Agree Realty
Annual Report 2017

Plain-text annual report

ANNUAL REPORT for the year ended DECEMBER 31, 2017 Agree Realty Corporation (NYSE: ADC) is a fully-integrated, self-administered, and self-managed real estate investment trust (REIT) focused on the acquisition and development of properties net leased to industry-leading retailers throughout the United States. United States. Building upon the foundation of excellence established throughout the past four decades, Agree Realty continues to be a market leader in the net lease space. At December 31, 2017, our growing portfolio consisted of 436 assets in 43 states, portfolio consisted of 436 assets in 43 states, containing approximately 8.7 million square feet of gross leasable space. ANNUAL REPORT for the year ended DECEMBER 31, 2017 Agree Realty Corporation (NYSE: ADC) is a fully-integrated, self-administered, and self-managed real estate investment trust (REIT) focused on the acquisition and development of properties net leased to industry-leading retailers throughout the United States. United States. Building upon the foundation of excellence established throughout the past four decades, Agree Realty continues to be a market leader in the net lease space. At December 31, 2017, our growing portfolio consisted of 436 assets in 43 states, portfolio consisted of 436 assets in 43 states, containing approximately 8.7 million square feet of gross leasable space. CORPORATE INFORMATION EXECUTIVE OFFICERS Clay Thelen Chief Financial Officer Secretary Laith Hermiz Chief Operating Officer Daniel Ravid Chief Administrative Officer Jerry Rossi Former, Group President Chief Executive Officer R&R Consulting William S. Rubenfaer President Leon Schurgin Of Counsel Dawda Mann DIRECTORS Minerva Realty Consultants, LLC The TJX Companies Former, Director of Business Rubenfaer Associates, PC Richard Agree Executive Chairman Board of Directors Joey Agree President Chief Executive Officer Director Merrie S. Frankel President Adjunct Professor Columbia University New York University Farris Kalil Development of Commercial Lending Michigan National Bank John Rakolta, Jr. Chairman Chief Executive Officer Walbridge Embassy Suites 850 Tower Drive Troy, MI 48098 Auditors Grant Thornton LLP 27777 Franklin Road Southfield, MI 48034 Annual Meeting of Stockholders Tuesday, May 15, 2018 - 10:00 am Counsel Honigman 39400 Woodward Ave., Ste. 101 Bloomfield Hills, MI 48304 Registrar & Transfer Agent Computershare P.O. Box 30170 College Station, TX 7784 DTP SB To Match Hant 8.25 x 10.75 (23 X35) .25 HT ] 4 Page Out 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Spot 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Spot 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Cyan Dear Fellow Shareholders, In last year’s letter, I shared how our Core Values guide our decisions and drive our actions. Today, I am very pleased to report that adherence to these Core Values led us to achieve another year of record performance in 2017. While we’re proud of our performance this past year, we’re focused on continuing to lead through the dynamically changing retail environment that lies ahead. Our foundation of conservatism combined with our entrepreneurial spirit allow us to minimize risks while capitalizing on unique opportunities. With that, please allow me to review the Company’s past achievements and speak to our envisioned future. Leading Through A Disruptive Environment Over the past year, much has been made of the challenges that retailers are facing as the pressures of e-commerce continue to grow. In reality, these challenges have existed for quite some time. I personally witnessed one of the first casualties of e- commerce when Borders filed bankruptcy in 2011. Born from this experience was a rigorous focus on investing in retailers that have adopted successful 21st century omni-channel strategies. The headlines regarding the death of brick and mortar retail, and the success of e-commerce, are both false and misleading. The future of retail is very bright. However, it inherently involves a transformation of both traditional brick and mortar retailers as well as online retailers into true omni-channel operators. The retailers that combine a productive 21st century in-store shopping experience with an easily navigable online presence will thrive; while those that are stuck in the 20th century or fail to take advantage of physical nodes will be eliminated. One needs to look no further than the many e-commerce start-ups that have failed or those that have adopted omni-channel strategies to see the future. Warby Parker, UNTUCKit, Peloton, Bonobos, and of course Amazon, have served to demonstrate that e-commerce only is an unproductive retail strategy. Today, I am very proud to call Agree Realty a well-respected retail thought leader. Consistent Execution Of Our Operating Strategy In the eight years since the launch of our acquisition platform, we’ve demonstrated our ability to consistently execute on our operating strategy while delivering double-digit total returns to our shareholders. Since 2010, we’ve invested approximately $1.4 billion into more than 400 high-quality retail net lease properties. Over that time, we’ve added several world-class retailers to our top tenants list including Walmart, Lowe’s, TJX Companies, Hobby Lobby and AutoZone. Simultaneously, we’ve reduced our exposure to our top three tenants from 70% to less than 15% at year-end 2017. While we’ve prudently expanded our portfolio, we’ve also consistently accelerated the pace of our growth. We deployed or committed nearly $400 million of capital into 90 high-quality retail net lease properties this past year, marking our eighth consecutive year of record growth for our Company. These properties are leased to 49 different tenants operating in 22 diverse e-commerce and recession resistant retail sectors and are well-diversified geographically, spanning 27 states. As a result of our thoughtful portfolio construction and consistent growth, at year-end our industry-leading portfolio spanned 436 properties, covering over 8.7 million square feet encompassing 43 states. Our portfolio was 99.7% occupied, generated approximately 44% of annualized base rent from investment grade tenants and had a weighted-average remaining lease term of 10.2 years.     