To our Stockholders:
We are pleased at this time to report the results of our 2010 activities including a review of our operating results and
our expanding portfolio. As of December 31, 2010, our real estate portfolio consisted of 81 properties totaling
approximately 3.8 million square feet located in 17 states. Our portfolio occupancy at year end remained one of the
highest in the industry at 99.2% with a weighted average lease term of 11.6 years remaining. As you know, in February
2011, Borders, Inc. filed for bankruptcy protection and announced the closure of five of the Company’s stores. The
Company was prepared for this bankruptcy event by Borders, Inc. and our asset management team has already started
marketing these stores for potential retenanting or disposition.
In April 2010, the Company raised $31 million through a well received secondary common stock offering. These
proceeds were used to pay off existing amounts outstanding under our credit facility. This additional capital afforded the
Company enhanced flexibility to acquire and develop high-quality net lease assets while simultaneously maintaining its
conservative underlying balance sheet.
During 2010, the Company expanded its portfolio from 73 properties to 81 properties via the development and
acquisition of high-quality net lease retail properties. Total revenues for the Company increased 5% to $36,112,000
compared to $34,402,000 in 2009. Funds from operations saw a decrease from $23,634,000 in 2009 to $16,793,000 in
2010 primarily due to an $8.1 million non-cash impairment charge which was recognized in connection with the
bankruptcy filing of Borders, Inc., offset in part by a $700,000 lease termination receipt which was recognized in
connection with the termination of our Borders lease in Aventura, Florida. Funds from operations per diluted share was
$1.76 per share in 2010 compared with $2.81 per share in 2009. Absent the items noted above, recurring funds from
operations in 2010 would have increased to $24,233,000, or $2.54 per diluted share. The annual cash dividend
amounted to $2.04 per share in 2010, representing a payout ratio of 80% of recurring funds from operations.
At this time, we are continuing to seek and execute upon opportunities with the objective of further diversifying and
growing our portfolio. The following are some of our notable accomplishments throughout the previous twelve months:
• The development and completion of three Walgreens in Ann Arbor, Michigan, Atlantic Beach and St. Augustine
Shores, Florida. The total cost of these projects was approximately $10.3 million. The Company also completed a
fee project on behalf of Walgreens in downtown Oakland, California.
• The redevelopment and expansion of our Boynton Festive Center by adding Dick’s Sporting Goods.
• The acquisition of nine net lease properties for an aggregate cost of $36.8 million, including four CVS stores, a
Lowe’s Home Improvement store in Concord, North Carolina, a Kohl’s in Tallahassee, Florida, a PNC Bank
branch located in Antioch, Illinois and a Chase bank in Spring Grove, Illinois.
• The disposition of three properties for net proceeds of $14.2 million. Two Borders stores located in Santa
Barbara, California and Aventura, Florida, were sold. Additionally, in January 2011 we completed the sale of two
Borders assets located in Tulsa, Oklahoma receiving net proceeds of $6.5 million. These transactions were part
of our overall business plan to reduce the number of Borders stores within our portfolio.
We look forward to, and remain focused on the continued growth and diversification of our portfolio in the coming
years through the development and acquisition of high-quality, well-located, net lease retail properties. Lastly, and as
always, I would like to thank the Board of Directors, our Management Team and our Stockholders for their continued
support and investment in our Company.
Sincerely,
Richard Agree
Chief Executive Officer and Chairman of the Board
Agree Realty Corporation
Financial Highlights
Financial - For Year Ended December 31,
2010
2009
2008
Total revenues ($000's)
Operating income ($000's)
Funds from operations (1) ($000's)
$
36,112
$
34,402
$
32,919
$
19,030
$
17,994
$
16,282
$
24,233
$
23,634
$
21,598
Funds from operations per share - dilutive (1)
$
2.54
$
2.81
$
2.58
Dividends per share
Property Portfolio
Real estate assets, at cost ($000's)
Total assets ($000's)
Total debt and accrued interest ($000's)
Number of properties
Gross leasable area (sq. ft)
$
2.04
$
2.02
$
2.00
2010
2009
2008
$
338,221
$
320,444
$
311,343
$
285,042
$
261,789
$
256,897
$
100,128
$
104,814
$
101,069
81
73
68
3,848,000 3,492,000
3,448,000
(1) Funds from operations exclude impairment charges of $8,140,000 and lease termination income of $700,000 in 2010.
Total Return Performance
140
120
100
80
60
40
e
u
l
a
V
x
e
d
n
I
Agree Realty Corporation
Russell 2000
SNL REIT Retail Shopping Ctr
12/31/2005
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
Index
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
Agree Realty Corporation
Russell 2000
SNL REIT Retail Shopping Ctr
100.00
100.00
100.00
126.14
118.37
134.61
117.56
116.51
110.82
77.47
77.15
66.72
110.43
98.11
65.86
134.76
124.46
85.53
Period Ending
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
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)
31850 Northwestern Highway
Farmington Hills, Michigan
(Address of principal executive offices)
38-3148187
(I.R.S. Employer
Identification No.)
48334
(Zip code)
(248) 737-4190
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.0001 par value
Name of each exchange on which registered
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes { } No {X}
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes { } No {X}
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 {X} No { }
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes { } No { }
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. { }
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 { } Accelerated filer {X} Non-accelerated filer { } Smaller reporting company { }
(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 { } No {X}
The aggregate market value of the Registrant’s shares of common stock held by non-affiliates was approximately $227,469,436 as of June 30,
2010, based on the closing price of $23.32 on the New York Stock Exchange on that date.
At February 28, 2011, there were 9,857,314 shares of common stock, $.0001 par value per share, outstanding.
Portions of the registrant’s definitive proxy statement for the annual stockholder meeting to be held in 2011 are incorporated by reference into
Part III of this Form 10-K as noted herein.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Part I
Item 1.
Business ................................................................................................................................................. 1
Item 1A. Risk Factors……………………………………………………………………………………………
5
Item 1B. Unresolved Staff Comments ................................................................................................................ 18
Item 2.
Properties ............................................................................................................................................. 18
Item 3.
Legal Proceedings ................................................................................................................................ 26
Item 4.
[Removed and Reserved] ..................................................................................................................... 26
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities .................................................................................................................................. 26
Item 6.
Selected Financial Data ....................................................................................................................... 28
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .............. 29
Item 7A
Quantitative and Qualitative Disclosures about Market Risk .............................................................. 35
Item 8
Item 9
Financial Statements and Supplementary Data .................................................................................... 36
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ............. 36
Item 9A
Controls and Procedures ...................................................................................................................... 36
Item 9B
Other Information ................................................................................................................................ 37
Part III
Item 10. Directors, Executive Officers and Corporate Governance ................................................................... 37
Item 11.
Executive Compensation ..................................................................................................................... 37
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ................................................................................................................................................. 37
Item 13.
Certain Relationships and Related Transactions, and Director Independence ..................................... 38
Item 14.
Principal Accountant Fees and Services .............................................................................................. 38
Item 15.
Exhibits and Financial Statement Schedules ....................................................................................... 38
Signatures ............................................................................................................................................................... 42
Part IV
[This page intentionally left blank.]
FORWARD LOOKING STATEMENTS
PART I
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 “Securities Exchange Act”). These forward-looking statements represent our expectations, plans or beliefs
concerning future events and may be identified by terminology such as “anticipate,” “estimate,” “should,” “expect,”
“believe,” “intend,” “may,” “will,” “seek,” “could,” 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 ongoing U.S. recession, the existing global credit and financial
crisis and other changes in general economic, financial and real estate 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 or at all; 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 in Item 1A. “Risk Factors” and elsewhere in this report and in
subsequent filings with the Securities and Exchange Commission (“SEC”). 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.
Item 1. BUSINESS
General
Agree Realty Corporation, a Maryland corporation, is a fully-integrated, self-administered and self-
managed real estate investment trust (“REIT”). The terms “Registrant”, “Company”, “we”, “our” or “us” refer to
Agree Realty Corporation and/or its majority owned operating partnership, Agree Limited Partnership (“Operating
Partnership”), and/or its majority owned and controlled subsidiaries, including its qualified taxable REIT
subsidiaries (“TRS”), as the context may require. Our assets are held by and all of our operations are conducted
through, directly or indirectly, the Operating Partnership, of which we are the sole general partner and in which we
held a 96.56% interest as of December 31, 2010. Under the partnership agreement of the Operating Partnership, we,
as the sole general partner, have exclusive responsibility and discretion in the management and control of the
Operating Partnership.
We are focused primarily on the ownership, development, acquisition and management of retail properties
net leased to national tenants. We were incorporated in December 1993 to continue and expand the business
founded in 1971 by our current Chief Executive Officer 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 December 31, 2010, approximately 89% of our annualized base rent was derived from national
tenants. As of December 31, 2010, approximately 62% of our annualized base rent was derived from our top three
tenants: Walgreen Co. (“Walgreen”) – 31%; Borders Group, Inc. (“Borders”) – 20%; and Kmart Corporation
(“Kmart”) - 11%.
At December 31, 2010, our portfolio consisted of 81 properties, located in 17 states containing an aggregate
of approximately 3.8 million square feet of gross leasable area (“GLA”). Included in our 81 properties are two
properties leased to Borders and located in Tulsa, Oklahoma that are classified as held for sale as of December 31,
2010. As of December 31, 2010, our portfolio included 69 freestanding net leased properties and 12 community
shopping centers that were 99.2% leased with a weighted average lease term of approximately 11.6 years remaining.
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. See Item 2. “Properties” for a summary of our developments and acquisitions in 2010, as well as other
information regarding our tenants, leases and properties as of December 31, 2010.
We expect to continue to grow our asset base primarily through the development and acquisition of retail
properties that are leased on a long-term basis to national tenants. Historically we have focused on development
because we believe, based on our historical returns we have been able to achieve, it generally provided us a higher
return on investment than the acquisition of similarly located properties. However, during 2010, we commenced an
aggressive acquisition program to acquire retail properties net leased to national tenants. Since our initial public
offering in 1994, we have developed 61 of our 81 properties, including 49 of our 69 freestanding properties and all
12 of our community shopping centers. As of December 31, 2010, the properties that we developed accounted for
approximately 76% 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.
Growth Strategy
Development. Our growth strategy is to develop retail properties that are pre-leased on a long-term basis to
national tenants. We believe that this strategy produces superior risk adjusted returns. Our development process
commences with the identification of land parcels that we believe are situated in an attractive retail location. The
location must be in a concentrated retail corridor, have high traffic counts, good visibility and demographics
compatible with the desires of a targeted retail tenant. After assessing site feasibility we propose long-term net
leases that commence prior to the development of the site.
Upon the execution of the lease, we acquire the land and pursue all necessary approvals to commence
development. We direct all aspects of the development process, including due diligence, design, construction, lease
negotiation and management. Asset management and the majority of the leasing activities are handled directly by
our personnel. We believe that this approach enhances our ability to maximize the long-term value of our properties
and results in an efficient use of our capital resources.
Acquisitions. We selectively acquire single tenant properties when we have determined that a potential
acquisition meets our return on investment criteria and such acquisition will diversify our rental income.
Financing Strategy
The majority of our mortgage indebtedness is long-term, fixed rate and non-recourse in nature. Whenever
feasible, we enter into long-term financing for our properties to match the underlying long-term leases. We intend
to limit our floating rate debt to borrowings under our credit facilities, which are primarily used to finance
development and acquisition activities. Once project development is complete, we typically consider refinancing
this floating rate debt with fixed rate, non-recourse debt. As of December 31, 2010, our total mortgage debt was
approximately $71.6 million with a weighted average maturity of 7.7 years. Of this total mortgage indebtedness,
approximately $47.9 million is fixed rate, self–amortizing debt with a weighted average interest rate of 6.56% and a
weighted average maturity of 10.4 years. The remaining mortgage debt of approximately $23.7 million bears
interest at 150 basis points over LIBOR or 1.76% as of December 31, 2010 and has a maturity date of July 14, 2013,
which can be extended at our option for two additional years. In January 2009, we entered into an interest rate swap
agreement that fixes the interest rate during the initial term of the variable interest mortgage at 3.744%. In addition
to our mortgage debt, we had $28.4 million outstanding under our credit facilities as of December 31, 2010 with a
weighted average interest rate of 1.48%. We intend to maintain a ratio of total indebtedness (including construction
and acquisition financing) to market capitalization of 65% or less. At December 31, 2010, our ratio of indebtedness
to market capitalization assuming the conversion of units of limited partnership interest in our Operating Partnership
(“OP units”), was approximately 37.7%. The decrease in our ratio of indebtedness to market capitalization from
2009 to 2010 was primarily the result of our completion of an offering of 1,495,000 shares of our common stock and
an increase in the market price of our common stock.
We are evaluating our borrowing policies on an on-going basis in light of current economic conditions,
relative costs of debt and equity capital, market value of properties, growth and acquisition opportunities and other
factors. There is no contractual limit or any limit in our organizational documents on our ratio of total indebtedness
to total market capitalization, and accordingly, we may modify our borrowing policy and may increase or decrease
our ratio of debt to market capitalization without stockholder approval.
2
Asset Management
We maintain a proactive leasing and capital improvement program that, combined with the quality and
locations of our properties, has made our properties attractive to tenants. We intend to continue to hold our
properties for long-term investment and, accordingly, place a strong emphasis on the quality of construction and an
on-going program of regular maintenance. Our properties are designed and built to require minimal capital
improvements other than renovations or expansions paid for by tenants. At our 12 community shopping centers
properties, we sub contract on site functions such as maintenance, landscaping, snow removal and sweeping. The
cost of these functions is generally reimbursed by our tenants. Personnel from our corporate headquarters conduct
regular inspections of each property and maintain regular contact with major tenants.
We have a management information system designed to provide management with the operating data
necessary to make informed business decisions on a timely basis. This system provides us rapid access to lease data,
tenants’ sales history, cash flow budgets and forecasts. Such a system enables us to maximize cash flow from
operations and closely monitor corporate expenses.
Major Tenants
As of December 31, 2010, approximately 57% of our GLA was leased to Walgreen, Borders, and Kmart
and approximately 62% of our total annualized base rent was attributable to these tenants. At December 31, 2010,
Walgreen occupied approximately 11% of our GLA and accounted for approximately 31% of our annualized base
rent. At December 31, 2010, Borders occupied approximately 19% of our GLA and accounted for approximately
20% of our annualized base rent. At December 31, 2010, Kmart occupied approximately 26% of our GLA and
accounted for approximately 11% of our annualized base rent. No other tenant accounted for more than 10% of
gross leasable area or annualized base rent in 2010. The loss of any of these anchor tenants or a significant number
of their stores, or the inability of any of them to pay rent, would have a material adverse effect on our business.
On February 16, 2011, Borders filed a petition for reorganization relief under Chapter 11 of the Bankruptcy
Code. The Chapter 11 petition for relief was filed in the U.S. Bankruptcy Court, Southern District of New York.
Borders announced that it has received commitments for $505 million in Debtor-In-Possession financing led by GE
Capital, Restructuring Finance. Borders also announced it plans to undertake a strategic Store Reduction Program to
facilitate reorganization and has identified certain underperforming stores, equivalent to approximately 30% of the
company’s national store network, that are expected to close in the next several weeks. Borders disclosed an
intention to close stores at five locations where it leases space from us, representing approximately $2.6 million of
our annualized base rent as of December 31, 2010.
Tax Status
We have operated and intend to operate in a manner to qualify as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). In order to maintain
qualification as a REIT, we must, among other things, distribute at least 90% of our REIT taxable income and meet
certain asset and income tests. Additionally, our charter limits ownership of our Company, directly or
constructively, by any single person to 9.8% of the value of our outstanding common stock and preferred stock,
subject to certain exceptions. As a REIT, we are not subject to federal income tax with respect to that portion of our
income that meets certain criteria and is distributed annually to the stockholders.
We established TRS entities pursuant to the provisions of the REIT Modernization Act. Our TRS entities
are 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 our Company which occur
within our TRS entities are subject to federal and state income taxes.
Competition
The U.S. commercial real estate investment market continues to be a highly competitive industry. We
actively compete with many other entities engaged in the development, acquisition and operation of commercial
3
properties. As such, we compete for a limited supply of properties and financing for these properties. Investors
include large institutional investors, insurance companies, credit companies, pension funds, private individuals,
investment companies and other REITs, many of which have greater financial and other resources than we do.
There can be no assurance that we will be able to compete successfully with such entities in our development,
acquisition and leasing activities in the future.
Potential Environmental Risks
Investments in real property create a potential for environmental liability on the part of the owner or
operator of such real property. If hazardous substances are discovered on or emanating from a property, the owner
or operator of the property may be held strictly liable for all costs and liabilities relating to such hazardous
substances. We have obtained a Phase I environmental study (which involves inspection without soil sampling or
ground water analysis) conducted by independent environmental consultants on each of our properties.
Furthermore, we have adopted a policy of conducting a Phase I environmental study on each property we acquire
and if necessary conducting additional investigation as warranted.
During 2010, we conducted Phase I environmental studies on the four properties we developed and the nine
properties that we acquired. The results of the Phase I studies indicated that in three of our developments no further
action was required, including no further soil sampling or ground water analysis. On the remaining one
development, in addition to the Phase I environmental study, we conducted additional investigation including a
Phase II environmental assessment including a base line environmental assessment. The results of the Phase I
investigations of the acquired properties indicated that no further action was required. In addition, we have no
knowledge of any hazardous substances existing on any of our properties in violation of any applicable laws;
however, no assurance can be given that such substances are not located on any of the properties. We carry no
insurance coverage for the types of environmental risks described above.
We believe that we are in compliance, in all material respects, with all federal, state and local ordinances
and regulations regarding hazardous or toxic substances. Furthermore, we have not been notified by any
governmental authority of any noncompliance, liability or other claim in connection with any of the properties.
Employees
As of February 26, 2011, we employed 11 persons. Employee responsibilities include accounting,
construction, leasing, property coordination and administrative functions for the properties. Our employees are not
covered by a collective bargaining agreement, and we consider our employee relations to be satisfactory.
Financial Information About Industry Segments
We are in the business of development, acquisition and management of freestanding net leased properties
and community shopping centers. We consider our activities to consist of a single industry segment. See the
Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K.
Available Information
Our headquarters are located at 31850 Northwestern Highway, Farmington Hills, MI 48334 and our
telephone number is (248) 737-4190. Our website address is www.agreerealty.com. Our reports electronically filed
with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act can be accessed
through this site, free of charge, as soon as reasonably practicable after we electronically file or furnish such reports.
These filings are also available on the SEC’s website at www.sec.gov. Our website also contains copies of our
corporate governance guidelines and code of business conduct and ethics as well as the charters of our audit,
compensation and nominating and corporate governance committees. The information on our website is not part of
this report.
4
ITEM 1A.
RISK FACTORS
Risks Related to Our Business and Operations
The recent global economic and financial market crisis has had and may continue to have a negative effect on
our business and operations.
The recent global economic and financial market crisis has caused, among other things, a general tightening
in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, lower consumer and
business spending, and lower consumer confidence and net worth, all of which has had and may continue to have a
negative effect on our business, results of operations, financial condition and liquidity. Many of our tenants have
been affected by the current economic turmoil. Current or potential tenants may delay or postpone entering into
long-term net leases with us which could continue to lead to reduced demand for commercial real estate. We are
also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given
certain fixed costs and commitments associated with our operations.
The timing and nature of any recovery in the credit and financial markets remains uncertain, and there can
be no assurance that market conditions will improve in the near future or that our results will not continue to be
materially and adversely affected. Such conditions make it very difficult to forecast operating results, make
business decisions and identify and address material business risks. The foregoing conditions may also impact the
valuation of certain long-lived or intangible assets that are subject to impairment testing, potentially resulting in
impairment charges which may be material to our financial condition or results of operations.
Capital markets are currently experiencing a period of dislocation and instability, which has had and could
continue to have a negative impact on the availability and cost of capital.
