fund our operations and pay dividends in accordance with REIT requirements for at least the next 12 months. 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. As of March 31, 2008, our ratio of indebtedness to market capitalization was approximately 37%. We believe that these financing sources will enable us to generate funds sufficient to meet both our short-term and long-term capital needs.
During the quarter ended March 31, 2008, we declared a quarterly dividend of $0.50 per share. We paid the dividend on April 15, 2008 to holders of record on March 31, 2008.

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As of March 31, 2008, we had total mortgage indebtedness of $45,089,631 with a weighted average interest rate of 6.64%. This mortgage debt is all fixed rate debt.
In addition, the Operating Partnership has in place a $50 million credit facility (the “Credit Facility”) with Bank of America, as the agent, which is guaranteed by the Company. The Credit Facility matures in November 2009 and can be extended at our option, subject to specified conditions, for two additional one-year periods. Advances under the Credit Facility bear interest within a range of one-month to twelve-month LIBOR plus 100 basis points to 150 basis points or the lender’s prime rate, at our option, based on certain factors such as the ratio of our indebtedness to the capital value of our properties. The Credit Facility generally is used to fund property acquisitions and development activities. As of March 31, 2008, $40,000,000 was outstanding under the Credit Facility bearing a weighted average interest rate of 4.92%.
We also have in place a $5 million line of credit (the “Line of Credit”), which matures in November 2009 and can be extended at our option, subject to specified conditions, for two additional one-year periods. The Line of Credit bears interest at the lender’s prime rate less 75 basis points or 150 basis points in excess of the one-month to twelve-month LIBOR rate, at our option. The purpose of the Line of Credit is generally to provide working capital and fund land options and start-up costs associated with new projects. As of March 31, 2008, $750,000 was outstanding under the Line of Credit bearing a weighted average interest rate of 4.50%.
The following table outlines our contractual obligations as of March 31, 2008 for the periods presented below (in thousands).
                                         
            April 1, 2008 —     April 1, 2009 —     April 1, 2011 —        
    Total     Mar. 31, 2009     Mar. 31, 2011     Mar. 31, 2013     Thereafter  
Mortgages Payable
  $ 45,090     $ 2,795     $ 6,176     $ 7,047     $ 29,072  
Notes Payable
    40,750             40,750              
Land Lease Obligation
    11,130       683       1,412       1,463       7,572  
Interest Payments on
    22,950       4,822       6,572       4,367       7,189  
Mortgages And Notes Payable
                                       
Other Long-Term Liabilities
                             
 
                             
Total
  $ 119,920     $ 8,300     $ 54,910     $ 12,877     $ 43,833  
 
                             
At March 31, 2008 we had three development projects under construction that will add an additional 43,290 square feet of GLA to our portfolio. The projects are expected to be completed during the second quarter of 2008. In addition, we are redeveloping a portion of our Big Rapids, Michigan shopping center which we also expect to complete during the second quarter of 2008. Additional funding required to complete the projects is estimated to be $4,855,000, which is not reflected in the table above, and will be funded through advances under the Credit Facility.
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.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet arrangements with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources.

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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
Funds from Operations (“FFO”) is defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) to mean net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. 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 predictably 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 use historical cost accounting is insufficient by itself.
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. Further, while we adhere to the NAREIT definition of FFO, our presentation of FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that not all REITs use the same definition.
The following table provides a reconciliation of FFO and net income for the three months ended March 31, 2008 and 2007:
                 
    Three Months Ended
    March 31,
    2008   2007
 
 
               
Net income
  $ 3,578,952     $ 3,605,059  
Depreciation of real estate assets
    1,262,496       1,208,065  
Amortization of leasing costs
    14,800       12,250  
Minority interest
    309,525       313,487  
 
 
               
Funds from Operations
  $ 5,165,773     $ 5,138,861  
 
 
               
Weighted Average Shares and Operating Partnership Units Outstanding — Dilutive
    8,347,405       8,359,163  
 

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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 outstanding debt, by year of expected maturity, to evaluate the expected cash flows and sensitivity to interest rate changes.
                                                         
    Year Ended March 31,                
    2009   2010   2011   2012   2013   Thereafter   Total
 
                                                       
Fixed rate debt
  $ 2,795     $ 2,986     $ 3,190     $ 3,407     $ 3,640     $ 29,072     $ 45,090  
Average interest rate
    6.64 %     6.64 %     6.64 %     6.64 %     6.64 %     6.64 %      
Variable rate debt
              $ 40,750                       $ 40,750  
Average interest rate
                4.91 %                        
The fair value (in thousands) is estimated at $45,000 and $40,750 for fixed rate debt and variable rate debt, respectively, as of March 31, 2008.
The table above incorporates those exposures that exist as of March 31, 2008; 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.
We do not enter into financial instrument transactions for trading or other speculative purposes or to manage interest rate exposure.
As of March 31, 2008, a 1% adverse change in interest rates on the portion of our debt bearing interest at variable rates would result in an annual increase in interest expense of approximately $407,000.
ITEM 4. CONTROLS AND PROCEDURES
At December 31, 2007, management identified the following material weakness in our internal controls:
  We lack segregation of duties in the period-end financial reporting process. Our chief financial officer is the only employee with any significant knowledge of generally accepted accounting principles. The chief financial officer 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, under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, 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 Exchange Act, as of the end of the period covered by this report.
Based on this evaluation as of March 31, 2008, 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

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reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC.
Our audit committee has engaged independent third party consultants to perform periodic reviews of our financial reporting closing process to help mitigate the material weakness in our internal control over financial reporting. 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.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not presently involved in any litigation nor, to our knowledge, is any other litigation threatened against us, except for routine litigation arising in the ordinary course of business which is expected to be covered by our liability insurance.
ITEM 1A. RISK FACTORS
There were no material changes in our risk factors set forth under Item 1A of Part I of our most recently filed Form 10-K.
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

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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)
 
    3.2   Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006)
 
*31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Richard Agree, President and Chief Executive Officer
 
*31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Kenneth R. Howe, Vice President and Chief Financial Officer
 
*32.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Richard Agree, President and Chief Executive Officer
 
*32.2   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kenneth R. Howe, Vice President and Chief Financial Officer
 
*   Filed herewith

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
Agree Realty Corporation
 
   
/s/ RICHARD AGREE      
Richard Agree     
President and Chief Executive Officer
(Principal Executive Officer) 
   
 
     
/s/ KENNETH R. HOWE      
Kenneth R. Howe     
Vice-President and Financial Officer
(Principal Financial and Accounting Officer) 
   
 
Date: May 8, 2008

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