Delivering Results To Shareholders Our record performance in 2017 led to another material dividend increase for our shareholders. During the year, our Board of Directors approved dividend increases that resulted in excess of 5% year-over-year growth. Our dividend was complemented by funds from operation (“FFO”) per share growth of approximately 7%, and adjusted funds from operations (“AFFO”) per share growth of nearly 8%. Our annualized dividend of $2.08 per share represents payout ratios of approximately 73% of FFO per share and 74% of AFFO per share, respectively. Our goal continues to be to provide our fellow shareholders with a growing, reliable income stream through a secure and consistent dividend. Our dividend and robust per share earnings growth drove total shareholder returns of more than 16% in 2017. Once again, placing Agree Realty as one of the top performing companies in our sector. Furthermore, our success is not fleeting; we have now outperformed the net lease sector over a three, four and five-year period. Positioned To Continue Leading Our consistent performance over the better part of the past decade has positioned Agree Realty to continue to provide superior risk-adjusted returns. During 2017, we executed on several strategic capital markets transactions that fortified our balance sheet and provided us with balance sheet optionality and flexibility. These transactions have a common underlying thread; the creation of a long-term sustainable capital structure that serves to enable our disciplined growth. During this past year, we prudently raised more than $229 million in equity capital with the issuance of 4.8 million common shares. This includes the issuance of 1.8 million common shares of equity through our ATM Program in the fourth quarter, realizing gross proceeds of $87.1 million. We also originated $100 million of long-term, unsecured, fixed-rate debt. These senior unsecured notes have a 12-year term, maturing on September 20, 2029, and carry a fixed interest rate of 4.19%. Additionally, we entered into two separate, uncommitted $100 million private placement shelf agreements during the year, both of which had full capacity at year-end. As a result of our capital markets activity, we ended the year with a sector-leading net debt to recurring EBITDA of 4.3 times. Our fixed charge coverage ratio was a robust 4.2 times and our total debt to total enterprise value was approximately 24.5%. At year-end, we also had $45 million of net cash on hand. This conservative, investment-grade mindset to our balance sheet positions our Company to continue executing on our distinguished operating strategy for years to come. We have proven that risk mitigation and per share earnings growth are not mutually exclusive. In Conclusion The results are in. Today, our Company is among the lowest leveraged in the net lease sector with a leading portfolio of omni-channel retailers. We are both well-positioned and exceptionally prepared to lead through a dynamic and exciting environment. I would like to thank our Board of Directors, our fantastic team members, and our loyal shareholders for their continued support of our growing Company. Sincerely, Joey Agree President & Chief Executive Officer 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Spot 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Spot 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Cyan ] 4 Page In 2 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 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, 2017 Commission File Number 1-12928 AGREE REALTY CORPORATION (Exact name of Registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 38-3148187 (I.R.S. Employer Identification No.) 70 E. Long Lake Road, Bloomfield Hills, Michigan 48304 (Address of Principal Executive Offices) Registrant’s telephone number, including area code: (248) 737-4190 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 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 [This page intentionally left blank.] 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 Yes (2) has been subject file such No the past 90 days. reports), and requirements to such filing for 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Emerging growth company Accelerated filer Non-accelerated filer Smaller reporting company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of the Registrant’s shares of common stock held by non-affiliates was approximately $1,313,587,447 as of June 30, 2017, based on the closing price of $45.87 on the New York Stock Exchange on that date. At February 20, 2018, there were 30,992,597 shares of common stock, $.0001 par value per share, outstanding. 