The general disruption in the U.S. capital markets has impacted the broader worldwide financial and credit
markets and reduced the availability of debt and equity capital for the market as a whole. These conditions could
persist for a prolonged period of time or worsen in the future. Our ability to access the capital markets may be
restricted at a time when we would like, or need, to access those markets, which could have an impact on our
flexibility to react to changing economic and business conditions. The resulting lack of available credit, lack of
confidence in the financial sector, increased volatility in the financial markets and reduced business activity could
materially and adversely affect our business, financial condition, results of operations and our ability to obtain and
manage our liquidity. In addition, the cost of debt financing and the proceeds of equity financing may be materially
adversely impacted by these market conditions.
Single tenant leases involve significant risks of tenant default.
We focus our development and investment activities on ownership of real properties that are leased to a
single tenant. Therefore, the financial failure of, or other default in payment by, a single tenant under its lease is
likely to cause a significant reduction in our operating cash flows from that property and a significant reduction in
the value of the property, and could cause a significant reduction in our revenues and a significant impairment
loss. We may also experience difficulty or a significant delay in re-leasing such property. The current economic
conditions and the credit crisis may put financial pressure on and increase the likelihood of the financial failure of,
or other default in payment by, one or more of the tenants to whom we have exposure.
Failure by any major tenant with leases in multiple locations to make rental payments to us, because of a
deterioration of its financial condition or otherwise, would have a material adverse effect on us.
We derive substantially all of our revenue from tenants who lease space from us at our properties.
Therefore, our ability to generate cash from operations is dependent on the rents that we are able to charge and
collect from our tenants. At any time, our tenants may experience a downturn in their business that may
significantly weaken their financial condition, particularly during periods of economic uncertainty. As a result, our
tenants may delay lease commencements, decline to extend or renew leases upon expiration, fail to make rental
payments when due, close a number of stores or declare bankruptcy. Any of these actions could result in the
5
termination of the tenant’s leases and the loss of rental income attributable to the terminated leases. In addition,
lease terminations by a major tenant or a failure by that major tenant to occupy the premises could result in lease
terminations or reductions in rent by other tenants in the same shopping centers under the terms of some leases. In
that event, we may be unable to re-lease the vacated space at attractive rents or at all. The occurrence of any of the
situations described above would have a material adverse effect on our results of operations and our financial
condition. See “—We rely significantly on three major tenants, and therefore, are subject to tenant credit
concentrations that make us more susceptible to adverse events with respect to those tenants” below.
We rely significantly on three major tenants, and therefore, are subject to tenant credit concentrations that make
us more susceptible to adverse events with respect to those tenants.
As of December 31, 2010, we derived approximately 62% of our annualized base rent from three major
tenants:
•
•
•
approximately 31% of our annualized base rent was from Walgreen;
approximately 20% of our annualized base rent was from Borders; and
approximately 11% of our annualized base rent was from Kmart.
In addition, a significant portion of our 2009 and 2010 development projects were for Walgreen. In the event of a
default by any of these tenants under their leases, we may experience delays in enforcing our rights as lessor and
may incur substantial costs in protecting our investment. Any bankruptcy, insolvency or failure to make rental
payments by, or any adverse change in the financial condition of, one or more of these tenants, or any other tenant to
whom we may have a significant credit concentration now or in the future, would likely result in a material
reduction of our cash flows or material losses to our company.
As discussed in more detail below under Item 2. “Properties—Development and Acquisition Summary,”
Borders reported a net (loss) for its 2009 fiscal year ended January 31, 2010 of approximately ($109 million). In
addition, on February 16, 2011, Borders filed a petition for reorganization relief under Chapter 11 of the Bankruptcy
Code. The Chapter 11 petition for relief was filed in the U.S. Bankruptcy Court, Southern District of New York.
Borders has announced that it has received commitments for $505 million in Debtor-In-Possession financing led by
GE Capital, Restructuring Finance. Borders also announced it plans to undertake a strategic Store Reduction
Program to facilitate reorganization and has identified certain underperforming stores, equivalent to approximately
30% of the company’s national store network, that are expected to close in the next several weeks. Borders
disclosed an intention to close stores at five locations where it leases space from us, representing approximately $2.6
million of our annualized base rent as of December 31, 2010.
The Chapter 11 bankruptcy will allow Borders to assume or reject any of its leases with us (including the
leases for the five properties on the store closing list recently published by Borders). The rejection of any of the
leases would have a negative effect on our rental revenues and cash flows. Borders may also propose rent
reductions under any of the leases, which if accepted by us would have a negative effect on our rental revenues and
cash flows. It is also possible that Borders may assume leases for some locations, which would require Borders to
abide by the existing lease terms. Until Borders determines its plan under Chapter 11, we cannot determine the
impact on our rental revenues and cash flows.
In addition, because Borders is a significant tenant, negative information about its performance, financial
condition and business prospects (including its bankruptcy filing) may adversely affect the market and price of our
common stock.
Bankruptcy laws will limit our remedies if a tenant becomes bankrupt and rejects the lease.
If a tenant becomes bankrupt or insolvent, that could diminish the income we receive from that tenant’s
leases. We may not be able to evict a tenant solely because of its bankruptcy. On the other hand, a bankruptcy court
might authorize the tenant to terminate its leasehold with us. If that happens, our claim against the bankrupt tenant
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for unpaid future rent would be an unsecured prepetition claim subject to statutory limitations, and therefore such
amounts received in bankruptcy are likely to be substantially less than the remaining rent we otherwise were owed
under the leases. In addition, any claim we have for unpaid past rent could be substantially less than the amount
owed.
Certain of our tenants at our community shopping centers have the right to terminate their leases if other tenants
cease to occupy a property.
In the event that certain tenants cease to occupy a property, although under most circumstances such a
tenant would remain liable for its lease payments, such an action may result in certain other tenants at our
community shopping centers having the right to terminate their leases at the affected property, which could
adversely affect the future income from that property. As of December 31, 2010, each of our 12 community
shopping centers had tenants with those provisions in their leases.
Our portfolio has limited geographic diversification, which makes us more susceptible to adverse events in these
areas.
Our properties are located primarily in the mid-western United States and in particular, the State of
Michigan (with 43 properties). An economic downturn or other adverse events or conditions such as terrorist
attacks or natural disasters in these areas, or any other area where we may have significant concentration now or in
the future, could result in a material reduction of our cash flows or material losses to our company.
Risks associated with our development and acquisition activities.
We intend to continue the development of new properties and to consider possible acquisitions of existing
properties. We anticipate that our new developments will be financed under lines of credit or other forms of
construction financing that will result in a risk that permanent financing on newly developed projects might not be
available or would be available only on disadvantageous terms. In addition, new project development is subject to a
number of risks, including risks of construction delays or cost overruns that may increase project costs, risks that the
properties will not achieve anticipated occupancy levels or sustain anticipated rental projections and new project
commencement risks such as receipt of zoning, occupancy and other required governmental permits and
authorizations and the incurrence of development costs in connection with projects that are not pursued to
completion. If permanent debt or equity financing is not available on acceptable terms to refinance new
development or acquisitions undertaken without permanent financing, further development activities or acquisitions
might be curtailed or cash available for distribution might be adversely affected. Acquisitions entail risks that
investments will fail to perform in accordance with expectations and that judgments with respect to the costs of
improvements to bring an acquired property up to standards established for the market position intended for that
property will prove inaccurate, as well as general investment risks associated with any new real estate investment.
Properties that we acquire or develop may be located in new markets where we may face risks associated with
investing in an unfamiliar market.
We may acquire or develop properties in markets that are new to us. When we acquire or develop
properties located in these markets, we may face risks associated with a lack of market knowledge or understanding
of the local economy, forging new business relationships in the area and unfamiliarity with local government and
permitting procedures.
We own several of our properties subject to ground leases that expose us to the loss of such properties upon
breach or termination of the ground leases and may limit our ability to sell these properties.
We own several of our properties through leasehold interests in the land underlying the buildings and we
may acquire additional buildings in the future that are subject to similar ground leases. As lessee under a ground
lease, we are exposed to the possibility of losing the property upon termination, or an earlier breach by us, of the
ground lease, which may have a material adverse effect on our business, financial condition and results of
operations, our ability to make distributions to our stockholders and the trading price of our common stock.
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Our ground leases contain certain provisions that may limit our ability to sell certain of our properties. In
order to assign or transfer our rights and obligations under certain of our ground leases, we generally must obtain the
consent of the landlord which, in turn, could adversely impact the price realized from any such sale.
Joint venture investments will expose us to certain risks.
We may from time to time enter into joint venture transactions for portions of our existing or future real
estate assets. Investing in this manner subjects us to certain risks, among them the following:
• We will not exercise sole decision-making authority regarding the joint venture’s business and
assets and, thus, we may not be able to take actions that we believe are in our company’s best
interests.
• We may be required to accept liability for obligations of the joint venture (such as recourse carve-
outs on mortgage loans) beyond our economic interest.
• Our returns on joint venture assets may be adversely affected if the assets are not held for the long-
term.
The availability and timing of cash distributions is uncertain.
We expect to continue to pay quarterly distributions to our stockholders. However, we bear all expenses
incurred by our operations, and our funds generated by operations, after deducting these expenses, may not be
sufficient to cover desired levels of distributions to our stockholders. In addition, our board of directors, in its
discretion, may retain any portion of such cash for working capital. We cannot assure our stockholders that
sufficient funds will be available to pay distributions.
We depend on our key personnel.
Our success depends to a significant degree upon the continued contributions of certain key personnel
including, but not limited to, our executive officers, each of whom would be difficult to replace. If any of our key
personnel were to cease employment with us, our operating results could suffer. Our ability to retain our executive
officers or to attract suitable replacements should any members of the management group leave is dependent on the
competitive nature of the employment market. The loss of services from key members of the management group or
a limitation in their availability could adversely impact our future development or acquisition operations, our
financial condition and cash flows. Further, such a loss could be negatively perceived in the capital markets. We
have not obtained and do not expect to obtain key man life insurance on any of our key personnel.
We face significant competition.
We face competition in seeking properties for acquisition and tenants who will lease space in these
properties from insurance companies, credit companies, pension or private equity funds, private individuals,
investment companies, other REITs and other industry participants, many of which have greater financial and other
resources than we do. There can be no assurance that we will be able to successfully compete with such entities in
our development, acquisition and leasing activities in the future.
General Real Estate Risk
Our performance and value are subject to general economic conditions and risks associated with our real estate
assets.
There are risks associated with owning and leasing real estate. Although many of our leases contain terms
that obligate the tenants to bear substantially all of the costs of operating our properties, investing in real estate
involves a number of risks. Income from and the value of our properties may be adversely affected by:
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changes in general or local economic conditions;
the attractiveness of our properties to potential tenants;
changes in supply of or demand for similar or competing properties in an area;
bankruptcies, financial difficulties or lease defaults by our tenants;
changes in operating costs and expense and our ability to control rents;
our ability to lease properties at favorable rental rates;
our ability to sell a property when we desire to do so at a favorable price;
unanticipated changes in costs associated with known adverse environmental conditions or
retained liabilities for such conditions;
changes in or increased costs of compliance with governmental rules, regulations and fiscal
policies, including changes in tax, real estate, environmental and zoning laws, and our potential
liability thereunder; and
unanticipated expenditures to comply with the Americans with Disabilities Act and other similar
regulations.
The global economic and financial market crisis has exacerbated many of the foregoing risks. If a tenant
fails to perform on its lease covenants, that would not excuse us from meeting any mortgage debt obligation secured
by the property and could require us to fund reserves in favor of our mortgage lenders, thereby reducing funds
available for payment of cash dividends on our shares of common stock.
The fact that real estate investments are relatively illiquid may reduce economic returns to investors.
We may desire to sell a property in the future because of changes in market conditions or poor tenant
performance or to avail ourselves of other opportunities. We may also be required to sell a property in the future to
meet secured debt obligations or to avoid a secured debt loan default. Real estate properties cannot always be sold
quickly, and we cannot assure you that we could always obtain a favorable price, especially in light of the current
global economic and financial market crisis. We may be required to invest in the restoration or modification of a
property before we can sell it. This lack of liquidity may limit our ability to vary our portfolio promptly in response
to changes in economic or other conditions and, as a result, could adversely affect our financial condition, results of
operations, cash flows and our ability to pay distributions on our common stock.
Our ability to renew leases or re-lease space on favorable terms as leases expire significantly affects our
business.
We are subject to the risks that, upon expiration of leases for space located in our properties, the premises
may not be re-let or the terms of re-letting (including the cost of concessions to tenants) may be less favorable than
current lease terms. If a tenant does not renew its lease or if a tenant defaults on its lease obligations, there is no
assurance we could obtain a substitute tenant on acceptable terms. If we cannot obtain another tenant with
comparable structural needs, we may be required to modify the property for a different use, which may involve a
significant capital expenditure and a delay in re-leasing the property. Further, if we are unable to re-let promptly all
or a substantial portion of our retail space or if the rental rates upon such re-letting were significantly lower than
expected rates, our net income and ability to make expected distributions to stockholders would be adversely
affected. There can be no assurance that we will be able to retain tenants in any of our properties upon the
expiration of their leases.
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A property that incurs a vacancy could be difficult to sell or re-lease.
A property may incur a vacancy either by the continued default of a tenant under its lease or the expiration
of one of our leases. Certain of our properties may be specifically suited to the particular needs of a tenant. We may
have difficulty obtaining a new tenant for any vacant space we have in our properties. If the vacancy continues for a
long period of time, we may suffer reduced revenues resulting in less cash available to be distributed to
stockholders. In addition, the resale value of a property could be diminished because the market value of a
particular property will depend principally upon the value of the leases of such property.
Potential liability for environmental contamination could result in substantial costs.
Under federal, state and local environmental laws, we may be required to investigate and clean up any
release of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or
actual responsibility, simply because of our current or past ownership or operation of the real estate. If unidentified
environmental problems arise, we may have to make substantial payments, which could adversely affect our cash
flow and our ability to make distributions to our stockholders. This potential liability results from the following:
• As owner we may have to pay for property damage and for investigation and clean-up costs
incurred in connection with the contamination.
• The law may impose clean-up responsibility and liability regardless of whether the owner or
operator knew of or caused the contamination.
• Even if more than one person is responsible for the contamination, each person who shares legal
liability under environmental laws may be held responsible for all of the clean-up costs.
• Governmental entities and third parties may sue the owner or operator of a contaminated site for
damages and costs.
These costs could be substantial and in extreme cases could exceed the value of the contaminated
property. The presence of hazardous substances or petroleum products or the failure to properly remediate
contamination may adversely affect our ability to borrow against, sell or lease an affected property. In addition,
some environmental laws create liens on contaminated sites in favor of the government for damages and costs it
incurs in connection with a contamination.
A majority of our leases require our tenants to comply with environmental laws and to indemnify us against
environmental liability arising from the operation of the properties. However, we could be subject to strict liability
under environmental laws because we own the properties. There is also a risk that tenants may not satisfy their
environmental compliance and indemnification obligations under the leases. Any of these events could substantially
increase our cost of operations, require us to fund environmental indemnities in favor of our secured lenders and
reduce our ability to service our secured debt and pay dividends to stockholders and any debt security interest
payments. Environmental problems at any properties could also put us in default under loans secured by those
properties, as well as loans secured by unaffected properties.
Uninsured losses relating to real property may adversely affect our returns.
Our leases require tenants to carry comprehensive liability and extended coverage insurance on our
properties. However, there are certain losses, including losses from environmental liabilities, terrorist acts or
catastrophic acts of nature, that are not generally insured against or that are not generally fully insured against
because it is not deemed economically feasible or prudent to do so. If there is an uninsured loss or a loss in excess
of insurance limits, we could lose both the revenues generated by the affected property and the capital we have
invested in the property. In the event of a substantial unreimbursed loss, we would remain obligated to repay any
mortgage indebtedness or other obligations related to the property.
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Risks Related to Our Debt Financings
Leveraging our portfolio subjects us to increased risk of loss, including loss of properties in the event of a
foreclosure.
At December 31, 2010, our ratio of indebtedness to market capitalization (assuming conversion of OP
units) was approximately 38%. The use of leverage presents an additional element of risk in the event that (1) the
cash flow from lease payments on our properties is insufficient to meet debt obligations, (2) we are unable to
refinance our debt obligations as necessary or on as favorable terms or (3) there is an increase in interest rates. If a
property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the
property could be foreclosed upon with a consequent loss of income and asset value to us. Under the “cross-default”
provisions contained in mortgages encumbering some of our properties, our default under a mortgage with a lender
would result in our default under mortgages held by the same lender on other properties resulting in multiple
foreclosures.
As discussed in more detail below under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” we have seven mortgaged properties leased to Borders that serve as collateral for seven
non-recourse loans, including four mortgages that are cross-defaulted and cross-collateralized. The balances on the
non-recourse loans amount to approximately $18.5 million as of December 31, 2010, including $9.6 million under
the cross-collateralized loans. As of the date of this filing, and based on the Chapter 11 bankruptcy filing of Borders,
we are now in default on three mortgage loans amounting to approximately $8.9 million secured by a total of three
properties with 366,000 square feet of GLA representing $1.3 million of annualized base rents as of December 31,
2010. While the Chapter 11 bankruptcy filing of Borders is not a direct event of default under the cross-
collateralized mortgage loans, we anticipate that the remaining loans will go into default as a result of the scheduled
store closures. These four mortgage loans amounting to approximately $9.6 million are secured by four properties
with 103,000 square feet of GLA representing $2.1 million of annualized base rents as of December 31, 2010. We
are in the process of commencing negotiations with lenders for all seven loans regarding an appropriate course of
action. We can provide no assurance that our negotiations with the lenders will result in favorable outcomes to us.
Failure to restructure our mortgage obligations could result in default and foreclosure actions and loss of the
mortgaged properties. In addition, as a result of cross-collateralization or cross-default provisions contained in
certain of our mortgage loans, a default under one mortgage loan could result in a default on other indebtedness and
cause us to lose other better performing properties, which could materially and adversely affect our financial
condition and results of operations.
We intend to maintain a ratio of total indebtedness (including construction or acquisition financing) to
market capitalization of 65% or less. Nevertheless, we may operate with debt levels which are in excess of 65% of
market capitalization for extended periods of time. Our organization documents contain no limitation on the amount
or percentage of indebtedness which we may incur. Therefore, our board of directors, without a vote of the
stockholders, could alter the general policy on borrowings at any time. If our debt capitalization policy were
changed, we could become more highly leveraged, resulting in an increase in debt service that could adversely affect
our operating cash flow and our ability to make expected distributions to stockholders, and could result in an
increased risk of default on our obligations.
Covenants in our credit agreements could limit our flexibility and adversely affect our financial condition.
The terms of our credit facilities and other indebtedness require us to comply with a number of customary
financial and other covenants. These covenants may limit our flexibility in our operations, and breaches of these
covenants could result in defaults under the instruments governing the applicable indebtedness even if we have
satisfied our payment obligations. Our credit facility contains certain cross-default provisions which are triggered in
the event that our other indebtedness is in default. These cross-default provisions may require us to repay or
restructure the credit facility in addition to any mortgage or other debt that is in default. If our properties were
foreclosed upon, or if we are unable to refinance our indebtedness at maturity or meet our payment obligations, the
amount of our distributable cash flows and our financial condition would be adversely affected. We have provided
substitute borrowing base properties to replace Borders stores under the Credit Facility, and the banks have
acknowledged that the financial condition of Borders and any default under any of the non-recourse loans secured
by a property leased to Borders shall not be deemed a default under the Credit Facility.
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Credit market developments may reduce availability under our credit agreements.
Due to the current volatile state of the credit markets, there is risk that lenders, even those with strong
balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations
under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a
credit facility, allowing access to additional credit features and/or honoring loan commitments. If our lender(s) fail
to honor their legal commitments under our credit facilities, it could be difficult in the current environment to
replace our credit facilities on similar terms. The failure of any of the lenders under our credit facility may impact
our ability to finance our operating or investing activities.