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT Portions of the registrant’s definitive proxy statement for the annual stockholder meeting to be held in 2018 are incorporated by reference into Part III of this Annual Report on Form 10-K as noted herein. DOCUMENTS INCORPORATED BY REFERENCE 2 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 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 AGREE REALTY CORPORATION By: /s/ Joel N. Agree Joel N. Agree President and Chief Executive Officer Date: February 22, 2018 KNOW ALL PERSONS BY THESE PRESENTS, that we, the undersigned officers and directors of Agree Realty Corporation, hereby severally constitute Richard Agree, Joel N. Agree and Clayton Thelen, 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 Annual Report on Form 10-K filed herewith and any and all amendments to said Annual Report on 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 Annual Report on 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 22nd day of February 2018. By: By: By: By: By: By: By: By: By: Executive Chairman of the Board of Directors /s/ Richard Agree Richard Agree /s/ Joel N. Agree Joel N. Agree President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Clayton Thelen Clayton Thelen Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) /s/ Merrie S. Frankel Merrie S. Frankel Director /s/ Farris G. Kalil Farris G. Kalil Director /s/ John Rakolta John Rakolta Jr. Director /s/ Jerome Rossi Jerome Rossi Director /s/ William S. Rubenfaer William S. Rubenfaer Director /s/ Leon M. Schurgin Leon M. Schurgin Director 40 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Cyan ] 32 Page 2 22 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Notes to Schedule III December 31, 2017 AGREE REALTY CORPORATION Index to Form 10-K PART I Item 1: Business Item 1A: Risk Factors Item 1B: Unresolved Staff Comments Item 2: Item 3: Item 4: Properties Legal Proceedings Mine Safety Disclosures PART II Item 5: Item 6: Item 7: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A: Quantitative and Qualitative Disclosure about Market Risk Item 8: Item 9: Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A: Controls and Procedures Item 9B: Other Information PART III Item 10: Directors, Executive Officers and Corporate Governance Item 11: Executive Compensation Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13: Certain Relationships and Related Transactions, and Director Independence Item 14: Principal Accountant Fees and Services PART IV Item 15: Exhibits and Financial Statement Schedules Consolidated Financial Statements and Notes SIGNATURES Page 1 6 17 17 21 22 22 23 24 32 34 34 34 35 35 35 35 35 36 37 F-1 40 F-42 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT 2 22 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 1 4 - F [This page intentionally left blank.] 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Cyan ] 32 Page 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A 0 4 - F PART I Cautionary Note Regarding Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Agree Realty Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “will,” “seek,” “could,” “project,” or similar expressions. Forward-looking statements in this report include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations, our strategic plans and objectives, occupancy and leasing rates and trends, liquidity and ability to refinance our indebtedness as it matures, anticipated expenditures of capital, and other matters. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations, include, but are not limited to: the global and national economic conditions and changes in general economic, financial and real estate market conditions; changes in our business strategy; the potential need to fund improvements or other capital expenditures out of operating cash flow; 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; our ability to re-lease space as leases expire; loss or bankruptcy of one or more of our major tenants; our ability to maintain our qualification as a real estate investment trust (“REIT”) for federal income tax purposes and the limitations imposed on our business by our status as a REIT; and legislative or regulatory changes, including changes to laws governing REITs. The factors included in this report, including the documents incorporated by reference, and documents the Company subsequently files or furnishes with the SEC are not exhaustive and additional factors could cause actual results to differ materially from that described in the forward-looking statements. For a discussion of additional risk factors, see the factors included under the caption “Risk Factors” within this report. All forward-looking statements are based on information that was available, and speak only, as of the date on which they were made. Except as required by law, the Company disclaims any obligation to review or update these forward–looking statements to reflect events or circumstances as they occur. Unless the context otherwise requires, references in this Annual Report on Form 10-K to the terms "registrant,” the "Company," “Agree Realty,” "we,” “our” or "us" refer to Agree Realty Corporation and all of its consolidated subsidiaries, including its majority owned operating partnership, Agree Limited Partnership (the “Operating Partnership”). Agree Realty has elected to treat certain subsidiaries as taxable real estate investment trust subsidiaries which are collectively referred to herein as the “TRS.” Item 1: Business General The Company is a fully integrated REIT primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. The Company was founded in 1971 by its current Executive Chairman, Richard Agree, and its common stock was listed on the New York Stock Exchange (“NYSE”) in 1994. The Company’s assets are held by, and all of its operations are conducted through, directly or indirectly, the Operating Partnership, of which the Company is the sole general partner and in which it held a 98.8% interest as of December 31, 2017. 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. As of December 31, 2017, our portfolio consisted of 436 properties located in 43 states and totaling approximately 8.7 million square feet of gross leasable area (“GLA”). See “Item 2 – Properties – Geographic Diversification” for more information on market concentrations. Our portfolio included 433 net lease properties, which contributed approximately 98.5% of annualized base rent, and three community shopping centers, which generated the remaining 1.5% of annualized base rent. As of December 31, 2017, our portfolio was approximately 99.7% leased and had a weighted average remaining lease term of approximately 10.2 years. A significant majority of our properties are leased to national tenants and approximately 43.9% of our annualized base rent was derived from tenants, or parent entities thereof, with an 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Cyan ] 32 Page 2 22 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 2 22 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 investment grade credit rating from S&P Global Ratings, Moody’s Investor Service, Fitch Ratings or the National Association of Insurance Commissioners. Substantially all of our tenants are subject to net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. As of December 31, 2017, we had 32 full-time employees, including executive, investment, due diligence, construction, accounting, asset management and administrative personnel. Our principal executive offices are located at 70 E. Long Lake Road, Bloomfield Hills, MI 48304 and our telephone number is (248) 737-4190. We maintain a website at www.agreerealty.com. Our reports are electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act and 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 governance committees. The information on our website is not part of this report. Recent Developments Investments During 2017, we completed approximately $359.4 million of investments in net leased retail real estate, including acquisition and closing costs. Total investment volume includes the acquisition of 79 properties for an aggregate purchase price of approximately $338.0 million and the completed development of four properties for an aggregate cost of approximately $21.4 million. These 83 properties are net leased to 51 different tenants operating in 22 sectors and are located in 28 states. These assets are 100% leased for a weighted average lease term of approximately 11.6 years, and the weighted average capitalization rate on our investments was approximately 7.6%. Dividends We increased our quarterly dividend per share from $0.495 in March 2017 to $0.505 in June 2017 and further increased our quarterly dividend per share to $0.520 in December 2017. The fourth quarter dividend per share of $0.520 represents an annualized dividend of $2.08 per share and an annualized dividend yield of approximately 4.0% based on the last reported sales price of our common stock listed on the NYSE of $51.44 on December 29, 2017. We have paid a quarterly cash dividend for 95 consecutive quarters and, although we expect to continue our policy of paying quarterly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our recent pattern of increasing dividends per share, or what our actual dividend yield will be in any future period. Financing In April 2017, the Company entered into a new $200.0 million at-the-market equity program (“ATM program”) through which the Company may, from time to time, sell shares of common stock. The Company uses the proceeds generated from its ATM program for general corporate purposes, including funding our investment activity, the repayment or refinancing of outstanding indebtedness, working capital and other general corporate purposes. In May 2017, the Company filed an automatic shelf registration statement on Form S-3, registering an unspecified amount at an indeterminant aggregate initial offering price of common stock, preferred stock, depositary shares and warrants. The Company may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. In June 2017, the Company completed a follow-on underwritten offering of 2,415,000 shares of common stock. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $108.0 million, after deducting the underwriting discount. The proceeds from the offering were used to repay borrowings under our revolving credit facility to fund property acquisitions and for general corporate purposes. In August 2017, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $100.0 million aggregate 2 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A 9 3 - F 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A 8 3 - F principal amount of our 4.19% senior unsecured notes due September 2029. The senior unsecured notes are guaranteed by the Company. The closing of the private placement was consummated in September 2017, and, on that date, the Operating Partnership issued the senior unsecured notes. The senior unsecured notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act. In December 2017, the Company assumed an interest only mortgage note for $21.5 million with PNC Bank, National Association in connection with an acquisition. The mortgage note is due October 2019, secured by a multi-tenant property and has a fixed interest rate of 3.32%. During the year ended December 31, 2017, we issued 2,368,359 shares of common stock under our ATM program at an average price of $49.17, realizing gross proceeds of $116.5 million. We had approximately $83.5 million remaining capacity under the ATM program as of December 31, 2017. Dispositions During 2017, the Company sold real estate properties for net proceeds of $44.3 million and recorded a net gain of $14.2 million (net of any expected losses on real estate held for sale). Leasing During 2017, excluding properties that were sold, we executed new leases, extensions or options on more than 683,000 square feet of gross leasable area throughout our portfolio. The annual rent associated with these new leases, extensions or options is approximately $6.5 million. Material new leases, extensions or options included a 147,771 square foot Sam’s Club in Brooklyn, Ohio, a 33,608 square foot Big Lots in Cedar Park, Texas and a 32,147 square foot TJ Maxx in Aurora, Colorado. Business Strategies Our primary business objective is to generate consistent shareholder returns by primarily investing in and actively managing a diversified portfolio of retail properties net leased to industry leading tenants. The following is a discussion of our investment, financing and asset management strategies: Investment Strategy We are primarily focused on the long-term, fee simple ownership of properties net leased to national or large, regional retailers operating in sectors we believe to be more e-commerce and recession resistant. Our leases are typically long-term net leases that require the tenant to pay all property operating expenses, including real estate taxes, insurance and maintenance. We believe that a diversified portfolio of such properties provides for stable and predictable cash flow. We seek to expand and enhance our portfolio by identifying the best risk-adjusted investment opportunities across our development, Partner Capital Solutions (“PCS”) and acquisitions platforms. Development: We have been developing retail properties since the formation of our predecessor company in 1971 and our development platform seeks to employ our capabilities to direct all aspects of the development process, including site selection, land acquisition, lease negotiation, due diligence, design and construction. Our developments are typically build-to-suit projects that result in fee simple ownership of the property upon completion. Partner Capital Solutions: We launched our PCS program, formerly known as Joint Venture Capital Solutions program, in April 2012. Our PCS program allows us to acquire properties or development opportunities by partnering with private developers or retailers on their in-process developments. We offer construction expertise, relationships, access to capital and forward commitments to purchase to facilitate the successful completion of their projects. We typically take fee simple ownership of PCS projects upon their completion. Acquisitions: Our acquisitions platform was launched in April 2010 in order to expand our investment capabilities by pursuing opportunities that do not fall within our development platform, but that do meet both our real estate and return on investment criteria. We believe that development and PCS projects have the potential to generate superior risk-adjusted returns on investment in properties that are substantially similar to those we acquire. 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Cyan ] 32 Page 2 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 2 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Each platform leverages the Company’s real estate acumen to pursue investments in net lease retail real estate. Factors that we consider when evaluating an investment include but are not limited to: (cid:120) overall market-specific characteristics, such as demographics, market rents, competition and retail synergy (cid:120) asset-specific characteristics, such as the age, size, location, zoning, use and environmental history, (cid:120) accessibility, physical condition, signage and visibility of the property tenant-specific characteristics, including but not limited to the financial profile, operating history, business plan, size, market positioning, geographic footprint, management team, industry and/or sector-specific trends and other characteristics specific to the tenant and parent thereof; (cid:120) unit-level operating characteristics, including store sales performance and profitability, if available; (cid:120) lease-specific terms, including term of the lease, rent to be paid by the tenant and other tenancy considerations, and transaction considerations, such as purchase price, seller profile and other non-financial terms. (cid:120) Financing Strategy We seek to maintain a capital structure that provides us with the flexibility to manage our business and pursue our growth strategies, while allowing us to service our debt requirements and generate appropriate risk-adjusted returns for our shareholders. We believe these objectives are best achieved by a capital structure that consists primarily of common equity and prudent amounts of debt financing. However, we may raise capital in any form and under terms that we deem acceptable and in the best interest of our shareholders. We have previously utilized common stock equity offerings, secured mortgage borrowings, unsecured bank borrowings, private placements of senior unsecured notes and the sale of properties to meet our capital requirements. We continually evaluate our financing policies on an on-going basis in light of current economic conditions, access to various capital markets, relative costs of equity and debt securities, the market value of our properties and other factors. As of December 31, 2017, our ratio of total debt to total market capitalization, assuming the conversion of limited partnership interests in the Operating Partnership (“OP Units”) into shares of common stock, was approximately 24.5%, and our ratio of total debt to total gross assets (before accumulated depreciation) was approximately 33.0%. As of December 31, 2017, our total debt outstanding before deferred financing costs was $522.4 million, including $89.1 million of secured mortgage debt that had a weighted average fixed interest rate of 3.7% (including the effects of interest rate swap agreements) and a weighted average maturity of 3.0 years, $419.3 million of unsecured borrowings that had a weighted average fixed interest rate of 4.0% (including the effects of interest rate swap agreements) and a weighted average maturity of 8.3 years, and $14.0 million of floating rate borrowings under our revolving credit facility at a weighted average interest rate of approximately 2.6%. Certain financial agreements to which we are a party contain covenants that limit our ability to incur debt under certain circumstances; however, our organizational documents do not limit the absolute amount or percentage of indebtedness that we may incur. As such, we may modify our borrowing policies at any time without shareholder approval. 