Risks Related to Our Corporate Structure
Our charter and Maryland law contain provisions that may delay, defer or prevent a change of control
transaction.
Our charter contains a 9.8% ownership limit. Our charter, subject to certain exceptions, authorizes our
directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any
person to actual or constructive ownership of no more than 9.8% of the value of our outstanding shares of common
stock and preferred stock, except that the any member of the Agree-Rosenberg Group (as defined in our charter) (the
“Agree-Rosenberg Group”) may own up to 24%. Our board of directors, in its sole discretion, may exempt, subject
to the satisfaction of certain conditions, any person from the ownership limit. However, our board of directors may
not grant an exemption from the ownership limit to any person whose ownership, direct or indirect, in excess of
9.8% of the value of our outstanding shares of common stock and preferred stock could jeopardize our status as a
REIT. These restrictions on transferability and ownership will not apply if our board of directors determines that it
is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT. The ownership limit may
delay or impede, and we may use the ownership limit deliberately to delay or impede, a transaction or a change of
control that might involve a premium price for our common stock or otherwise be in the best interest of our
stockholders.
We have a staggered board. Our directors are divided into three classes serving three-year staggered
terms. The staggering of our board of directors may discourage offers for our company or make an acquisition more
difficult, even when an acquisition is in the best interest of our stockholders.
We have a shareholder rights plan. Under the terms of this plan, we can in effect prevent a person or
group from acquiring more than 15% of the outstanding shares of our common stock because, unless we approve of
the acquisition, after the person acquires more than 15% of our outstanding common stock, all other stockholders
will have the right to purchase securities from us at a price that is less than their then fair market value. This would
substantially reduce the value and influence of the stock owned by the acquiring person. Our board of directors can
prevent the plan from operating by approving the transaction in advance, which gives us significant power to
approve or disapprove of the efforts of a person or group to acquire a large interest in our company.
We could issue stock without stockholder approval. Our board of directors could, without stockholder
approval, issue authorized but unissued shares of our common stock or preferred stock. In addition, our board of
directors could, without stockholder approval, classify or reclassify any unissued shares of our common stock or
preferred stock and set the preferences, rights and other terms of such classified or reclassified shares. Our board of
directors could establish a series of stock that could, depending on the terms of such series, delay, defer or prevent a
transaction or change of control that might involve a premium price for our common stock or otherwise be in the
best interest of our stockholders.
Provisions of Maryland law may limit the ability of a third party to acquire control of our company.
Certain provisions of Maryland law may have the effect of inhibiting a third party from making a proposal to acquire
us or of impeding a change of control under certain circumstances that otherwise could provide the holders of shares
of our common stock with the opportunity to realize a premium over the then prevailing market price of such shares,
including:
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“business combination” provisions that, subject to limitations, prohibit certain business combinations
between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or
more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on
which the stockholder becomes an interested stockholder and thereafter would require the recommendation
of our board of directors and impose special appraisal rights and special stockholder voting requirements on
these combinations; and
“control share” provisions that provide that “control shares” of our company (defined as shares which,
when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of
three increasing ranges of voting power in electing directors) acquired in a “control share acquisition”
(defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting
rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all
the votes entitled to be cast on the matter, excluding all interested shares.
The business combination statute permits various exemptions from its provisions, including business
combinations that are approved or exempted by the board of directors before the time that the interested stockholder
becomes an interested stockholder. Our board of directors has exempted from the business combination provisions
of the MGCL any business combination with Mr. Richard Agree or any other person acting in concert or as a group
with Mr. Richard Agree.
In addition, our bylaws contain a provision exempting from the control share acquisition statute any
members of the Agree-Rosenberg Group, our other officers, our employees, any of the associates or affiliates of the
foregoing and any other person acting in concert of as a group with any of the foregoing.
Additionally, Title 3, Subtitle 8 of the Maryland General Corporation Law, or MGCL, permits our board of
directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to
implement takeover defenses. These provisions may have the effect of inhibiting a third party from making an
acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company
under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a
premium over the then-current market price.
Our charter, our bylaws, the limited partnership agreement of our operating partnership and Maryland law
also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve
a premium price for our common stock or otherwise be in the best interest of our stockholders.
Our board of directors can take many actions without stockholder approval.
Our board of directors has overall authority to oversee our operations and determine our major corporate
policies. This authority includes significant flexibility. For example, our board of directors can do the following:
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change our investment and financing policies and our policies with respect to certain other activities,
including our growth, debt capitalization, distributions, REIT status and investment and operating policies;
• within the limits provided in our charter, prevent the ownership, transfer and/or accumulation of shares in
order to protect our status as a REIT or for any other reason deemed to be in the best interests of us and our
stockholders;
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issue additional shares without obtaining stockholder approval, which could dilute the ownership of our
then-current stockholders;
classify or reclassify any unissued shares of our common stock or preferred stock and set the preferences,
rights and other terms of such classified or reclassified shares, without obtaining stockholder approval;
employ and compensate affiliates;
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direct our resources toward investments that do not ultimately appreciate over time;
change creditworthiness standards with respect to third-party tenants; and
determine that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.
Any of these actions could increase our operating expenses, impact our ability to make distributions or
reduce the value of our assets without giving our stockholders the right to vote.
Future offerings of debt and equity may not be available to us or may adversely affect the market price of our
common stock.
We expect to continue to increase our capital resources by making additional offerings of equity and debt
securities in the future, which would include classes of preferred stock, common stock and senior or subordinated
notes. Our ability to raise additional capital may be adversely impacted by market conditions, and we do not know
when market conditions will stabilize or improve. All debt securities and other borrowings, as well as all classes of
preferred stock, will be senior to our common stock in a liquidation of our company. Additional equity offerings
could dilute our stockholders’ equity, reduce the market price of shares of our common stock, or be of preferred
stock having a distribution preference that may limit our ability to make distributions on our common stock.
Continued market dislocations could cause us to seek sources of potentially less attractive capital. Our ability to
estimate the amount, timing or nature of additional offerings is limited as these factors will depend upon market
conditions and other factors.
The market price of our stock may vary substantially.
The market price of our common stock could be volatile, and investors in our common stock may
experience a decrease in the value of their shares, including decreases unrelated to our operating performance or
prospects. Among the market conditions that may affect the market price of our common stock are the following:
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our financial condition and operating performance and the performance of other similar
companies;
actual or anticipated variations in our quarterly results of operations;
the extent of investor interest in our company, real estate generally or commercial real estate
specifically;
the reputation of REITs generally and the attractiveness of their equity securities in comparison to
other equity securities, including securities issued by other real estate companies, and fixed
income securities;
changes in expectations of future financial performance or changes in estimates of securities
analysts;
fluctuations in stock market prices and volumes; and
announcements by us or our competitors of acquisitions, investments or strategic alliances.
Certain officers and directors may have interests that conflict with the interests of stockholders.
Certain of our officers and members of our board of directors own OP units in our Operating Partnership.
These individuals may have personal interests that conflict with the interests of our stockholders with respect to
business decisions affecting us and our Operating Partnership, such as interests in the timing and pricing of property
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sales or refinancings in order to obtain favorable tax treatment. As a result, the effect of certain transactions on
these unit holders may influence our decisions affecting these properties.
Federal Income Tax Risks
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes and to maintain our exemption from the 1940 Act, we
must continually satisfy numerous income, asset and other tests, thus having to forgo investments we might
otherwise make and hindering our investment performance.
Failure to qualify as a REIT could adversely affect our operations and our ability to make distributions.
We will be subject to increased taxation if we fail to qualify as a REIT for federal income tax
purposes. Although we believe that we are organized and operate in such a manner so as to qualify as a REIT under
the Internal Revenue Code, no assurance can be given that we will remain so qualified. Qualification as a REIT
involves the application of highly technical and complex Code provisions for which there are only limited judicial or
administrative interpretations. The complexity of these provisions and applicable Treasury Regulations is also
increased in the context of a REIT that holds its assets in partnership form. The determination of various factual
matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. A REIT
generally is not taxed at the corporate level on income it distributes to its stockholders, as long as it distributes
annually at least 100% of its taxable income to its stockholders. We have not requested and do not plan to request a
ruling from the Internal Revenue Service that we qualify as a REIT.
If we fail to qualify as a REIT, we will face tax consequences that will substantially reduce the funds
available for payment of cash dividends:
• We would not be allowed a deduction for dividends paid to stockholders in computing our taxable
income and would be subject to federal income tax at regular corporate rates.
• We could be subject to the federal alternative minimum tax and possibly increased state and local
taxes.
• Unless we are entitled to relief under statutory provisions, we could not elect to be treated as a
REIT for four taxable years following the year in which we were disqualified.
In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends (other than any
mandatory dividends on any preferred shares we may offer). As a result of these factors, our failure to qualify as a
REIT could adversely effect the market price for our common stock.
Changes in tax laws may prevent us from maintaining our qualification as a REIT.
As we have previously described, we intend to maintain our qualification as a REIT for federal income tax
purposes. However, this intended qualification is based on the tax laws that are currently in effect. We are unable to
predict any future changes in the tax laws that would adversely affect our status as a REIT. If there is a change in the
tax laws that prevent us from qualifying as a REIT or that requires REITs generally to pay corporate level income
taxes, we may not be able to make the same level of distributions to our stockholders.
An investment in our stock has various tax risks that could affect the value of your investment, including the
treatment of distributions in excess of earnings and the inability to apply “passive losses” against distributions.
An investment in our stock has various tax risks. Distributions in excess of current and accumulated
earnings and profits, to the extent that they exceed the adjusted basis of an investor’s stock, will be treated as long-
term capital gain (or short-term capital gain if the shares have been held for less than one year). Any gain or loss
realized upon a taxable disposition of shares by a stockholder who is not a dealer in securities will be treated as a
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long-term capital gain or loss if the shares have been held for more than one year, and otherwise will be treated as
short-term capital gain or loss. Distributions that we properly designate as capital gain distributions will be treated as
taxable to stockholders as gains (to the extent that they do not exceed our actual net capital gain for the taxable year)
from the sale or disposition of a capital asset held for greater than one year. Distributions we make and gain arising
from the sale or exchange by a stockholder of shares of our stock will not be treated as passive income, meaning
stockholders generally will not be able to apply any “passive losses” against such income or gain.
Excessive non-real estate asset values may jeopardize our REIT status.
In order to qualify as a REIT, at least 75% of the value of our assets must consist of investments in real
estate, investments in other REITs, cash and cash equivalents, and government securities. Therefore, the value of
any properties we own that are not considered real estate assets for federal income tax purposes must represent in the
aggregate less than 25% of our total assets. In addition, under federal income tax law, we may not own securities in
any one issuer (other than a REIT, a qualified REIT subsidiary or a TRS) which represent in excess of 10% of the
voting securities or 10% of the value of all securities of any one issuer, or which have, in the aggregate, a value in
excess of 5% of our total assets, and we may not own securities of one or more TRSs which have, in the aggregate, a
value in excess of 25% of our total assets. We may invest in securities of another REIT, and our investment may
represent in excess of 10% of the voting securities or 10% of the value of the securities of the other REIT. If the
other REIT were to lose its REIT status during a taxable year in which our investment represented in excess of 10%
of the voting securities or 10% of the value of the securities of the other REIT as of the close of a calendar quarter,
we may lose our REIT status.
Compliance with the asset tests is determined at the end of each calendar quarter. Subject to certain
mitigation provisions, if we fail to meet any such test at the end of any calendar quarter, we will cease to qualify as a
REIT.
We may have to borrow funds or sell assets to meet our distribution requirements.
Subject to some adjustments that are unique to REITs, a REIT generally must distribute 90% of its taxable
income. For the purpose of determining taxable income, we may be required to accrue interest, rent and other items
treated as earned for tax purposes but that we have not yet received. In addition, we may be required not to accrue as
expenses for tax purposes some items which actually have been paid, including, for example, payments of principal
on our debt, or some of our deductions might be disallowed by the Internal Revenue Service. As a result, we could
have taxable income in excess of cash available for distribution. If this occurs, we may have to borrow funds or
liquidate some of our assets in order to meet the distribution requirement applicable to a REIT.
Future distributions may include a significant portion as a return of capital.
Our distributions may exceed the amount of our income as a REIT. If so, the excess distributions will be
treated as a return of capital to the extent of the stockholder’s basis in our stock, and the stockholder’s basis in our
stock will be reduced by such amount. To the extent distributions exceed a stockholder’s basis in our stock, the
stockholder will recognize capital gain, assuming the stock is held as a capital asset.
Our ownership of and relationship with any TRS which we recently formed or acquire in the future will be
limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the
application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not
be qualifying income if earned directly by the parent REIT. Overall, no more than 25% of the value of a REIT’s
assets may consist of stock or securities of one or more TRSs. A TRS will typically pay federal, state and local
income tax at regular corporate rates on any income that it earns. In addition, the TRS rules impose a 100% excise
tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. The
TRS that we recently formed will pay federal, state and local income tax on its taxable income, and its after-tax net
income will be available for distribution to us but will not be required to be distributed to us. There can be no
assurance that we will be able to comply with the 25% limitation discussed above or to avoid application of the
16
100% excise tax discussed above.
Liquidation of our assets may jeopardize our REIT qualification.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income.
If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply
with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on
any gain if we sell assets in transactions that are considered to be “prohibited transactions,” which are explained in
the risk factor below.
We may be subject to other tax liabilities even if we qualify as a REIT.
Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal,
state and local taxes on our income and property. For example, we will be subject to income tax to the extent we
distribute less than 100% of our REIT taxable income (including capital gains). Additionally, we will be subject to a
4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than
the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income
from prior years. Moreover, if we have net income from “prohibited transactions,” that income will be subject to a
100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business. The determination as to whether a particular sale is a prohibited
transaction depends on the facts and circumstances related to that sale. While we will undertake sales of assets if
those assets become inconsistent with our long-term strategic or return objectives, we do not believe that those sales
should be considered prohibited transactions, but there can be no assurance that the IRS would not contend
otherwise. The need to avoid prohibited transactions could cause us to forego or defer sales of properties that might
otherwise be in our best interest to sell.
In addition, any net taxable income earned directly by our TRS, or through entities that are disregarded for
federal income tax purposes as entities separate from our TRS, will be subject to federal and possibly state corporate
income tax. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have
less cash available for distributions to our stockholders.
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular
corporations.
The maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and
estates were reduced in recent years to 15% (through 2012). Dividends payable by REITs, however, are generally
not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or
dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors
who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than
investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the
stock of REITs, including our stock.
Our ownership limit contained in our charter may be ineffective to preserve our REIT status.
In order for us to qualify as a REIT for each taxable year, no more than 50% in value of our outstanding
capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar
year (the “5/50 Rule”). Individuals for this purpose include natural persons, private foundations, some employee
benefit plans and trusts, and some charitable trusts. In order to preserve our REIT qualification, our charter
generally prohibits (i) any member of the Agree-Rosenberg Group from directly or indirectly owning more than
24% of the value of our outstanding stock and (ii) any other person from directly or indirectly owning more than
9.8% of the value of our outstanding common stock and preferred stock, subject to certain exceptions. Because of
the way our ownership limit is written, including because of the limit on persons other than a member of the Agree-
Rosenberg Group is not less than 9.8%, our charter limitation may be ineffective to ensure that we do not violate the
17
5/50 Rule.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax
liabilities.
The REIT provisions of the Internal Revenue Code substantially limit our ability to hedge our liabilities.
Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or
currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does not
constitute qualifying income for purposes of income tests that apply to us as a REIT. To the extent that we enter
into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying
income for purposes of the income tests. As a result of these rules, we may need to limit our use of advantageous
hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities
because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest
rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax
benefit, except for being carried forward against future taxable income in the TRSs.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
ITEM 2.
PROPERTIES
Our properties consist of 69 freestanding net leased properties and 12 community shopping centers that, as
of December 31, 2010, were 99.2% leased, with a weighted average lease term of 11.6 years. Two freestanding net
leased properties were classified as held for sale as of December 31, 2010. Approximately 89% of our annualized
base rent was attributable to national retailers. Among these retailers are Walgreen, Borders and Kmart which, at
December 31, 2010, collectively represented approximately 62% of our annualized base rent. A majority of our
properties were built for or are leased to national tenants who require a high quality location with strong retail
characteristics. We developed 49 of our 69 freestanding properties and all 12 of our community shopping centers.
Properties we have developed (including our community shopping centers) account for approximately 76% of our
annualized base rent as of December 31, 2010. Our 69 freestanding properties are comprised of 68 retail locations
and Borders’ corporate headquarters. See Notes 6 and 7 to the Consolidated Financial Statements included herein
for information regarding mortgage debt and other debt related to our properties.
A substantial portion of our income consists of rent received under net leases. A majority of our leases
provide for the payment of fixed base rentals monthly in advance and for the payment by tenants of a pro rata share
of the real estate taxes, insurance, utilities and common area maintenance of the shopping center as well as payment
to us of a percentage of the tenant’s sales. We received percentage rents of $34,518, $15,366 and $15,396 for the
fiscal years 2010, 2009 and 2008, respectively. Leases with Borders do not contain percentage rent provisions.
Leases with Walgreen and Kmart do contain percentage rent provisions; however, no percentage rent was received
from these tenants during these periods. Some of our leases require us to make roof and structural repairs, as
needed.
Development and Acquisition Summary
During 2010, we completed the following developments and redevelopments:
Tenant(s)
Walgreen (drug store)
Walgreen (drug store)
Walgreen (drug store)
Dick’s Sporting Goods (retail store) Boynton Beach, Florida
Location
Ann Arbor, Michigan
Atlantic Beach, Florida
St. Augustine Shores, Florida
Cost
$3.1 million
$3.6 million
$3.7 million
$3.7 million
18
During 2010, we completed the following acquisitions:
Tenant(s)
CVS Caremark (drug store)
CVS Caremark (drug store)
CVS Caremark (drug store)
PNC Bank (retail bank)
Lowes (retail store)
CVS Caremark (drug store)
Kohl’s (department store)
JP Morgan Chase (retail bank)
Walgreen (drug store)
Location
Atchison, Kansas
Johnstown, Ohio
Lake in the Hills, Illinois
Antioch, Illinois
Concord, North Carolina
Mansfield, Connecticut
Tallahassee, Florida
Spring Grove, Illinois
Shelby Township, Michigan
Cost
$4.2 million
$3.5 million
$5.8 million
$2.8 million
$9.9 million
$3.3 million
$2.2 million
$2.9 million
$2.2 million
During 2010, we completed the following dispositions:
Tenant(s)
Borders (book store)
Walgreen (drug store)
Borders (book store)
Major Tenants
Location
Santa Barbara, California
Marion Oaks, Florida
Aventura, Florida
Sales price
$9.8 million
$4.1 million
$ .5 million
The following table sets forth certain information with respect to our major tenants:
Number
of Leases
Annualized Base
Rent as of
December 31, 2010
Percent of Total
Annualized Base Rent as
of December 31, 2010
30
Walgreen................................................................
14
Borders ................................................................
Kmart ................................................................12
56
Total ................................................................
$ 11,299,499
7,357,947
3,847,911
$ 22,505,357
31%
20
11
62%
Walgreen is a leader of the U.S. chain drugstore industry and trades on the New York Stock Exchange
under the symbol “WAG”. Walgreen operated 8,133 locations in 50 states, the District of Columbia, Puerto Rico
and Guam and had total assets of approximately $26.3 billion as of August 31, 2010. As of February 11, 2011,
Walgreen’s long-term debt had a Standard and Poor’s rating of A and a Moody’s rating of A2. For its fiscal year
ended August 31, 2010, Walgreen reported that its annual net sales were $67.4 billion, its annual net income was
$2.1 billion and it had stockholders’ equity of $14.4 billion.
Borders trades on the New York Stock Exchange under the symbol “BGP”. Borders is a specialty retailer
of books as well as other educational and entertainment items. Borders employs approximately 19,500 employees
throughout the United States, primarily in its Borders and Waldenbooks stores. At November 30, 2010, Borders
operated 518 superstores under the Borders name. Borders has reported that its annual revenues for its 2009 fiscal
year ended January 30, 2010 were approximately $2.8 billion, its annual net (loss) for 2009 was approximately
($109 million) and its total stockholders’ equity at fiscal year end 2009 was approximately $158 million. On
February 16, 2011, Borders filed a petition for reorganization relief under Chapter 11 of the Bankruptcy Code. The
Chapter 11 petition for relief was filed in the U.S. Bankruptcy Court, Southern District of New York. Borders
19
announced that it has received commitments for $505 million in Debtor-In-Possession financing led by GE Capital,
Restructuring Finance. Borders also announced it plans to undertake a strategic Store Reduction Program to
facilitate reorganization and has identified certain underperforming stores, equivalent to approximately 30% of the
company’s national store network, that are expected to close in the next several weeks. As part of this
reorganization process, Borders disclosed an intention to close stores at five locations where it leases space from us,
representing approximately $2.6 million of our annualized base rent as of December 31, 2010.
Kmart is a wholly-owned subsidiary of Sears Holdings Corporation (“Sears”), which trades on the Nasdaq
stock market under the symbol “SHLD”. Kmart is a mass merchandising company that offers customers quality
products through a portfolio of brands and labels. As of January 30, 2010, Kmart operated approximately 1,327
stores across 49 states, Guam, Puerto Rico and the U.S. Virgin Islands. Sears is a broadline retailer with
approximately 2,300 full-line and 1,200 specialty retail stores in the United States. As of October 30, 2010, Sears
had total assets of $26.0 billion, total liabilities of $17.6 billion and stockholders equity of $8.4 billion. All of our
Kmart properties are in the traditional Kmart format and these Kmart properties average 85,000 square feet per
property.
The financial information set forth above with respect to Walgreen, Borders and Kmart was derived from
the annual reports on Form 10-K filed by Borders and Walgreen with the SEC with respect to their 2009 fiscal years
and the quarterly report on Form 10-Q filed by Sears Holdings Corporation with the SEC with respect to the third
quarter of 2010. Additional information regarding Walgreen, Borders or Kmart may be found in their respective
public filings. These filings can be accessed at www.sec.gov. We are unable to confirm, and make no
representations with respect to, the accuracy of these reports and therefore you should not place undue reliance on
such information as it pertains to our operations.
Location of Properties in the Portfolio
The following table presents information about our properties as of December 31, 2010.
State
Number
of
Properties
Total GLA
(Sq. feet)
Percent of Total GLA
Leased on December 31,
2010
Connecticut ................................................................1
Florida ................................................................ 8
Georgia ................................................................ 1
Illinois ................................................................
4
Indiana ................................................................ 2
Kansas ................................................................ 3
Kentucky................................................................ 1
Maryland................................................................ 2
Michigan ................................................................43
Nebraska ................................................................ 2
New Jersey ................................................................1
New York ................................................................2
1
North Carolina ................................................................
2
Ohio ................................................................
Oklahoma (1) ................................................................4
Pennsylvania ................................................................1
Wisconsin ................................................................3
81
Total/Average ................................................................
10,125
396,648
14,820
40,740
15,844
58,225
116,212
53,503
2,178,811
61,500
10,118
27,626
170,393
34,225
99,634
37,004
523,036
3,848,464
20
100%
99%
100%
100%
100%
100%
100%
100%
99%
100%
100%
100%
100%
100%
100%
100%
98%
99%
(1) Includes two properties leased to Borders containing 50,352 square feet that were classified as held for sale as of
December 31, 2010 and subsequently sold in January 2011.
Lease Expirations
The following table shows lease expirations for our community shopping centers and wholly-owned
freestanding properties, assuming that none of the tenants exercise renewal options.
December 31, 2010
Gross Leasable Area
Annualized Base Rent
Expiration Year
Number
of Leases
Expiring
Square
Footage
Percent
of Total
2011 ................................................................12
2012 ................................................................29
2013 ................................................................21
2014 ................................................................15
2015 ................................................................21
2016 ................................................................13
2017 ................................................................5
2018 ................................................................11
2019 ................................................................6
2020 ................................................................6
47
Thereafter ................................................................
Total ................................................................186
111,563
281,356
330,063
213,570
827,135
150,641
38,944
200,235
70,170
170,718
1,374,254
3.0%
7.5%
8.8%
5.7%
21.9%
4.0%
1.0%
5.3%
1.9%
4.5%
36.4%
Amount
$ 781,944
1,457,922
1,805,397
1,162,160
4,464,549
2,138,456
371,995
3,392,318
1,741,879
2,068,701
17,015,402
Percent
of Total
2.1%
4.0%
5.0%
3.2%
12.3%
5.9%
1.0%
9.3%
4.8%
5.7%
46.7%
3,768,649
100.0%
$36,400,723
100.0%
We have made preliminary contact with the 12 tenants whose leases expire in 2011. Of those tenants, two
tenants, at their option, have the right to extend their lease term, two tenants have extended their lease term and eight
tenants have leases expiring in 2011. We expect two tenants to terminate their leases in 2011 and six tenants to
extend their leases or enter into lease extensions
Annualized Base Rent of our Properties
The following table sets forth annualized base rent as of December 31, 2010 for each type of retail tenant:
Type of Tenant
Annualized
Base Rent
National(1) ................................................................................................
Regional(2) ................................................................................................
Local ................................................................................................
$ 32,556,399
2,720,342
1,123,982
Total ................................................................................................$ 36,400,723
__________________
Percent of
Annualized
Base Rent
89%
8
3
100%
(1)
Includes the following national tenants: Walgreen, Borders, Kmart, Wal-Mart, CVS, Lowe’s, Dick’s Sporting Goods, PNC Bank,
Kohl’s, Fashion Bug, Rite Aid, JC Penney, Avco Financial, GNC Group, Radio Shack, Super Value, Maurices, Payless Shoes,
Blockbuster Video, Family Dollar, H&R Block, Sally Beauty, Jo Ann Fabrics, Staples, Best Buy, Dollar Tree, TGI Friday’s and Pier 1
Imports.
21
(2)
Includes the following regional tenants: Roundy’s Foods, Meijer, Dunham’s Sports, Christopher Banks and Beall’s Department
Stores.
Freestanding Properties
At December 31, 2010, our 67 operating freestanding properties were leased to Walgreen (29), Borders
(14), Rite Aid (7), CVS Caremark (4), Kmart (2), JP Morgan Chase (2), Los Tres Amigos (1), Citizens Bank (1),
Dick’s Sporting Goods (1), Lake Lansing RA Associates, LLC (1), Meijer (1), Wal-Mart (Sam’s Club) (1), Kohl’s
(1), PNC Bank (1) and Lowe’s (1). Our freestanding properties provided $26,260,862, or approximately 72.2%, of
our annualized base rent as of December 31, 2010, at an average base rent per square foot of $13.60. These
properties contain, in the aggregate, 1,935,456 square feet of GLA or approximately 51% of our total GLA as of
December 31, 2010. Our freestanding properties tend to have high traffic counts, are generally located in densely
populated areas and are leased to a single tenant on a long term basis. Of our 67 operating freestanding properties,
47 were developed by us. Our freestanding properties had a weighted average lease term of 14.2 years as of
December 31, 2010.
Our freestanding properties range in size from 4,426 to 330,322 square feet of GLA and are located in the
following states: Connecticut (1), Florida (7), Georgia (1), Illinois (3), Indiana (2), Kansas (3), Maryland (2),
Michigan (37), Nebraska (2), New Jersey (1), New York (2), North Carolina (1), Ohio (2), Oklahoma (4) and
Pennsylvania (1).
The following table sets forth more information about our freestanding properties as of December 31, 2010.
Tenant
Location
Year
Completed/
Expanded
Total
GLA
Lease Expiration(2)
(Option expiration)
Columbus, OH (10)
Borders ................................................................................................
Monroeville, PA (10)
Borders and TGI Fridays ................................................................
Norman, OK
Borders ................................................................................................
Borders and Chili’s (8) ................................................................
Omaha, NE
Borders (8) ................................................................Wichita, KS (10)
Borders (8) ................................................................Lawrence, KS (10)
Borders ................................................................................................
Tulsa, OK (9)
Borders (8) ................................................................Oklahoma City, OK (10)
Borders (8) ................................................................Omaha, NE
Borders (8) ................................................................Indianapolis, IN (11)
Borders (8) ................................................................Columbia, MD
Borders (8) ................................................................Germantown, MD
Ann Arbor, MI
Borders Headquarters (8) ................................................................
Borders ................................................................................................
Tulsa, OK (9)
Borders (8) ................................................................Boynton Beach, FL (11)
Borders (8) ................................................................Ann Arbor, MI
Chase Bank (7) ................................................................
Southfield, MI
Chase Bank ................................................................Spring Grove, IL
Citizens Bank ................................................................Flint, MI
CVS Pharmacy ................................................................Atchison, KS
CVS Pharmacy ................................................................
CVS Pharmacy ................................................................Lake in the Hills, IL
CVS Pharmacy ................................................................Mansfield, CT
Dick’s Sporting Goods ................................................................
Boynton Beach, FL
Johnstown, OH
1996
1996
1996
1995
1995
1997
1998
2002
2002
2002
1999
2000
1996/1998
1996
1996
1996
2009
2010
2003
2010
2010
2010
2010
2010
21,000
37,004
24,641
36,500
25,000
20,000
25,579
24,641
25,000
15,844
28,000
25,503
330,322
24,773
20,745
110,000
4,270
4,300
4,426
13,225
13,225
13,225
10,125
43,790
Jan 23, 2016 (2036)
Nov 8, 2016 (2036)
Sep 20, 2016 (2036)
Nov 3, 2015 (2035)
Nov 10, 2015 (2035)
Oct 16, 2022 (2042)
Sep 30, 2018 (2038)
Jan 31, 2018 (2038)
Jan 31, 2018 (2038)
Dec 31, 2017 (2038)
Jan 31, 2018 (2038)
Jan 31, 2018 (2038)
Jan 29, 2023 (2043)
Sep 30, 2018 (2038)
July 20, 2024 (2044)
Jan 31, 2025 (2045)
Oct 31, 2029 (2059)
Apr 20, 2038 (2067)
Apr 15, 2023
Jan 31, 2036 (2065)
Jan 31, 2035 (2059)
Jan 31, 2035 (2084)
Jan 31, 2027 (2046)
Oct 31, 2021 (2040)
22
Tenant
Location
Kmart ................................................................................................
Kmart ................................................................................................
Kohl’s (1) ................................................................Tallahassee, FL
Grayling, MI
Oscoda, MI
East Lansing, MI
Lake Lansing RA Associates, LLC (4) ................................
Lansing, MI
Los Tres Amigos (3) ................................................................
Concord, NC
Lowe’s Home Centers ................................................................
Meijer ................................................................................................
Plainfield, IN
PNC Bank ................................................................Antioch, IL
Rite Aid (8) ................................................................Webster, NY
Rite Aid (8) ................................................................Albion, NY
Rite Aid (8) ................................................................Canton Twp, MI
Rite Aid (8) ................................................................Roseville, MI
Mt Pleasant, MI
Rite Aid ................................................................................................
Rite Aid ................................................................................................
N Cape May, NJ
Rite Aid (8) ................................................................Summit Twp, MI
Sam’s Club (6) ................................................................Roseville, MI
Walgreen (8) ................................................................Waterford, MI
Walgreen (8) ................................................................Chesterfield, MI
Walgreen (8) ................................................................Pontiac, MI
Walgreen (8) ................................................................Grand Blanc, MI
Walgreen (8) ................................................................Rochester, MI
Walgreen and Auto Zone (8) ................................ Ypsilanti, MI
Walgreen (1) (8) ................................................................
Petoskey, MI
Walgreen (8) ................................................................Flint, MI
Walgreen (8) ................................................................Flint, MI
Walgreen (8) ................................................................New Baltimore, MI
Walgreen (8) ................................................................Flint, MI
Walgreen ................................................................ Big Rapids, MI
Walgreen (8) ................................................................Flint, MI
Walgreen (8) ................................................................Flint, MI
Walgreen ................................................................ Midland, MI
Walgreen (8) ................................................................Grand Rapids, MI
Walgreen (8) ................................................................Delta Township, MI
Walgreen and Retail space (8) ................................Livonia, MI
Walgreen ................................................................ Barnesville, GA
Walgreen and Chase Bank (8) ................................Macomb Township, MI
Walgreen ................................................................ Ypsilanti, MI
Walgreen (8) ................................................................Shelby Township, MI
Walgreen ................................................................ Brighton, MI
Walgreen ................................................................ Silver Springs Shores, FL
Walgreen ................................................................ Port St John, FL
Walgreen ................................................................ Lowell, MI
23
Year
Completed/
Expanded
1984
1984/1990
2010
Total
GLA
Lease Expiration(2)
(Option expiration)
52,320
90,470
102,381
Sep 30, 2012 (2059)
Sep 30, 2012 (2059)
Jan 31, 2028 (2057)
2004
2004
2010
2007
2010
2004
2004
2003
2005
2005
2005
2006
2002
1997
1998
1998
1998
1998
1999
2000
2000
2001
2001
2002
2003
2004
2004
2005
2005
2005
2007
2007
2008
2008
2008
2009
2009
2009
2009
14,564
Dec 31, 2028 (2078)
5,448
Aug 31, 2014 (2032)
Oct 31, 2028 (2058)
170,393
Note (5) Nov 5, 2027 (2047)
Mar 31, 2039 (2088)
3,215
Feb 24, 2024 (2044)
13,813
Oct 12, 2024 (2044)
13,813
Oct 31, 2019 (2049)
11,180
June 30, 2025 (2050)
11,060
Nov 30, 2025 (2065)
11,095
Nov 30, 2025 (2065)
10,118
Oct 31, 2019 (2039)
11,060
Aug 4, 2022 (2082)
132,332
Feb 28, 2018 (2058)
13,905
July 31, 2018 (2058)
13,686
Oct 31, 2018 (2058)
13,905
Feb 28, 2019 (2059)
13,905
June 30, 2019 (2059)
13,905
Dec 31, 2019 (2059)
21,620
Apr 30, 2020 (2060)
13,905
Dec 31, 2020 (2060)
14,490
Feb 28, 2021 (2061)
15,120
Aug 31, 2021 (2061)
14,490
Apr 30, 2027 (2077)
14,490
Apr 30, 2028 (2078)
13,560
Feb 28, 2029 (2079)
14,560
Oct 31, 2029 (2079)
13,650
July 31, 2030 (2080)
14,820
Aug 30, 2030 (2080)
14,820
Nov 30, 2030 (2080)
14,559
June 30, 2032 (2082)
19,390
14,820
Nov 30, 2032 (2082)
19,090 Mar 31, 2033 (2083)
13,650 Mar 31, 2032 (2082)
Jul 31, 2033 (2083)
14,820
Jan 31, 2034 (2084)
14,550
Dec 31, 2033 (2083)
14,550
Apr 30, 2034 (2084)
14,550
Sep 30, 2034 (2084)
13,650
Tenant
Location
Year
Completed/
Expanded
Total
GLA
Walgreen (1) ................................................................Ann Arbor, MI
Walgreen ................................................................ Atlantic Beach, FL
Walgreen ................................................................ St. Augustine Shores, FL
2010
2010
2010
Total ................................................................................................
________________
13,650
14,478
14,820
1,985,808
Lease Expiration(2)
(Option expiration)
Aug 31, 2035 (2085)
Aug 31, 2035 (2085)
Jan 31, 2036 (2086)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Properties subject to long-term ground leases where a third party owns the underlying land and has leased the land to us to construct or
operate freestanding properties. We pay rent for the use of the land and we are generally responsible for all costs and expenses
associated with the building and improvements. At the end of the lease terms, as extended (Petoskey, MI 2074, Tallahassee, FL 2032
and Ann Arbor, MI 2035), the land together with all improvements revert to the land owner. We have an option to purchase the
Petoskey property after August 7, 2019 and the Ann Arbor property after June 3, 2012.
At the expiration of tenant’s initial lease term, each tenant (except Citizens Bank) has an option, subject to certain requirements, to
extend its lease for an additional period of time.
This 2.03 acre property is leased from us by Los Tres Amigos pursuant to a ground lease. The tenant occupies a 5,448 square foot
building.
This 11.3 acre property is leased from us by Lake Lansing RA Associates, LLC pursuant to a ground lease. The ground lesssee has
constructed a 14,564 square foot building.
This 32.5 acre property is leased from us by Meijer pursuant to a ground lease. Meijer expects to construct an estimated 210,000
square foot super center.
This 12.68 acre property is leased from us by Wal-Mart pursuant to a ground lease. Wal-Mart has constructed a Sam’s Club retail
building containing approximately 132,332 square feet.
This 1.0 acre property is leased from us by JP Morgan Chase Bank pursuant to a ground lease. JP Morgan Chase has constructed a
retail bank branch containing approximately 4,270 square feet.
Properties subject to a mortgage/debt or pledged pursuant to our credit facilities
Classified as held for sale as of December 31, 2010
(10)
Borders has disclosed its intention to close their store at this location
(11)
Borders sub-leases their space at these locations to another tenant
Community Shopping Centers
Our 12 community shopping centers range in size from 20,000 to 241,458 square feet of GLA. The
community shopping centers are located in five states as follows: Florida (1), Illinois (1), Kentucky (1), Michigan
(6) and Wisconsin (3). Our community shopping centers tend to be located in high traffic, market dominant centers
in which customers of our tenants purchase day-to-day necessities. Our community shopping centers are anchored
by national tenants.
The location, general character and primary occupancy information with respect to the community
shopping centers as of December 31, 2010 are set forth below:
Property Location
Location
Year
Completed/
Expanded
GLA
Sq. Ft.
Annualized
Base Rent (2)
Percent
Occupied
at
December
31,
2010
Percent
Leased at
December
31,
2010 (4)
Average
Base
Rent per
Sq. Ft.(3)
Anchor Tenants (Lease
expiration/Option period
expiration) (5)
Capital Plaza (1) ................................Frankfort, KY
1978/ 2006
116,212
$
599,000
$ 5.15
100%
100%
Kmart(2013/2053)
Walgreen (2031/2052)
24
Property Location
Location
Charlevoix,
MI
Charlevoix Commons ................................
Year
Completed/
Expanded
GLA
Sq. Ft.
Annualized
Base Rent (2)
Percent
Occupied
at
December
31,
2010
Percent
Leased at
December
31,
2010 (4)
Average
Base
Rent per
Sq. Ft.(3)
1991
137,375
686,495
5.00
100%
100%
Anchor Tenants (Lease
expiration/Option period
expiration) (5)
Kmart (2015/2065)
Roundy’s (2011)
Family Farm (2016)
Chippewa
Falls, WI
Chippewa Commons (6) ................................
1991
168,311
959,823
5.76
99%
99%
Kmart (2014/2064)
Ironwood Commons ................................
Ironwood, MI
1991
185,535
937,643
5.005
100%
100%
Kmart (2015/2065)
Super Value (2011/2036)
Marshall Plaza ................................ Marshall, MI
1990
119,279
646,959
5.42
100%
100%
Kmart (2015/2065)
Central Michigan Commons.....
Mt. Pleasant,
MI
1973/ 1997
241,458
1,039,018
4.39
98%
98%
Kmart (2013/2048)
Roundy’s (2010/2030)
Fashion Bug (2014/2024)
J.C. Penney Co. (2015/2035)
Staples, Inc. (2015/2030)
North Lakeland Plaza (6) ................................
Lakeland, FL
1987
171,334
1,306,574
7.71
99%
99%
Best Buy (2013/2028)
Petoskey Town Center (6) ...............................
Petoskey, MI
1990
174,870
998,273
5.90
97%
97%
Kmart (2015/2065)
Beall’s (2020/2035)
Roundy’s (2010/2030)
Fashion Bug (2012/2022)
Plymouth Commons ................................