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 and preventative maintenance. Our properties are designed and built to require minimal capital improvements other than renovations or alterations, typically paid for by tenants. At our three community shopping center properties, we subcontract 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 our 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 helps us to maximize cash flow from operations and closely monitor corporate expenses. 4 7 3 - F 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Cyan 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A 6 3 - F Financial and Asset Information about Industry Segments We are in the business of acquiring, developing and managing retail real estate which we consider one reporting segment. See “Item 2 – Properties" and “Item 6 – Selected Financial Data" and “Note 2 – Summary of Significant Accounting Policies” to our consolidated financial statements for additional financial and asset information. Competition The U.S. commercial real estate investment market is a highly competitive industry. We actively compete with many entities engaged in the acquisition, development and operation of commercial properties. As such, we compete with other investors for a limited supply of properties and financing for these properties. Investors include traded and non-traded public REITs, private equity firms, institutional investment funds, insurance companies and private individuals, many of which have greater financial resources than we do and the ability to accept more risk than we believe we can prudently manage. There can be no assurance that we will be able to compete successfully with such entities in our acquisition, development and leasing activities in the future. Significant Tenants As of December 31, 2017, we leased 25 properties to Walgreens. Total annualized base rents from Walgreens were approximately 7.7%, 11.6% and 17.2% for the years ended 2017, 2016 and 2015, respectively. As of December 31, 2017, the weighted average remaining lease term of our Walgreens leases was 9.4 years. No other tenant accounted for more than 5.0% of our annualized base rent as of December 31, 2017. See “Item 2 – Properties” for additional information on our top tenants and the composition of our tenant base. Regulation Environmental Investments in real property create the 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 and, in certain instances, have conducted additional investigation, including a Phase II environmental assessment. Furthermore, we have adopted a policy of conducting a Phase I environmental study on each property we acquire and an additional investigation as warranted. We have no knowledge of any hazardous substances existing on our properties in violation of any applicable laws; however, no assurance can be given that such substances are not located on any of our 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 our properties. Americans with Disabilities Act of 1990 Our properties, as commercial facilities, are required to comply with Title III of the Americans with Disabilities Act of 1990 and similar state and local laws and regulations (collectively, the “ADA”). Investigation of a property may reveal non-compliance with the ADA. Our tenants will typically have primary responsibility for complying with the ADA, but we may incur costs if the tenant does not comply. As of December 31, 2017, we have not been notified by any governmental authority, nor are we otherwise aware, of any non-compliance with the ADA that we believe would have a material adverse effect on our business, financial position or results of operations. Available Information We make available free of charge through our website at www.agreerealty.com all reports we electronically file with, or furnish to, the SEC, including our Annual Report on Form 10-K, Quarterly Reports on From 10-Q, and current reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable 5 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 2 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 2 ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Cyan after those documents are filed with, or furnished to, the SEC. These filings are also accessible on the SEC’s website at www.sec.gov. Item 1A: Risk Factors The following factors and other factors discussed in this Annual Report on Form 10-K could cause our actual results to differ materially from those contained in forward-looking statements made in this report or presented elsewhere in future SEC reports. You should carefully consider each of the risks, assumptions, uncertainties and other factors described below and elsewhere in this report, as well as any reports, amendments or updates reflected in subsequent filings or furnishings with the SEC. We believe these risks, assumptions, uncertainties and other factors, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and could materially and adversely affect our business operations, results of operations, financial condition and liquidity. Risks Related to Our Business and Operations Economic and financial conditions may have a negative effect on our business and operations. Changes in global