Plymouth, WI
1990
162,031
809,869
5.14
97%
97%
Kmart (2015/2065)
Ferris Commons ................................
Big Rapids,
MI
1990
173,557
1,016,836
5.86
100%
100%
Kmart (2015/2065)
Roundy’s (2015/2030)
Shawano Plaza (6) ................................Shawano, WI
1990
192,694
983,371
5.21
98%
98%
Kmart (2014/2064)
MC Sports (2018/2033)
Peebles (2019/2039)
Roundy’s (2015/2030)
J.C. Penney Co. (2015/2035)
Fashion Bug (2012/2019)
West
Frankfort, IL
West Frankfort Plaza ................................
1982
20,000
136,000
6.80
100%
100%
Fashion Bug (2012)
Total/Average ................................
1,862,656
$
10,119,861
$ 5.52
98%
98%
__________________
(1)
(2)
(3)
(4)
(5)
(6)
All community shopping centers except Capital Plaza (which is subject to a long-term ground lease expiring in 2053 from a third
party) are wholly-owned by us.
Total annualized base rents of our Company as of December 31, 2010.
Calculated as total annualized base rents, divided by gross leaseable area actually leased as of December 31, 2010.
Roundy’s has sub-leased the space it leases at Charlevoix Commons (35,896 square feet, rented at a rate of $5.97 per square foot). The
lease with Roundy’s will expire on December 31, 2011. We have entered into a lease with Family Farm and Home, Inc (the Roundy’s
sub-tenant). The Family Farm lease commences January 1, 2012, has a term of 5 years and a rental rate of $2.00 per square foot.
The option to extend the lease beyond its initial term is only at the option of the tenant.
Properties subject to a mortgage/debt or pledged pursuant to our credit facilities.
25
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings in the ordinary course of business. We are not
presently involved in any litigation nor, to our knowledge, is any other litigation threatened against us, other than
routine litigation arising in the ordinary course of business, which is expected to be covered by our liability
insurance and all of which collectively is not expected to have a material adverse effect on our liquidity, results of
operations or business or financial condition.
ITEM 4. [REMOVED AND RESERVED]
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange under the symbol “ADC”. The following
table sets forth the high and low closing prices of our common stock, as reported on the New York Stock Exchange,
and the dividends declared per share of common stock by us for each calendar quarter in the last two fiscal years.
Dividends were paid in the periods immediately subsequent to the periods in which such dividends were declared.
Quarter Ended
March 31, 2010
June 30, 2010
September 30, 2010
December 31, 2010
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
High
$24.67
$26.80
$26.74
$28.63
$19.32
$18.66
$24.61
$24.94
Low
$19.56
$21.73
$21.52
$24.79
$9.31
$14.89
$17.10
$ 21.01
Dividends Declared Per
Common Share
$0.51
$0.51
$0.51
$0.51
$0.50
$0.50
$0.51
$0.51
On March 3, 2011, the reported closing sale price per share of common stock on the New York Stock
Exchange was $24.60.
At February 15, 2011, there were 9,857,314 shares of our common stock issued and outstanding
which were held by approximately 200 stockholders of record. The number of stockholders of record does not
reflect persons or entities who held their shares in nominee or “street” name. In addition, at December 31, 2010
there were 347,619 OP units outstanding held by a limited partner other than our Company. The OP units are
exchangeable into shares of common stock on a one for one basis.
For 2010, we paid $2.04 per share of common stock in dividends. Of the $2.04, 90.0% represented ordinary
income, and 10.0% represented return of capital, for tax purposes. For 2009, we paid $2.02 per share of common
stock in dividends. Of the $2.02, 100.0% represented ordinary income, and 0.0% represented return of capital, for
tax purposes.
We intend to continue to declare quarterly dividends to our stockholders. However, our distributions are
determined by our board of directors and will depend on a number of factors, including the amount of our funds
from operations, the financial and other condition of our properties, our capital requirements, restrictions in our debt
instruments, our annual distribution requirements under the provisions of the Internal Revenue Code applicable to
REITs and such other factors as our board of directors deems relevant. We have historically paid cash dividends,
although we may choose to pay a portion in stock dividends in the future. To qualify as a REIT, we must distribute
at least 90% of our REIT taxable income prior to net capital gains to our stockholders, as well as meet certain other
26
requirements. We must pay these distributions in the taxable year the income is recognized, or in the following
taxable year if they are declared during the last three months of the taxable year, payable to stockholders of record
on a specified date during such period and paid during January of the following year. Such distributions are treated
as paid by us and received by our stockholders on December 31 of the year in which they are declared. In addition,
at our election, a distribution for a taxable year may be declared in the following taxable year if it is declared before
we timely file our tax return for such year and if paid on or before the first regular dividend payment after such
declaration. These distributions qualify as dividends paid for the 90% REIT distribution test for the previous year
and are taxable to holders of our capital stock in the year in which paid.
During the year ended December 31, 2010, we did not sell any unregistered securities. During the fourth
quarter of 2010, we did not repurchase any of our equity securities.
For information about our equity compensation plan, please see Part III, Item 12 of this report.
27
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth our selected financial information on a historical basis and should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all
of the financial statements and notes thereto included elsewhere in this Form 10-K. Certain amounts have been
reclassified to conform to the current presentation of discontinued operations. The balance sheet for the periods
ending December 31, 2006 through 2010 and operating data for each of the periods presented were derived from our
audited financial statements.
Selected Financial Data
(in thousands, except per share, number of properties, and percentage leased information)
Year Ended December 31,
2010
2009
2008
2007
2006
$
36,112
$
34,402
$ 32,919
$
31,887
$ 30,329
Operating Data
Total Revenues .........................................................
Expenses
Property Expense (1) ..............................................
General and Administrative ...................................
Interest ...................................................................
Depreciation and amortization ...............................
Impairment charge
3,848
5,003
4,712
5,687
7,700
3,891
4,559
4,635
5,359
-
3,975
4,361
5,179
5,064
-
3,838
4,462
4,896
4,725
-
17,921
1,044
3,747
4,019
4,625
4,559
-
16,950
-
Total Expenses .....................................................
26,950
18,444
18,579
Other Income (Expense) (2) ....................................
-
-
-
Income From Continuing Operations .......................
9,162
15,958
14,340
15,010
13,379
Gain on Sale of Asset From Discontinued Operations
Income From Discontinued Operations ...............
4,738
1,728
-
2,036
-
-
1,942
1,817
-
1,815
Net Income .............................................................
15,628
17,994
16,282
16,827
15,194
Less Net Income Attributable to Non-Controlling
Interest..................................................................
561
950
1,265
1,345
1,220
Net Income Attributable to Agree Realty Corporation
$
15,067 $
17,044
$
15,017
$
15,482
$ 13,974
Number of Properties ...............................................
Number of Square Feet.............................................
Percentage Leased ....................................................
Per Share Data – Diluted
Net Income ...........................................................
81
3,848
99%
73
3,492
68
3,439
98%
99%
64
3,385
99%
60
3,355
99%
$
1.64 $
2.14
$
1.95
$
2.01
$
1.83
Weighted Average of Common Shares Outstanding –
Diluted ..............................................................
Cash Dividends ........................................................
Balance Sheet Data
Real Estate (before accumulated depreciation) .........
Total Assets ..............................................................
Total Debt, including accrued interest………………
$
$
$
$
9,191
7,966
7,719
7,716
7,651
2.04 $
2.02
$
2.00
$
1.97
$
1.96
338,221 $
285,042 $
100,128 $
320,444
261,789
104,814
$ 311,343
$ 256,897
$ 101,069
$ 290,074
$ 239,348
82,889
$
$ 268,248
$ 223,515
$ 69,031
(1)
(2)
(3)
Property expense includes real estate taxes, property maintenance, insurance, utilities and land lease expense.
Other income is composed of gain on land sales.
Net income per share has been computed by dividing the net income by the weighted average number of shares of common stock
outstanding and the effect of dilutive securities outstanding.
28
ITEM 7.
Overview
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, directly
or indirectly, the Operating Partnership, of which we are the sole general partner and held a 96.56% interest as of
December 31, 2010. 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 elsewhere in this Form 10-K.
Recent Accounting Pronouncements
Effective January 1, 2010, companies are required to separately disclose the amounts of significant
transfers of assets and liabilities into and out of Level 1, Level 2 and Level 3 of the fair value hierarchy and the
reasons for those transfers. Companies must also develop and disclose their policy for determining when transfers
between levels are recognized. In addition companies are required to provide fair value disclosures of each class
rather than each major category of assets and liabilities. For fair value measurements using significant other
observable inputs (Level 2) or significant unobservable inputs (Level 3), companies are required to disclose the
valuation technique and the inputs used in determining fair value for each class of assets and valuation technique
and the inputs used in determining fair value for each class of assets and liabilities. Adoption of this standard did
not have a material effect on our consolidated results of operations or financial position.
Effective January 1, 2010, companies are required to separately disclose purchases, sales, issuances and
settlements on a gross basis in the reconciliation of recurring Level 3 fair value measurements. Adoption of this
standard did not have a material effect on our consolidated results of operations or financial position.
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. The viability of all projects under construction or
development are regularly evaluated under applicable accounting requirements, including requirements relating to
abandonment of assets or changes in use. To the extent a project, or individual components of the project, are no
longer considered to have value, the related capitalized costs are charged against operations. 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.
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 the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be written down to fair value and such excess
29
carrying value is charged to income. The expected cash flows of a project are dependent on estimates and other
factors subject to change, including (1) changes in the national, regional, and/or local economic climates, (2)
competition from other shopping centers, stores, clubs, mailings, and the internet, (3) increases in operating costs,
(4) bankruptcy and/or other changes in the condition of third parties, including tenants, (5) expected holding period,
and (6) availability of credit. These factors could cause our expected future cash flows from a project to change, and,
as a result, an impairment could be considered to have occurred. During 2010 we recorded impairment charges of
$8.14 million related to the carrying value of our real estate assets.
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, 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 Internal Revenue
Code.
We established TRS entities pursuant to the provisions of the REIT Modernization Act. Our TRS entities
are 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 our Company which occur
within our TRS entities are subject to federal and state income taxes. As of December 31, 2010 and 2009, we had
accrued a deferred income tax amount of $705,000. In addition, we have recorded an income tax liability of
$17,000 and $62,000 as of December 31, 2010 and 2009 respectively.
Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009
Minimum rental income increased $1,487,000, or 5%, to $32,787,000 in 2010, compared to $31,300,000 in
2009. The increase was the result of the development of a Walgreen drug store in Ann Arbor, Michigan in
September 2010, the development of a Walgreen drug store located in Atlantic Beach, Florida in October 2010, the
development of a Walgreen drug store in St Augustine Shores, Florida in November 2010, the development of a
Walgreen drug store in Brighton, Michigan in February 2009, the development of a Walgreen drug store in Port St.
John, Florida in June 2009, the development of a Walgreen drug store in Lowell, Michigan in September 2009 and
the development of a Chase bank branch land lease in Southfield, Michigan in October 2009. Our revenue increases
from these developments amounted to $787,000. In addition, rental income increased $702,000 as a result of the
nine property acquisitions that were completed during 2010 and a decrease of $2,000 from other rental income
adjustments.
Percentage rents increased from $15,000 in 2009 to $35,000 in 2010.
Operating cost reimbursements decreased $43,000, or 2%, to $2,604,000 in 2010, compared to $2,647,000
in 2009. Operating cost reimbursements decreased due to the net decrease in property operating expenses as
explained below.
We earned development fee income of $590,000 in 2010 related to a project we have completed in
Oakland, California. We recognized $410,000 of development fee income in 2009 related to the Oakland,
California project.
Other income increased $68,000 to $98,000 in 2010, compared to $30,000 in 2009.
Real estate taxes decreased $25,000, or 1%, to $1,913,000 in 2010 compared to $1,938,000 in 2009. The
decrease is the result of the capitalization of $50,000 of real estate taxes related to the Dick’s Sporting Goods re-
development and $25,000 of general assessment increases on the properties.
Property operating expenses (shopping center maintenance, snow removal, insurance and utilities)
decreased $108,000, or 7%, to $1,458,000 in 2010 compared to $1,566,000 in 2009. The decrease was the result of
30
an increase in shopping center maintenance expenses of $65,000; decreased snow removal costs of ($131,000);
decreased utility costs of ($15,000); and decreased insurance costs of ($27,000) in 2010 versus 2009.
Land lease payments increased $90,000, or 23%, to $477,000 in 2010 compared to $387,000 for 2009. The
increase is the result of our leasing of land for our Shelby Township, Michigan development.
General and administrative expenses increased $444,000, or 10%, to $5,003,000 in 2010 compared to
$4,559,000 in 2009. The increase in general and administrative expenses was primarily the result of increased
employee costs of $288,000, increased income tax expenses in our TRS entities of $32,000, increased professional
fees of $57,000 and an increase in other costs of $67,000. General and administrative expenses as a percentage of
rental income increased to 14.8% for 2010 from 14.1% in 2009.
Depreciation and amortization increased $328,000, or 6%, to $5,687,000 in 2010 compared to $5,359,000
in 2009. The increase was the result the development of five properties in 2009, the development of four properties
in 2010 and the acquisition of nine properties in 2010.
We incurred an impairment charge of $7,700,000 in 2010 as a result of writing down the carrying value of
our real estate assets to fair value for four properties leased to Borders and that Borders has indicated they plan to
close as part of their bankruptcy restructuring plan. There was no impairment charge in 2009.
Interest expense increased $77,000, or 2%, to $4,712,000 in 2010, from $4,635,000 in 2009. The increase
in interest expense resulted from the development and acquisition of additional properties during 2010.
We recognized a gain on sale of assets of $4,738,000 in 2010. The gain pertains to the sale of three
properties during 2010. The disposed properties were located in Santa Barbara, California, Marion Oaks, Florida
and Aventura, Florida. There were no property sales in 2009.
Income from discontinued operations decreased $308,000, or 15%, to $1,728,000 in 2010 compared to
$2,036,000 in 2009.
Our net income decreased $2,366,000, or 13%, to $15,628,000 in 2010, from $17,994,000 in 2009 as a
result of the foregoing factors.
Comparison of Year Ended December 31, 2009 to Year Ended December 31, 2008
Minimum rental income increased $1,183,000, or 4%, to $31,300,000 in 2009, compared to $30,117,000 in
2008. The increase was the result of the development of a Walgreen drug store and a bank land lease in Macomb
Township, Michigan in March 2008, the development of a Walgreen drug store located in Ypsilanti, Michigan in
May 2008, the development of a Walgreen drug store in Shelby Township, Michigan in July 2008, the development
of a Walgreen drug store in Silver Springs Shores, Florida in January 2009, the development of a Walgreen drug
store in Brighton, Michigan in February 2009, the development of a Walgreen drug store in Port St John, Florida in
June 2009, the development of a Walgreen drug store in Lowell, Michigan in September 2009 and the development
of a Chase bank branch land lease in Southfield, Michigan in October 2009. Our revenue increases from these
developments amounted to $1,570,000. In addition, rental income from our Big Rapids, Michigan shopping center
increased by $182,000 as a result of redevelopment activities and rental income decreased ($569,000) as a result of
the closing of a Circuit City store in Boynton Beach, Florida and other rental adjustments.
Operating cost reimbursements decreased $136,000, or 5%, to $2,647,000 in 2009, compared to $2,782,000
in 2008. Operating cost reimbursements decreased due to the net decrease in property operating expenses as
explained below.
We earned development fee income of $410,000 in 2009 related to a project we have commenced in
Oakland, California. There was no development fee income in 2008.
Other income increased $26,000 to $30,000 in 2009, compared to $4,000 in 2008.
31
Real estate taxes increased $71,000, or 4%, to $1,938,000 in 2009 compared to $1,867,000 in 2008. The
increase is the result of general assessment increases on the properties.
Property operating expenses (shopping center maintenance, snow removal, insurance and utilities)
decreased $247,000, or 14%, to $1,566,000 in 2009 compared to $1,813,000 in 2008. The decrease was the result of
a decrease in shopping center maintenance expenses of ($73,000); decreased snow removal costs of ($175,000);
increased utility costs of $29,000; and decreased insurance costs of ($28,000) in 2009 versus 2008.
Land lease payments increased $92,000, or 31%, to $387,000 in 2009 compared to $295,000 for 2008. The
increase is the result of our leasing of land for our Shelby Township, Michigan development.
General and administrative expenses increased $198,000, or 5%, to $4,559,000 in 2009 compared to
$4,361,000 in 2008. The increase was primarily the result of increased dead deal costs related to property searches
in Michigan and Florida and compensation related expenses. General and administrative expenses as a percentage
of rental income remained at 13.3% for 2009 and 2008.
Depreciation and amortization increased $295,000, or 6%, to $5,359,000 in 2009 compared to $5,064,000
in 2008. The increase was the result the development and acquisition of four properties in 2008 and five properties
in 2009.
Interest expense decreased $544,000, or 11%, to $4,635,000 in 2009, from $5,179,000 in 2008. The
decrease in interest expense resulted from substantial reductions in interest rates in 2009 as compared to 2008.
Income from discontinued operations increased $94,000, or 5%, to $2,036,000 in 2010 compared to
$1,942,000 in 2009.
Our net income increased $1,712,000, or 11%, to $17,994,000 in 2009, from $16,282,000 in 2008 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 (as defined
below). 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,
although market conditions have limited the availability of new sources of financing and capital, which may have an
impact on our ability to obtain financing for planned new development projects in the near term. 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 intend to maintain a ratio of total indebtedness (including construction or acquisition financing) to
market capitalization of 65% or less. Nevertheless, we may operate with debt levels which are in excess of 65% of
market capitalization for extended periods of time. At December 31, 2010, our ratio of indebtedness to market
capitalization was approximately 38%. This ratio decreased from 53% as of December 31, 2009 as a result of an
increase in the market value of our common stock and the issuance of additional common shares.
During the quarter ended December 31, 2010, we declared a quarterly dividend of $.51 per share. The cash
dividend was paid on January 4, 2011 to holders of record on December 20, 2010.
Our cash flows from operations increased $2,531,000 to $26,111,000 in 2010, compared to $23,580,000 in
2009. Cash used in investing activities increased $24,071,000 to $32,820,000 in 2010, compared to $8,749,000 in
2009. Cash provided by financing activities increased $21,424,000 to $6,613,000 in 2010, compared to
32
$(14,811,000) in 2009. Our cash and cash equivalents decreased by $95,000 to $593,000 as of December 31, 2010
as a result of the foregoing factors.
As of December 31, 2010, we had total mortgage indebtedness of $71,526,780. Of this total mortgage
indebtedness, $47,859,952 is fixed rate, self-amortizing debt with a weighted average interest rate of 6.56% and the
remaining mortgage debt of $23,666,828 has a maturity date of July 14, 2013, can be extended at our option for two
additional years and bears interest at 150 basis points over LIBOR (or 1.76% as of December 31, 2010). In January
2009, we entered into an interest rate swap agreement that fixes the interest rate during the initial term of the
mortgage at 3.744%.
We have seven mortgaged properties leased to Borders that serve as collateral for seven non-recourse
loans, including four mortgages that are cross-defaulted and cross-collateralized. The balances on the non-recourse
loans amount to approximately $18.5 million as of December 31, 2010, including $9.6 million under the cross-
collateralized loans. As of the date of this filing, and based on the Chapter 11 bankruptcy filing of Borders, we are
now in default on three mortgage loans amounting to approximately $8.9 million secured by a total of three
properties with 366,000 square feet of GLA representing $1.3 million of annualized base rents as of December 31,
2010. While the Chapter 11 bankruptcy filing of Borders is not a direct event of default under the cross-
collateralized mortgage loans, we anticipate that the remaining loans will go into default as a result of the scheduled
store closures. These four mortgage loans amounting to approximately $9.6 million are secured by four properties
with 103,000 square feet of GLA representing $2.1 million of annualized base rents as of December 31, 2010. We
are in the process of commencing negotiations with the lenders for all seven loans regarding an appropriate course
of action. We can provide no assurance that our negotiations with the lenders will result in favorable outcomes to
us.
In addition, the Operating Partnership has in place a $55 million secured credit facility (the “Credit
Facility”) with Bank of America, as the agent, which is guaranteed by our Company. The Credit Facility matures in
November 2011. Advances under the Credit Facility bear interest within a range of one-month to 12-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 February 15, 2011, $25,380,254 was outstanding under the Credit
Facility bearing a weighted average interest rate of 1.26%. We have provided substitute borrowing base properties
to replace Borders stores under the Credit Facility, and the banks have acknowledged that the financial condition of
Borders and any default under any of the non-recourse loans secured by a property leased to Borders shall not be
deemed a default under the Credit Facility.
We also have in place a $5 million line of credit (the “Line of Credit”), which matures in November 2011.
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 12-month LIBOR rate, at our option. The purpose of the Line of Credit is to generally provide
working capital and fund land options and start-up costs associated with new projects. As of February 15, 2011,
$2,000,000 was outstanding under the Line of Credit bearing a weighted average interest rate of 2.50%.
The following table outlines our contractual obligations (in thousands) as of December 31, 2010:
Mortgages Payable
Notes Payable
Land Lease Obligations
Other Long-Term Liabilities
Estimated
Mortgages and Notes Payable
Interest Payments on
Total
$ 71,527
28,380
18,784
-
21,099
Yr 1
$4,296
28,380
712
-
4,324
2-3 Yrs
$31,493
-
1,425
-
4-5 Yrs
$ 9,514
-
1,425
-
Over 5 Yrs
$26,224
-
15,222
-
6,666
4,100
6,009
Total
$139,790
$37,712
$39,584
$15,039
$47,455
Estimated interest payments are based on stated rates for Mortgages Payable, and for Notes Payable the
interest rate in effect for the most recent quarter is assumed to be in effect through the respective maturity date.
33
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, medium 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.
Inflation
Our leases generally contain provisions designed to mitigate the adverse impact of inflation on net income.
These provisions include clauses enabling us to pass through to our tenants certain operating costs, including real
estate taxes, common area maintenance, utilities and insurance, thereby reducing our exposure to cost increases 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 term 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 U.S. generally accepted accounting principles
(“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.
34
The following table provides a reconciliation of FFO and net income for the years ended December 31,
2010, 2009 and 2008:
2010
Year ended December 31,
2009
2008
Net income
Depreciation of real estate assets
Amortization of leasing costs
Amortization of lease intangibles
Gain on sale of assets
Funds from operations
Weighted average shares and
OP units outstanding
Basic
$15,627,834
5,759,599
92,972
50,479
(4,737,968)
$17,994,036
5,574,084
65,977
-
-
$ 16,282,038
5,257,391
58,771
-
-
$16,792,916
$23,634,097
$21,598,200
9,503,278
8,396,597
8,364,366
Diluted
9,539,119
8,416,696
8,376,259
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk primarily through our 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.
Fixed rate debt
Average interest rate
2011
$3,779
6.56%
2012
$4,035
6.56%
2013
$4,308
6.56%
2014
$4,601
6.56%
2015
$4,913
6.56%
Thereafter
$26,224
6.56%
Variable rate mortgage
$517
$548
$22,602
-
-
Average interest rate
3.74%
3.74%
3.74%
-
-
Variable rate debt
$28,380
-
-
- -
Average interest rate
1.48%
-
-
-
-
-
-
-
-
Total
$47,860
-
$23,667
-
$28,380
-
The fair value (in thousands) is estimated at $48,012, $22,255 and $28,380 for fixed rate mortgages,
variable rate mortgage and other variable rate debt, respectively, as of December 31, 2010.
The table above incorporates those exposures that exist as of December 31, 2010; 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 entered into an interest rate swap agreement to hedge interest rates on $24.5 million in variable-rate
borrowings outstanding. Under the terms of the interest rate swap agreement, we will receive from the counterparty
interest on the notional amount based on 1.50% plus one-month LIBOR and will pay to the counterparty a fixed rate
of 3.744%. This swap effectively converted $24.5 million of variable-rate borrowings to fixed-rate borrowings. As
of December 31, 2010, the interest rate swap was valued at $793,211. We do not use derivative instruments for
trading or other speculative purposes and we did not have any other derivative instruments or hedging activities as
of December 31, 2010.
35
As of December 31, 2010, a 100 basis point increase in interest rates on the portion of our debt bearing
interest at variable rates would result in an increase in interest expense of approximately $284,000.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed in the Index to Financial Statements and
Financial Statement Schedules appearing on Page F-1 of this Form 10-K and are included in this Form 10-K
following page F-1.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and
with the participation of our principal executive officer and principal financial officer, of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act). Based on this
evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and
procedures are 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.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act. Our internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with GAAP. Our internal control over
financial reporting includes those policies and procedures that
(i)
(ii)
(iii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of our Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Under the supervision of our principal executive officer and our principal financial officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment and those criteria, our management believes that we maintained effective
internal control over financial reporting as of December 31, 2010.
36
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during our most recently completed
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Attestation Report of Independent Registered Public Accounting Firm
The attestation report required under this item is contained on page F-2 of this Form 10-K
ITEM 9B.
OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated herein by reference to our definitive proxy statement with respect to our 2011 Annual Meeting
of Stockholders.
ITEM 11.
EXECUTIVE COMPENSATION
Incorporated herein by reference to our definitive proxy statement with respect to our 2011 Annual Meeting
of Stockholders.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table summarizes the equity compensation plan under which our common stock may be
issued as of December 31, 2010.
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
─
Weighted average exercise
price of outstanding
options, warrants and
rights
(b)
─
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
663,126 (1)
─
─
─
─
─
663,126
Plan category
Equity compensation plans
approved by security
holders
Equity compensation plans
not approved by security
holders
Total
37
(1)
Relates to various stock-based awards available for issuance under our 2005 Equity Incentive Plan, including incentive stock options,
non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, unrestricted stock awards, and
dividend equivalent rights.
Additional information is incorporated herein by reference to our definitive proxy statement with respect to
our 2011 Annual Meeting of Stockholders.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Incorporated herein by reference to our definitive proxy statement with respect to our 2011 Annual Meeting
of Stockholders.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference to our definitive proxy statement with respect to our 2011 Annual Meeting
of Stockholders.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
15(a)
The following documents are filed as part of this Report:
PART IV
(1) (2) The financial statements and supplementary data are listed in the Index to Financial Statements and
Financial Statement Schedules appearing on Page F-1 of this Form 10-K.
(3) Exhibits
3.1
3.2
3.3
3.4
4.1
4.2
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 (No. 33-73858), as
amended )
Articles Supplementary, establishing the terms of the Series A Preferred Stock (incorporated by
reference to Exhibit 3.1 to the Company’s Form 8-K (No. 001-12928) filed on December 9, 2008)
Articles Supplementary, classifying additional shares of Common Stock and Excess Stock
(incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K (No. 001-12928) filed on
December 9, 2008)
Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Form 10-K
(No. 001-12928) for the year ended December 31, 2006)
Rights Agreement, dated as of December 7, 1998, by and between Agree Realty Corporation, a
Maryland corporation, and Computershare Trust Company, N.A., f/k/a EquiServe Trust Company,
N.A., a national banking association, as successor rights agent to BankBoston, N.A., a national
banking association (incorporated by reference to Exhibit 4.1 to the Company’s Registration
Statement on Form S-3 (No. 333-161520) filed on November 13, 2008)
Second Amendment to Rights Agreement, dated as of December 8, 2008, by and between Agree
Realty Corporation, a Maryland corporation, and Computershare Trust Company, N.A., f/k/a
EquiServe Trust Company, N.A., a national banking association, as successor rights agent to
BankBoston, N.A., a national banking association (incorporated by reference to Exhibit 4.1 to the
Company’s Form 8-K (No. 001-12928) filed on December 9, 2008)
38
4.3
4.4
10.1
Amended and Restated Registration Rights Agreement, dated July 8, 1994 by and among the
Company, Richard Agree, Edward Rosenberg and Joel Weiner (incorporated by reference to
Exhibit 10.2 to the Company’s Form 10-K (No. 001-12928) for the year ended December 31,
1994)
Form of certificate representing shares of common stock (incorporated by reference to Exhibit 4.2
to the Company’s Registration Statement on Form S-3 (No. 333-161520) filed on August 24, 2009
Amended and Restated $50 million Line of Credit agreement dated November 5, 2003, among
Agree Realty Corporation, Standard Federal Bank and Bank One (incorporated by reference to
Exhibit 10.1 to the Company’s Form 10-Q (No. 001-12928) for the quarter ended September 30,
2003)
10.2
Third Amended and Restated Line of Credit Agreement by and between the Company, and
LaSalle Bank Midwest National Association Individually and as Agent for the Lenders and
together with Fifth Third Bank (incorporated by reference to Exhibit 10.28 to the Company’s
Form 10-K (No. 001-12928) for the year ended December 31, 2006)
10.3
10.4
10.5
10.6
10.7
10.8
Amendment to the Third Amended and Restated Line of Credit Agreement dated April 25, 2008,
by and between Agree Realty Corporation, Agree Limited Partnership and LaSalle Bank Midwest
National Association, individually and as agent for the lenders and together with Fifth Third Bank.
(incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended
September 30, 2009)
Loan Agreement dated as of July 14, 2008 by and between Agree Limited Partnership, as
Borrower, and The Financial Institutions party thereto, as Co-Lenders, and LaSalle Bank Midwest
National Association, as Agent (incorporated by reference to Exhibit 4.1 to the Company’s Form
10-Q (No. 001-12928) for the quarter ended June 30, 2008)
Commercial Mortgage dated as of July 14, 2008 executed by Agree Limited Partnership to and for
the benefit of LaSalle Bank Midwest National Association and Raymond James Bank, FSB
(incorporated by reference to Exhibit 4.2 to the Company’s Form 10-Q (No. 001-12928) for the
quarter ended June 30, 2008)
Continuing Unconditional Guaranty dated as of July 14, 2008 by Agree Realty Corporation for the
benefit of La Salle Bank Midwest National Association (incorporated by reference to Exhibit 4.3
to the Company’s Form 10-Q (No. 001-12928) for the quarter ended June 30, 2008)
First Amended and Restated Agreement of Limited Partnership of Agree Limited Partnership,
dated as of April 22, 1994, by and among the Company, Richard Agree, Edward Rosenberg and
Joel Weiner (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-K (No. 001-
12928) for the year ended December 31, 1996)
Contribution Agreement, dated as of April 21, 1994, by and among the Company, Richard Agree,
Edward Rosenberg and the co-partnerships named therein (incorporated by reference to
Exhibit 10.10 to the Company’s Form 10-K (No. 001-12928) for the year ended December 31,
1996)
10.9+
Agree Realty Corporation Profit Sharing Plan (incorporated by reference to Exhibit 10.13 to the
Company’s Form 10-K (No. 001-12928) for the year ended December 31, 1996)
10.10+
Employment Agreement, dated July 14, 2009, by and between the Company and Richard Agree
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (No. 001-12928) filed on
July 16, 2009)
39
10.11+
10.12+
10.13+
10.12+
10.13+
10.14+
12.1*
Employment Agreement, dated July 14, 2009, by and between the Company and Joey Agree
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K (No. 001-12928) filed on
July 16, 2009)
Letter Agreement of Employment dated July 8, 2010 between Agree Limited Partnership and Alan
Maximiuk (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (No. 001-
12928) filed on November 8, 2010)
Letter Agreement of Employment dated April 5, 2010 between Agree Limited Partnership and
Laith Hermiz (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (No. 001-
12928) filed on April 6, 2010)
2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.25 to the Company’s Form
10-K (No. 001-12928) for the year ended December 31, 2004)
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.9 to the Company’s
Form 10-K (No. 001-12928) for the year ended December 31, 2007)
Summary of Director Compensation (incorporated by reference to Exhibit 10.10 to the Company’s
Form 10-K (No. 001-12928) for the year ended December 31, 2007)
Statement of computation of ratios of earnings to combined fixed charges and preferred stock
dividends
21*
Subsidiaries of Agree Realty Corporation
23*
Consent of Baker Tilly Virchow Krause, LLP
24
Power of Attorney (included on the signature page of this Annual Report on Form 10-K)
31.1 *
31.2 *
32.1 *
32.2 *
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Richard Agree,
President, Chief Executive Officer and Chairman of the Board of Directors
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Alan D. Maximiuk,
Chief Financial Officer
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Richard Agree,
President, Chief Executive Officer and Chairman of the Board of Directors
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Alan D. Maximiuk,
Chief Financial Officer
*
+
Filed herewith
Management contract or compensatory plan or arrangement
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant has not filed debt instruments relating to
long-term debt that is not registered and for which the total amount of securities authorized thereunder does not
exceed 10% of total assets of the registrant and its subsidiaries on a consolidated basis as of December 31, 2010.
The registrant agrees to furnish a copy of such agreements to the SEC upon request.
15(b) The Exhibits listed in Item 15(a)(3) are hereby filed with this Report.
40
15(c)
The financial statement schedule listed at Item 15(a)(2) is hereby filed with this Report.
41
PURSUANT to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
of Directors
Date: March 15, 2011
AGREE REALTY CORPORATION
By:
/s/ Richard Agree
Name: Richard Agree
Chief Executive Officer and Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of Agree
Realty Corporation, hereby severally constitute Richard Agree, Joel N. Agree and Alan D. Maximiuk, and each of
them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our
names in the capacities indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-
K, and generally to do all such things in our names and in our capacities as officers and directors to enable Agree
Realty Corporation to comply with the provisions of the Securities Exchange Act of 1934, as amended and all
requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
PURSUANT to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities indicated on the 15th day of March 2011.
By:
By:
By:
/s/ Richard Agree
Richard Agree
Chief Executive Officer and
the Board of
Chairman of
Directors
(Principal Executive Officer)
/s/ Joel N. Agree
President, Chief Operating Officer
and Director
/s/ Alan D. Maximiuk
Alan D. Maximiuk
Vice President, Chief Financial
Officer and
Secretary
(Principal Financial and
Accounting Officer)
By:
By:
By:
By:
By:
/s/ Farris G. Kalil
Farris G. Kalil
Director
/s/ Michael Rotchford
Michael Rotchford
Director
/s/William S. Rubenfaer
William S. Rubenfaer
Director
/s/ Gene Silverman
Gene Silverman
Director
/s/ Leon M. Schurgin
Leon M. Schurgin
Director
42
Page
F-2
F-3
F-5
F-6
F-7
F-9
F-26
Reports of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation
F-1
[This page intentionally left blank.]
Report of Independent Registered Public Accounting Firm
To the Stockholders, Audit Committee and Board of Directors
Agree Realty Corporation
Farmington Hills, MI
We have audited the accompanying consolidated balance sheets of Agree Realty Corporation as of December 31, 2010 and
2009, and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended December 31,
2010, 2009 and 2008. We also have audited Agree Realty Corporation's internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The company's management is responsible for these
consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated
financial statements and an opinion on the company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Agree Realty Corporation as of December 31, 2010 and 2009 and the results of their operations and cash flows for
the years ended December 31, 2010, 2009 and 2008, in conformity with U.S. generally accepted accounting principles. Also in
our opinion, Agree Realty Corporation maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Baker Tilly Virchow Krause, LLP
Chicago, Illinois
March 15, 2011
F-2
Agree Realty Corporation
Consolidated Balance Sheets
2010
2009
$ 103,693,227
227,645,287
(66,111,215)
265,227,299
359,299
6,522,821
$
95,047,459
220,604,734
(64,076,469)
251,575,724
4,791,975
-
272,109,419
256,367,699
593,281
688,675
December 31,
Assets
Real Estate Investments (Notes 6 and 7)
Land
Buildings
Less accumulated depreciation
Property under development
Property held for sale, net
Net Real Estate Investments
Cash and Cash Equivalents
Accounts Receivable - Tenants, (Note 3) net of allowance of
$35,000 for possible losses at both December 31, 2010
and 2009
1,330,129
1,986,836
Unamortized Deferred Expenses
Financing costs, net of accumulated amortization of $5,392,802
and $5,126,333 at December 31, 2010 and 2009, respectively
Leasing costs, net of accumulated amortization of $934,399
and $841,427 at December 31, 2010 and 2009, respectively
Lease intangibles costs, net of accumulated amortization of
1,133,194
1,360,514
812,295
537,100
$50,479 and $-0- at December 31, 2010 and 2009 respectively
8,152,248
-
Other Assets
Total Assets
911,801
847,894
$ 285,042,367
$ 261,788,718
See accompanying notes to consolidated financial statements.
F-3
Agree Realty Corporation
Consolidated Balance Sheets
2010
2009
December 31,
Liabilities
Mortgages Payable (Note 6)
$
71,526,780
$
75,552,802
Notes Payable (Note 7)
28,380,254
29,000,000
Dividends and Distributions Payable (Note 8)
5,145,740
4,354,163
Deferred Revenue (Note 18)
Accrued Interest Payable
Accounts Payable
Capital expenditures
Operating
Interest Rate Swap (Note 9)
Deferred Income Taxes (Note 10)
Tenant Deposits
Total Liabilities
9,345,754
10,035,304
221,154
261,012
286,078
1,427,718
352,430
1,529,085
793,211
74,753
705,000
705,000
80,402
97,285
117,912,091
121,961,834
Stockholders’ Equity (Note 8)
Common stock, $.0001 par value; 13,350,000 shares authorized,
9,759,014 and 8,196,074 shares issued and outstanding
Excess stock, $0.0001 par value, 6,500,000 shares authorized,
0 shares issued and outstanding
Series A junior participating preferred stock, $0.0001 par value,
150,000 shares authorized, 0 shares issued and outstanding
Additional paid-in capital
Deficit
Accumulated other comprehensive income (loss)
Total Stockholders’ Equity – Agree Realty Corporation
Non-controlling interest
Total Stockholders’ Equity
976
-
820
-
-
179,705,353
(14,702,252)
(764,735)
-
147,466,101
(10,632,798)
(70,806)
164,239,342
2,890,934
167,130,276
136,763,317
3,063,567
139,826,884
See accompanying notes to consolidated financial statements.
$ 285,042,367
$ 261,788,718
F-4
Agree Realty Corporation
Consolidated Statements of Income
2010
2009
2008
$
32,786,621
34,518
2,604,007
589,541
97,583
$
31,299,502
15,366
2,646,634
409,643
30,462
$
30,116,821
15,396
2,782,484
-
3,850
36,112,270
34,401,607
32,918,551
1,912,593
1,458,261
476,531
5,003,384
5,687,413
7,700,000
1,937,523
1,565,679
387,300
4,559,005
5,358,961
-
1,866,551
1,812,522
294,948
4,361,419
5,063,540
-
22,238,182
13,808,468
13,398,980
13,874,088
20,593,139
19,519,571
(4,711,944)
(4,634,754)
(5,179,414)
Year Ended December 31,
Revenues
Minimum rents
Percentage rents
Operating cost reimbursement
Development fee income
Other income
Total Revenues
Operating Expenses
Real estate taxes
Property operating expenses
Land lease payments
General and administrative
Depreciation and amortization
Impairment charge
Total Operating Expenses
Income From Operations
Other (Expense)
Interest expense, net
Income Before Discontinued Operations
9,162,144
15,958,385
14,340,157
Gain on sale of assets from discontinued operations
Income from discontinued operations
4,737,968
1,727,722
-
2,035,651
-
1,941,881
Net Income
15,627,834
17,994,036
16,282,038
Less Net Income Attributable to Non-Controlling Interest
561,039
950,046
1,264,611
Net Income Attributable to Agree Realty Corporation
$
15,066,795
$
17,043,990
$
15,017,427
Other Comprehensive Loss, Net of
Attributable to Non-Controlling Interests
($24,529 and $3,947)
693,929
70,806
-
$
$
$
14,372,866
1.65
1.64
$
$
$
16,973,184
$
15,017,427
2.15
2.14
$
$
1.95
1.95
$
2.00
See accompanying notes to consolidated financial statements.
2.02
2.04
$
$
Total Comprehensive Income Attributable to Agree Realty
Corporation
Basic Earnings Per Share (Note 2)
Dilutive Earnings Per Share (Note 2)
Dividend Declared Per Common Share
F-5
Agree Realty Corporation
Consolidated Statements of Stockholders’ Equity
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Non-Controlling
Interest
Deficit
Accumulated
Other
Comprehensive
Income (loss)
Balance, January 1, 2008
7,754,246
$775
$142,260,659
$ 5,896,180
$ (10,647,624)
$ -
Issuance of restricted stock under the
Equity Incentive Plan
Forfeiture of restricted stock
Conversion of OP Units
Vesting of restricted stock
Dividends and distributions declared
$2.00 per share
Net income
46,350 4
-
-
-
-
(4,800)
68,134 7
-
-
-
-
-
-
-
-
501,025 (501,025)
-
1,130,474
-
-
-
-
(1,313,025)
1,264,611
(15,627,334)
15,017,427
-
-
-
Balance, December 31, 2008
7,863,930
786
143,892,158 5,346,741
(11,257,531)
-
Issuance of restricted stock under the
Equity Incentive Plan
Conversion of OP Units
Vesting of restricted stock
Other comprehensive (loss)
Dividends and distributions declared
$2.02 per share
Net income
74,350 8
257,794 26
-
-
-
-
-
-
2,398,186 (2,398,186)
1,175,757 -
-
(3,947)
-
-
-
-
-
-
-
(70,806)
-
-
-
-
-
-
(831,087)
950,046
(16,419,257)
17,043,990
-
-
Balance, December 31, 2009
8,196,074 820
147,466,101 3,063,567
(10,632,798)
(70,806)
Issuance of common stock, net of
issuance costs
Issuance of restricted stock under the
Equity Incentive Plan
Forfeiture of restricted stock
Vesting of restricted stock
Other comprehensive (loss)
Dividends and distributions declared
$2.04 per share
Net income
1,495,000 150
31,072,596 -
-
-
88,550 9
(20,610) (3)
-
-
-
-
-
-
-
-
-
-
-
1,166,656 -
-
(24,529)
-
-
-
-
-
(693,929)
-
-
(709,143)
561,039
(19,136,249)
15,066,795
-
-
Balance, December 31, 2010
9,759,014 $976
$ 179,705,353 $ 2,890,934
$ (14,702,252)
$ (764,735)
See accompanying notes to consolidated financial statements.
F-6
Agree Realty Corporation
Consolidated Statements of Cash Flows
Year Ended December 31,
2010
2009
2008
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation
Amortization
Stock-based compensation
Impairment charge
Gain on sale of assets
(Increase) decrease in accounts receivable
(Increase) decrease in other assets
(Decrease) increase in accounts payable
Decrease in deferred revenue
Increase (decrease) in accrued interest
Increase (decrease) in tenant deposits
$
15,627,834
$ 17,994,036
$ 16,282,038
5,810,159
409,920
1,166,656
8,140,000
(4,737,968)
656,707
(114,467)
(101,367)
(689,550)
(39,858)
(16,883)
5,643,350
354,212
1,175,757
-
-
(1,022,034)
69,172
267,275
(689,550)
(239,784)
27,208
5,320,394
237,297
1,130,474
-
-
(194,437)
(112,144)
(221,317)
(689,550)
171,625
5,992
Net Cash Provided By Operating Activities
26,111,183
23,579,642
21,930,372
Cash Flows From Investing Activities
Acquisition of real estate investments (including
capitalized interest of $319,235 in 2010, $220,782
in 2009 and $557,645 in 2008)
Payment of lease acquisition costs
Net proceeds from sale of assets
(38,821,775)
(8,202,727)
14,204,502
(8,748,856)
-
-
(21,418,961)
-
-
Net Cash Used In Investing Activities
(32,820,000)
(8,748,856)
(21,418,961)
See accompanying notes to consolidated financial statements.
F-7
Agree Realty Corporation
Consolidated Statements of Cash Flows
Year Ended December 31,
2010
2009
2008
Cash Flows From Financing Activities
Proceeds from common stock offering
Mortgage proceeds
Line-of-credit net (payments) borrowings
Dividends and limited partners’ distributions paid
Payments of mortgages payable
Payments of payables for capital expenditures
Payments for financing costs
Payments of leasing costs
31,072,752
-
(619,746)
(19,053,813)
(4,026,022)
(352,430)
(39,149)
(368,167)
-
11,358,000
(3,945,000)
(17,129,368)
(3,428,895)
(850,225)
(697,004)
(118,296)
-
24,800,000
(3,855,000)
(16,918,952)
(2,936,471)
(1,069,734)
(287,666)
(119,550)
Net Cash Used In Financing Activities
6,613,423
(14,810,788)
(387,373)
Increase
Net
Equivalents
(Decrease)
In Cash and Cash
Cash and Cash Equivalents, beginning of year
Cash and Cash Equivalents, end of year
Supplemental Disclosure of Cash Flow Information
Cash paid for interest (net of amounts capitalized)
Supplemental Disclosure of Non-Cash Transactions
Dividends and limited partners’ distributions
Declared and unpaid
Conversion of OP Units
Shares issued under Stock Incentive Plan
Real estate investments financed with accounts
payable
(95,394)
688,675
593,281
4,487,923
5,145,740
-
2,068,866
286,078
$
$
$
$
$
$
19,998
668,677
688,675
4,590,239
4,354,163
2,398,186
1,159,316
352,430
$
$
$
$
$
$
124,038
544,639
668,677
4,835,277
4,233,232
501,025
1,364,459
850,225
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
F-8
Agree Realty Corporation
Notes to Consolidated Financial Statements
1. The
Company
Agree Realty Corporation (the “Company”) is a self-administered, self-managed
real estate investment trust (“REIT”), which develops, acquires, owns and operates
retail properties, which are primarily leased to national and regional retail
companies under net leases. At December 31, 2010, the Company's properties are
comprised of 69 single tenant retail facilities and 12 community shopping centers
located in 17 states. Included in the 81 total properties were two properties held for
sale as of December 31, 2010. During the year ended December 31, 2010,
approximately 97% of the Company's annual base rental revenues was received
tenants under
from national and
including
approximately 31% from Walgreen Co. (“Walgreen”), 20% from Borders Group,
Inc. (“Borders”), and 11% from Kmart Corporation, a wholly-owned subsidiary of
Sears Holdings Corporation (“Kmart”).
long-term
regional
leases,
2.
Summary of
Significant
Accounting
Policies
Principles of Consolidation
The consolidated financial statements of Agree Realty Corporation include the
accounts of the Company, its majority-owned partnership, Agree Limited
Partnership (the “Operating Partnership”), and its wholly-owned subsidiaries. The
Company controlled, as the sole general partner, 96.56% and 95.93% of the
Operating Partnership as of December 31, 2010 and 2009, respectively. All
material intercompany accounts and transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of (1) assets and
liabilities and the disclosure of contingent assets and liabilities as of the date of the
financial statements, and (2) revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Values of Financial Instruments
Certain of the Company’s assets and liabilities are disclosed at fair value. Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. In determining fair value, the Company uses various valuation methods
including the market, income and cost approaches. The assumptions used in the
application of these valuation methods are developed from the perspective of
market participants, pricing the asset or liability. Inputs used in the valuation
methods can be either readily observable, market corroborated, or generally
unobservable inputs. Whenever possible the Company attempts to utilize
valuation methods that maximize the uses of observable inputs and minimizes the
use of unobservable inputs. Based on the operability of the inputs used in the
valuation methods the Company is required to provide the following information
according to the fair value hierarchy. The fair value hierarchy ranks the quality
F-9
Agree Realty Corporation
Notes to Consolidated Financial Statements
and reliability of the information used to determine fair values. Assets and
liabilities measured, reported and/or disclosed at fair value will be classified and
disclosed in one of the following three categories:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Observable market based inputs or unobservable inputs that are
corroborated by market data.
Level 3 – Unobservable inputs that are not corroborated by market data.
The table below sets forth the Company’s fair value hierarchy for liabilities
measured or disclosed at fair value as of December 31, 2010.
Level 1
Level 2
Level 3
Liability:
Interest rate swap
Fixed rate mortgage
Variable rate mortgage
Variable rate debt
$ —
$ —
$ —
$ —
$
$ —
$ —
$
793,211 $ —
$ 48,012,000
$ 22,255,000
28,380,254 $ —
The carrying amounts of the Company’s short-term financial instruments, which
consist of cash, cash equivalents, receivables, and accounts payable, approximate
their fair values. The fair value of the interest rate swap was derived using
estimates to settle the interest rate swap agreement, which is based on the net
present value of expected future cash flows on each leg of the swap utilizing
market-based inputs and discount rates reflecting the risks involved. The fair
value of fixed and variable rate mortgages was derived using the present value of
future mortgage payments based on estimated current market interest rates of
6.31% and 7.59% at December 31, 2010 and 2009, respectively. The fair value of
variable rate debt is estimated to be equal to the face value of the debt because the
interest rates are floating and is considered to approximate fair value.
Investments in Real Estate – Carrying Value of Assets
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.
F-10
Agree Realty Corporation
Notes to Consolidated Financial Statements
Depreciation and Amortization
Depreciation expense is computed using a straight-line method and estimated
useful lives for buildings and improvements of 20 to 40 years and equipment and
fixtures of 5 to 10 years.
Purchase Accounting for Acquisitions of Real Estate
Acquired real estate assets have been accounted for using the purchase method of
accounting and accordingly, the results of operations are included in the
consolidated statements of income from the respective dates of acquisition. The
Company allocates the purchase price to (i) land and buildings based on
management’s internally prepared estimates and (ii) identifiable intangible assets
or liabilities generally consisting of above-market and below-market in-place
leases and in-place leases. The Company uses estimates of fair value based on
estimated cash flows, using appropriate discount rates, and other valuation
techniques, including management’s analysis of comparable properties in the
existing portfolio, to allocate the purchase price to acquired tangible and intangible
assets.
The estimated fair value of above-market and below-market in-place leases for
acquired properties is recorded based on the present value (using an interest rate
which reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the in-place leases and
(ii) management’s estimate of fair market lease rates for the corresponding in-
place leases, measured over a period equal to the remaining non-cancelable term of
the lease.
During 2010, the Company recorded $8,202,727 as the fair value of above market
leases and other intangible assets.
The aggregate fair value of other intangible assets consisting of in-place, at market
leases, is estimated based on internally developed methods to determine the
respective property values and are included in lease intangibles cost
in the
consolidated balance sheets. Factors considered by management in their analysis
include an estimate of costs to execute similar leases and operating costs saved.
The fair value of intangible assets acquired is amortized to depreciation and
amortization on the consolidated statements of income over the remaining term of
the respective leases. The weighted average amortization period for the lease
intangible costs is 22.5 years.
Investment in Real Estate – Impairment evaluation
Management periodically assesses its Real Estate Investments for possible
impairment indicating that the carrying value of the asset, including accrued
F-11
Agree Realty Corporation
Notes to Consolidated Financial Statements
rental income, may not be recoverable through operations.
Events or
circumstances that may occur include significant changes in real estate market
conditions and the ability of the Company to re-lease or sell properties that are
currently vacant or become vacant. Management determines whether an
impairment in value has occurred by comparing the estimated future cash flows
(undiscounted and without interest charges), including the residual value of the
real estate, with the carrying cost of the individual asset. If an impairment is
indicated, a loss will be recorded for the amount by which the carrying value of
the asset exceeds fair value.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The Company maintains
its cash and cash equivalents at a financial institution. The account balances
periodically exceed the Federal Deposit Insurance Corporation (“FDIC”)
insurance coverage, and as a result, there is a concentration of credit risk related
to amounts on deposit in excess of FDIC insurance coverage.
Accounts Receivable – Tenants
from
receivable
tenants are unsecured and
reflect primarily
Accounts
reimbursement of specified common area expenses. Amounts outstanding in
excess of 30 days are considered past due. The Company determines its allowance
for uncollectible accounts based on historical trends, existing economic conditions,
and known financial position of its tenants. Tenant accounts receivable are written-
off by the Company in the year when receipt is determined to be remote.
Unamortized Deferred Expenses
Deferred expenses are stated net of total accumulated amortization. The nature and
treatment of these capitalized costs are as follows: (1) financing costs, consisting
of expenditures incurred to obtain long-term financing, are being amortized using
the effective interest method over the term of the related loan, (2) leasing costs,
which are amortized on a straight-line basis over the term of the related lease and
(3) lease intangibles, which are amortized over the remaining term of the lease
acquired. The Company incurred expenses of $409,920, $354,212 and $237,297
for the years ended December 31, 2010, 2009 and 2008, respectively.
Other Assets
The Company records prepaid expenses, deposits, vehicles, furniture and
fixtures, leasehold improvements, acquisition advances and miscellaneous
receivables as other assets in the accompanying balance sheets.
F-12
Agree Realty Corporation
Notes to Consolidated Financial Statements
Accounts Payable - Capital Expenditures
Included in accounts payable are amounts related to the construction of buildings.
Due to the nature of these expenditures, they are reflected in the statements of cash
flows as a non-cash financing activity.
Revenue Recognition
Minimum rental income attributable to leases is recorded when due from tenants.
Certain leases provide for additional percentage rents based on tenants' sales
volume. These percentage rents are recognized when determinable by the
Company. In addition, leases for certain tenants contain rent escalations and/or free
rent during the first several months of the lease term; however, such amounts are
not material.
Taxes Collected and Remitted to Governmental Authorities
The Company reports taxes, collected from tenants that are to be remitted to
governmental authorities, on a net basis and therefore does not include the taxes
in revenue.
Operating Cost Reimbursement
Substantially all of the Company's leases contain provisions requiring tenants to
pay as additional rent a proportionate share of operating expenses such as real
estate taxes, repairs and maintenance, insurance, etc. The related revenue from
tenant billings is recognized as operating cost reimbursement in the same period
the expense is recorded.
Income Taxes
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the “Internal
Revenue Code”)and related regulations. The Company generally will not be
subject to federal income taxes on amounts distributed to stockholders, providing
it distributes 100 percent of its REIT taxable income and meets certain other
requirements for qualifying as a REIT. For each of the years in the three-year
period ended December 31, 2010, the Company believes it has qualified as a
REIT. Notwithstanding the Company’s qualification for taxation as a REIT, the
Company is subject to certain state taxes on its income and real estate.
The Company and its taxable REIT subsidiaries (“TRS”) have made a timely
TRS election pursuant to the provisions of the REIT Modernization Act. A 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 (See Note 10). All
F-13
Agree Realty Corporation
Notes to Consolidated Financial Statements
provisions for federal income taxes in the accompanying consolidated financial
statements are attributable to the Company’s TRS.
Dividends
The Company declared dividends of $2.04, $2.02 and $2.00 per share during the
years ended December 31, 2010, 2009, and 2008; the dividends have been
reflected for federal income tax purposes as follows:
December 31,
Ordinary income
Return of capital
Total
$
2010
1.84
.20
$
2009
2.02
-
2008
1.96
$
.04
$
2.04
$
2.02
$
2.00
The aggregate federal
approximately $22.3 million less than the financial statement basis.
tax basis of Real Estate Investments
income
is
Earnings Per Share
Earnings per share have been computed by dividing the net income by the
weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average common and
potential dilutive common shares outstanding in accordance with the treasury
stock method.
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:
Year Ended December 31,
2010
2009
2008
Weighted average number of common
shares outstanding
Unvested restricted stock
Weighted average number of common
shares outstanding used in basic earnings
per share
9,322,509
166,850
8,086,840
140,980
7,810,692
104,050
9,155,659
7,945,860
7,706,642
Weighted
outstanding used in basic earnings per share
average
number
of
common
Effect of dilutive securities
Restricted stock
Weighted
outstanding used in diluted earnings per share
average
number
of
common
shares
shares
9,155,659
7,945,860
7,706,642
35,840
20,099
11,893
9,191,500
7,965,959
7,718,535
F-14
Agree Realty Corporation
Notes to Consolidated Financial Statements
Stock Based Compensation
The Company estimates fair value of restricted stock and stock option grants at
the date of grant and amortize those amounts into expense on a straight-line basis
or amount vested, if greater, over the appropriate vesting period. No stock
options were issued or vested during 2010, 2009 or 2008.
Recent Accounting Pronouncements
Effective January 1, 2010, companies are required to separately disclose the
amounts of significant transfers of assets and liabilities into and out of Level 1,
Level 2 and Level 3 of the fair value hierarchy and the reasons for those transfers.
Companies must also develop and disclose their policy for determining when
transfers between levels are recognized. In addition, companies are required to
provide fair value disclosures of each class rather than each major category of
assets and liabilities. For fair value measurements using significant other
observable inputs (Level 2) or significant unobservable inputs (Level 3),
companies are required to disclose the valuation technique and the inputs used in
determining fair value for each class of assets and valuation technique and the
inputs used in determining fair value for each class of assets and liabilities.
Adoption of this standard did not have a material effect on the Company’s
consolidated results of operations or financial position.
Effective January 1, 2010, companies are required to separately disclose
purchases, sales, issuances and settlements on a gross basis in the reconciliation of
recurring Level 3 fair value measurements. Adoption of this standard did not have
a material effect on the Company’s consolidated results of operations or financial
position.
For contracts where the Company does not retain ownership of real property
developed and received fee income for managing the development project, the
Company uses the percentage of completion accounting method. Under this
approach, income is recognized based on the status of the uncompleted contracts
and the current estimates of costs to complete. The percentage of completion is
determined by the relationship of costs incurred to the total estimated costs of the
contract. Provisions are made for estimated loses on uncompleted contracts in
the period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability including those arising from contract
penalty provisions and final contract settlements, may result in revisions to costs
and income. Such revisions are recognized in the period in which they are
determined. Claims for additional compensation due to the Company are
recognized in contract revenues when realization is probable and the amount can
be reliably estimated.
F-15
3. Costs and
Estimated
Earnings on
Uncompleted
Contracts
4. Impairment –
Real Estate
Agree Realty Corporation
Notes to Consolidated Financial Statements
Cost incurred on uncompleted
Estimated earnings
Contracts
Earned revenue
Less billings to date
Total
2010
2009
$
$
-
-
-
-
-
$520,357
409,643
930,000
-
$930,000
Total unbilled receivable at December 31, 2009 was $930,000 and is included
in accounts receivable – tenants on the consolidated balance sheet.
Management periodically assesses its real estate for possible impairment
whenever certain events or changes in circumstances indicate that the carrying
amount of the asset, including accrued rental income, may not be recoverable
through operations. Events or circumstances that may occur include significant
changes in real estate market conditions and the ability of the Company to re-
lease or sell properties that are vacant or become vacant. Impairments are
measured as the amount by which the current book value of the asset exceeds the
estimated fair value of the asset. As a result of the Company’s review of Real
Estate Investments, including identifiable intangible assets, the Company
recognized the following real estate impairments for the year ended December 31:
Continuing operations
Discontinued operations
2010
$7,700,000
440,000
2009
$
Total
$8,140,000
$
2008
-
-
-
$
$
-
-
-
Real Estate Investments measured as fair value due to impairment charges are
considered fair value measurements on a non recurring basis. The following table
presents the assets and liabilities carried on the balance sheet within the fair value
valuation hierarchy (as described above) as of December 31, 2010, for which a
nonrecurring change in fair value has been recorded during the year ended
December 31, 2010.
2010 (in thousands):
Fair Value as of
measurement
date
Quoted prices
in active
markets for
identical assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Impairment
Charge
Real Estate Investments
$16,137
$8,577
$1,386
$6,174
$8,140
The loss of $8.14 million represents an impairment charge related to Real Estate
F-16
Agree Realty Corporation
Notes to Consolidated Financial Statements
Investments which was included in net income during the year ended December 31,
2010. The fair value of certain Real Estate Investments was calculated differently
based on available information. Real Estate Investments considered to be measured
based on Level 1 inputs were based on actual sales negotiations and bona fide
purchase offers received from third parties. Real Estate Investments considered to
be measured based on Level 2 inputs were based on broker opinions of value or
analysis of recent comparable sales transactions.
Real Estate Investments
considered to be measured based on Level 3 inputs were based on an internal
valuation model using discounted cash flow analyses and income capitalization
using market lease rates and market cap rates. These cash flow projections
incorporate assumptions developed from the perspective of market participants
valuing the Real Estate Investments. During 2009 and 2008, the Company recorded
no impairment charge related to Real Estate Investments.
5. Total
Comprehensive
Income
The following is a reconciliation of net income to comprehensive income
attributable to Agree Realty Corporation for the years ended December 31, 2010 and
2009. For 2008 Net Income Attributable to Agree Realty Corporation and Total
Comprehensive Income Attributable to Agree Realty Corporation were identical.
Net income
Other comprehensive income (loss)
Total comprehensive income before non-controlling
interests
Less: non-controlling interest
Total comprehensive
interest
Non-controlling interest of comprehensive income (loss)
Comprehensive income attributable to Agree Realty
Corporation
income after non-controlling
2010
$15,627,834
(718,458)
2009
$17,994,036
(74,753)
14,909,376
561,039
17,919,283
950,046
14,348,337
(24,529)
16,969,237
(3,947)
$14,372,866
$16,973,184
6. Mortgages
Payable
Mortgages payable consisted of the following:
December 31,
2010
2009
Note payable in monthly
installments of
$42,000 plus interest at 150 basis points over
LIBOR (1.76% and 1.73% at December 31,
2010 and 2009 respectively). A final balloon
payment in the amount of $22,318,478 is due
on July 14, 2013 unless extended for a two
year period at the option of the Company
$ 23,666,828
$ 24,153,965
Note payable
in monthly
installments of
$153,838 including interest at 6.90% per
annum, with the final monthly payment due
F-17
Agree Realty Corporation
Notes to Consolidated Financial Statements
January 2020; collateralized by related real
estate and tenants’ leases
12,433,134
13,385,336
10,924,
11,325,
9,605,696
10,517,686
6,036,060
6,803,218
5,781,587
6,083,869
2,354,450
2,480,272
724,734
802,785
$71,526,780
$75,552,802
Note payable
in monthly
installments of
$91,675 including interest at 6.27% per
annum, with a final monthly payment due
July 2026; collateralized by related real
estate and tenants’ leases
Note payable
in monthly
installments of
$128,205 including interest at 6.20% per
annum, with a final monthly payment due
November 2018; collateralized by related
real estate and tenants’ leases
Note payable
in monthly
installments of
$99,598 including interest at 6.63% per
annum, with the final monthly payment due
February 2017; collateralized by related real
estate and tenants’ leases
Note payable in monthly installments of
$57,403 including interest at 6.50% per
annum, with the final monthly payment due
February 2023; collateralized by related real
estate and tenant lease
Note payable
in monthly
installments of
$25,631 including interest at 7.50% per
annum, with the final monthly payment due
May 2022; collateralized by related real
estate and tenant lease
Note payable
in monthly
installments of
$10,885 including interest at 6.85% per
annum, with the final monthly payment due
December 2017; collateralized by related
real estate and tenant lease
Total
F-18
Agree Realty Corporation
Notes to Consolidated Financial Statements
In February 2011, the bankruptcy filing of one of our tenants caused a non-
to
monetary default under
approximately $8.9 million secured by a total of three properties with 366,000
square feet of gross leasable area representing $1.3 million of annualized base rents
at December 31, 2010.
three non-recourse mortgage
loans amounting
7. Notes
Payable
In addition, while the bankruptcy filing of the tenant is not a direct event of default
under four non-recourse, cross-collateralized and cross-defaulted mortgage loans,
we anticipate that these loans will go into default as a result of a tenant store
closure. These four non-recourse mortgage loans amounting to approximately $9.6
million are secured by four properties with 103,000 square feet of gross leasable
area representing $2.1 million of annualized base rents as of December 31, 2010.
The Company is in the process of commencing negotiations with lenders regarding
an appropriate course of action. We can provide no assurance that our negotiations
with the lenders will result in favorable outcomes to us. Failure to restructure these
mortgage obligations could result in default and foreclosure actions and loss of the
mortgaged properties.
Future scheduled annual maturities of mortgages payable for years ending
December 31, assuming no mortgage defaults, are as follows: 2011 - $4,295,502;
2012 - $4,583,021; 2013 - $26,910,481; 2014 - $4,600,685; 2015 - $4,912,733 and
$26,224,358 thereafter. The weighted average interest rate at December 31, 2010
and 2009 was 5.63% and 5.66%, respectively.
The Operating Partnership has in place a $55 million line-of-credit agreement (the
“Credit Facility”), which is guaranteed by the Company up to the maximum amount
and for the full term. The agreement expires in November 2011. Advances under
the Credit Facility bear interest within a range of one-month to 12-month LIBOR
plus 100 basis points to 150 basis points or the bank's prime rate, at the option of
the Company, based on certain factors such as the ratio of the Company’s
indebtedness to the capital value of its properties. In addition, the Company must
maintain certain leverage and debt service coverage ratios, maintain its adjusted net
worth at a minimum level, maintain its tax status as a REIT, and distribute no more
than 95% of its adjusted funds from operations. The facility also requires that the
Company pay a non-use fee of .125% of the unfunded balance if its outstanding
balance is greater than $25 million or .20% of the unfunded balance if its
outstanding balance is less than $25 million. The Credit Facility is used to fund
property acquisitions and development activities. At December 31, 2010 and 2009,
$25,380,254 and $28,500,000, respectively, was outstanding under this facility with
a weighted average interest rate of 1.26% and 1.23%, respectively. The Credit
Facility’s covenants were all complied with at December 31, 2010.
In addition, the Company maintains a $5,000,000 line-of-credit agreement that
matures in November 2011. Monthly interest payments are required, either at the
bank's prime rate less 75 basis points, or 150 basis points in excess of the one-
month to 12-month LIBOR rate, at the option of the Company. At December 31,
2010 and 2009, $3,000,000 and $500,000, respectively, was outstanding under this
F-19
Agree Realty Corporation
Notes to Consolidated Financial Statements
agreement with a weighted average interest rate of 2.50% and 2.50%, respectively.
8. Dividends
and
Distribution
Payable
On December 6, 2010 the Company declared a dividend of $.51 per share for the
quarter ended December 31, 2010. The holders of OP Units were entitled to an
equal distribution per OP Unit held as of December 31, 2010. The dividends and
distributions payable are recorded as liabilities in the Company's consolidated
balance sheet at December 31, 2010. The dividend has been reflected as a reduction
of stockholders' equity and the distribution has been reflected as a reduction of the
limited partners' minority interest. These amounts were paid on January 4, 2011.
9. Derivative
Instruments
and
Hedging
Activity
On December 7, 2009 the Company declared a dividend of $.51 per share for the
quarter ended December 31, 2009. The holders of OP Units were entitled to an
equal distribution per OP Unit held as of December 31, 2009. The dividends and
distributions payable are recorded as liabilities in the Company's consolidated
balance sheet at December 31, 2009. The dividend has been reflected as a reduction
of stockholders' equity and the distribution has been reflected as a reduction of
stockholder equity and the distribution has been reflected as a reduction of the
limited partners’ minority interest. These amounts were paid on January 5, 2010.
On January 2, 2009, the Company entered into an interest rate swap agreement for a
notional amount of $24,501,280, effective on January 2, 2009 and ending on July 1,
2013. The notional amount decreases over the term to match the outstanding
balance of the hedge borrowing. The Company entered into this derivative
instrument to hedge against the risk of changes in future cash flows related to
changes in interest rates on $24,501,280 of the total variable-rate borrowings
outstanding. Under the terms of the interest rate swap agreement, the Company will
receive from the counterparty interest on the notional amount based on 1.5% plus
one-month LIBOR and will pay to the counterparty a fixed rate of 3.744%. This
swap effectively converted $24,501,280 of variable-rate borrowings to fixed-rate
borrowings beginning on January 2, 2009 and through July 1, 2013.
Companies are required to recognize all derivative instruments as either assets or
liabilities at fair value on the balance sheet. The Company has designated this
derivative instrument as a cash flow hedge. As such, changes in the fair value of the
derivative instrument are recorded as a component of other comprehensive income
(loss) for the year ended December 31, 2010 to the extent of effectiveness. The
ineffective portion of the change in fair value of the derivative instrument is
recognized in interest expense. For the year ended December 31, 2010, the
Company has determined this derivative instrument to be an effective hedge.
The Company does not use derivative instruments for trading or other speculative
purposes and it did not have any other derivative instruments or hedging activities
as of December 31, 2010.
10. Income
Taxes
In June 2006, the Financial Accounting Standards Board (“FASB”) issued an
interpretation which clarified the accounting for uncertainty in income taxes
recognized in a company’s financial statements. The interpretation prescribed a
recognition threshold and measurement attribute for the financial statement
F-20
Agree Realty Corporation
Notes to Consolidated Financial Statements
recognition and measurement of a tax position taken or expected to be taken in a tax
return. The interpretation also provided guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition.
The Company was subject to the provisions of FASB Accounting Standard
Codification 740-10 (“FASB ASC 740-10”) as of January 1, 2007, and has analyzed
its various federal and state filing positions. The Company believes that its income
tax filing positions and deductions are documented and supported. Additionally the
Company believes that its accruals for tax liabilities are adequate. Therefore, no
reserves for uncertain income tax positions have been recorded pursuant to FASB
ASC 740-10. In addition, the Company did not record a cumulative effect
adjustment related to the adoption of FASB ASC 740-10. The Company’s Federal
income tax returns are open for examination by taxing authorities for all tax years
after December 31, 2006. The Company has elected to record any related interest
and penalties, if any as income tax expense on the consolidated statements of
income.
For income tax purposes, the Company has certain TRS entities that have been
established and in which certain real estate activities are conducted.
As of December 31, 2010, the Company has estimated a current income tax liability
of approximately $17,000 and a deferred income tax liability in the amount of
$705,000. This deferred income tax balance represents the federal and state tax
effect of deferring income tax in 2007 on the sale of an asset under section 1031 of
the Internal Revenue Code. This transaction accrued within the TRS entities
described above.
The Company established a stock incentive plan in 1994 (the “1994 Plan”) under
which options were granted. The options, had an exercise price equal to the initial
public offering price ($19.50/share), could be exercised in increments of 25% on
each anniversary of the date of the grant, and expire upon employment termination.
All options granted under the 1994 Plan have been exercised. In 2005, the
Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005
Plan”), which replaced the 1994 Plan. The 2005 Plan authorizes the issuance of a
maximum of one million shares of common stock. No options were granted during
2010, 2009 or 2008.
As part of the Company's 2005 Equity Incentive Plan, restricted common stock is
granted to certain employees. As of December 31, 2010, there was $2,855,235 of
total unrecognized compensation costs related to the outstanding restricted stock,
which is expected to be recognized over a weighted average period of 3.34 years.
The Company used 0% for both the 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
F-21
11. Stock
Incentive
Plan
12. Stock Based
Awards
Agree Realty Corporation
Notes to Consolidated Financial Statements
the date of issuance of the restricted shares to exercise the rights of a stockholder of
the Company, including the right to vote the shares and the right to receive
dividends on the shares. The Company granted 88,550, 74,350 and 46,350 shares
of restricted stock in 2010, 2009 and 2008, respectively to employees and sub-
contractors under the 2005 Equity Incentive Plan. The restricted shares vest over a
five-year period based on continued service to the Company. Restricted share
activity is summarized as follows:
Non-vested restricted shares at
January 1, 2008
Restricted shares granted
Restricted shares vested
Restricted shares forfeited
Non-vested restricted shares at December 31,
2008
Restricted shares granted
Restricted shares vested
Restricted shares forfeited
Non-vested restricted shares at December 31,
2009
Restricted shares granted
Restricted shares vested
Restricted shares forfeited
Shares
Outstanding
Weighted
Average Grant
Date Fair Value
96,450
46,350
(33,950)
(4,800)
104,050
74,350
(37,420)
-
140,980
88,550
(42,070)
(20,610)
$24.89
$29.44
$28.57
$31.03
$30.57
$15.59
$30.46
$ -
$22.70
$23.36
$25.72
$25.06
13. Profit-
Sharing
Plan
Non-vested restricted shares at December 31,
2010
166,850
$22.00
The Company has a discretionary profit-sharing plan whereby it contributes to the
plan such amounts as the Board of Directors of the Company determines. The
participants in the plan cannot make any contributions to the plan. Contributions
to the plan are allocated to the employees based on their percentage of
compensation to the total compensation of all employees for the plan year.
Participants in the plan become fully vested after six years of service. No
contributions were made to the plan in 2010, 2009 or 2008.
14. Rental
Income
The Company leases premises in its properties to tenants pursuant to lease
agreements, which provide for terms ranging generally from five to 25 years. The
majority of leases provide for additional rents based on tenants' sales volume. The
weighted average remaining lease term is 11.5 years.
As of December 31, 2010, the future minimum rentals for the next five years from
rental property under the terms of all noncancellable tenant leases, assuming no
new or renegotiated leases are executed for such premises, are as follows (in
thousands):
F-22
Agree Realty Corporation
Notes to Consolidated Financial Statements
2011
2012
2013
2014
2015
Thereafter
Total
$
$
36,078
35,054
33,029
32,086
30,566
263,137
429,950
Of these future minimum rentals, approximately 46.5% of the total is attributable to
Walgreen, approximately 15.5% of the total is attributable to Borders and
approximately 5.5% is attributable to Kmart. Walgreen operates in the national
drugstore chain industry, Borders is an operator of book superstores in the United
States and Kmart’s principal business is general merchandise retailing through a
chain of discount department stores. Borders Group, Inc. filed for bankruptcy
protection under Chapter 11 of the US Bankruptcy Code in February 2011 and
announced the closing of over 200 of its stores including five stores leased to
Borders by the Company. The additional loss of any of these anchor tenants or the
inability of any of them to pay rent could have an adverse effect on the Company’s
business.
The Company’s properties are located primarily in the Midwestern United States
and in particular Michigan. Of the Company’s 81 properties, 43 are located in
Michigan.
15. Land Lease
Obligations
The Company has entered into certain land lease agreements for four of its
properties. Rent expense was $476,531, $387,300 and $294,948 for the years
ending December 31, 2010, 2009 and 2008, respectively. As of December 31,
2010, future annual lease commitments under these agreements are as follows:
For the Year ending December 31,
2011
2012
2013
2014
2015
Thereafter
Total
$ 712,300
712,300
712,300
712,300
712,300
15,222,521
$ 18,784,021
The Company leases its executive offices from a limited liability company controlled
by its Chief Executive Officer’s children. Under the terms of the lease, which expires
on December 31, 2014, the Company is required to pay an annual rental of $90,000
and is responsible for the payment of real estate taxes, insurance and maintenance
expenses relating to the building.
F-23
Agree Realty Corporation
Notes to Consolidated Financial Statements
16. Discontinued
Operations
During 2010, the Company sold two single tenant properties and entered into a lease
termination agreement for one property for a total of $14.2 million and recognized an
aggregate net gain of $4.7 million on the three transactions. The properties were
located in Santa Barbara, California, Marion Oaks, Florida and Aventura, Florida. Two
of the properties were leased to Borders and one was leased to Walgreen. In addition,
the Company has classified two single tenant properties that are leased to Borders and
located in Tulsa, Oklahoma as held for sale as of December 31, 2010. The Company
completed the sale of the two single tenant properties on January 24, 2011. The results
of operations for these five properties are presented as discontinued operations in the
Company’s Consolidated Statements of Income. Revenues for the properties were
$2,855,669, $2,858,639 and $2,734,978 for the years ended December 31, 2010, 2009
and 2008 respectively. Expenses for the properties including a $440,000 impairment
charge on the properties held for sale were $1,127,947, $822,988 and $793,097 for the
years ended December 31, 2010, 2009 and 2008, respectively.
The Company elected to not allocate consolidated interest expense to the discontinued
operations where the debt is not directly attributed to or related to the discontinued
operations.
17. Interim
Results
(Unaudited)
The following summary represents the unaudited results of operations of the Company,
expressed in thousands except per share amounts, for the periods from January 1, 2009
through December 31, 2010. Certain amounts have been reclassified to conform to the
current presentation of discontinued operations:
2010
Revenues
Net Income (Loss)
Earnings (Loss) Per Share – Diluted
Three Months Ended
March 31,
June 30,
September 30, December 31,
$
$
$
8,977
$ 8,759
9,969
$ 4,431
1.18
$
.46
$
$
$
8,810
4,541
$
$
9,566
(3,313)
.46
$ (.46)
2009
Revenues
Net Income
Earnings Per Share – Diluted
Three Months Ended
March 31,
June 30,
September 30, December 31,
$
$
$
8,534
$ 8,406
4,317
$ 4,508
.52
$
.54
$
$
$
8,484
4,607
$
$
8,978
4,562
.55
$ .53
F-24
Agree Realty Corporation
Notes to Consolidated Financial Statements
18. Deferred
Revenue
In July 2004, the Company’s tenant in two joint venture properties located in Ann
Arbor, MI and Boynton Beach, FL repaid $13.8 million that had been contributed
by the Company’s joint venture partner. As a result of this repayment the Company
became the sole member of the limited liability companies holding the properties.
Total assets of the two properties were approximately $13.8 million. The Company
has treated the $13.8 million repayment of the capital contribution as deferred
revenue and accordingly, will recognize rental income over the term of the related
leases.
19. Subsequent
Events
In January 2011, the Company granted 98,300 shares of restricted stock to
employees and associates under the 2005 Equity Incentive Plan. The restricted
shares vest over a five year period based on continued service to the Company.
The Company evaluates events occurring after the date of the financial statements
for events requiring recording or disclosure in the financial statements.
F-25
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Agree Realty Corporation
Notes to Schedule III
December 31, 2010
1) Reconciliation of Real Estate Properties
The following table reconciles the Real Estate Properties from January 1, 2008 to December
31, 2010:
2010
2009
2008
Balance at January 1
Construction and acquisition costs
Impairment charge
Disposition of real estate
$ 320,444,168
39,107,853
(8,140,000)
(11,919,189)
$ 311,342,882
9,101,286
-
-
$ 289,073,696
22,269,186
-
-
Balance at December 31
$ 339,492,832
$ 320,444,168
$ 311,342,882
2) Reconciliation of Accumulated Depreciation
The following table reconciles the accumulated depreciation from January 1, 2008 to
December 31, 2010:
2010
2009
2008
Balance at January 1
Current year depreciation expense
Disposition of real estate
$
64,076,469
5,759,599
(2,452,655)
$
58,502,384
5,574,085
-
$ 53,250,564
5,251,820
-
Balance at December 31
$
67,383,413
$
64,076,469
$ 58,502,384
3) Tax Basis of Buildings and Improvements
The aggregate cost of Building and Improvements for federal income tax purposes is
approximately $22,346,000 less than the cost basis used for financial statement purpose.
F-29
Agree Realty Corporation
Financial Highlights
Creating Value from the Ground Up…
Agree Realty's innovative development and acquisition strategies, superior
asset management and adaptive real estate technology create unparalleled value for
our clients and stockholders.
$26,000
$24,000
$22,000
$20,000
$18,000
2006
$350,000
$325,000
$300,000
$275,000
$250,000
2006
FUNDS FROM OPERATIONS
(in thousands)
2007
2008
2009
2010
REAL ESTATE ASSETS
(in thousands)
2007
2008
2009
2010