or national economic conditions, such as a global economic and financial market downturn or a disruption in the capital markets, may cause, among other things, a significant tightening in the credit markets, lower levels of liquidity, increases in the rate of default and bankruptcy and lower consumer spending and business spending, which could adversely affect our business and operations. Potential consequences of changes in economic and financial conditions include: (cid:120) (cid:120) (cid:120) changes in the performance of our tenants, which may result in lower rent and lower recoverable expenses that the tenant can afford to pay and tenant defaults under the leases; current or potential tenants may delay or postpone entering into long-term net leases with us; the ability to borrow on terms and conditions that we find acceptable may be limited or unavailable, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from acquisition and development activities, reduce our ability to make cash distributions to our shareholders and increase our future interest expense; (cid:120) 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 recognition of impairment charges on or reduced values of our properties, which may adversely affect our results of operations or limit our ability to dispose of assets at attractive prices and may reduce the availability of buyer financing; and (cid:120) (cid:120) one or more lenders under our revolving credit facility could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all. 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. Such conditions could make it very difficult to forecast operating results, make business decisions and identify and address material business risks. Our business is significantly dependent on single tenant properties. We focus our development and investment activities on ownership of real properties that are primarily net leased to a single tenant. Therefore, the financial failure of, or other default in payment by, a single tenant under its lease and the potential resulting vacancy 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 impairment loss. In addition, we would be responsible for all of the operating costs of a property following a vacancy at a single tenant building. Because our properties have generally been built to suit a particular tenant’s specific needs and desires, we may also incur significant losses to make the leased premises ready for another tenant and experience difficulty or a significant delay in releasing such property. (cid:2) 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 respective businesses that may significantly weaken their financial condition, particularly during periods of economic uncertainty. In addition, our tenants 6 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A 5 3 - F DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Cyan 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A 4 3 - F compete with alternative forms or retailing, including online shopping, home shopping networks and mail order catalogs. 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 loss of rental income attributable to the affected 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 may be subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants” below. Bankruptcy laws will limit our remedies if a tenant becomes bankrupt and rejects its leases. 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 for unpaid future rent would be an unsecured pre-petition claim subject to statutory limitations, and therefore any amounts received in bankruptcy are likely to be substantially less valuable 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. Our portfolio is concentrated in certain States, which makes us more susceptible to adverse events in these areas. Our properties are located in 43 States throughout the United States and in particular, the States of Michigan (where 47 properties out of 436 properties are located or 12.1% of our annualized base rent was derived as of December 31, 2017), Texas (31 properties or 8.5% of our annualized base rent) and Florida (33 properties or 7.4% of our annualized base rent). An economic downturn or other adverse events or conditions such as natural disasters in any of these areas, or any other area where we may have significant concentration in the future, could result in a material reduction of our cash flows or material losses to our company. There are 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 the revolving credit facility or other forms of financing that will result in a risk that permanent fixed rate 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 anticipated project costs. Furthermore, new project commencement risks also include receipt of zoning, occupancy, 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 finance 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, as well as general investment risks associated with any new real estate investment. We own certain 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 a limited number of 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 shareholders and the trading price of our common stock. 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. (cid:2) The capital markets may limit our sources of funds for financing activities. Our ability to access the capital markets may be restricted at a time when we would like, or need, to access those markets. This could have an impact on our flexibility to react to changing economic and business conditions. A 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 may be 7 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 2 22 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 2 22 ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Cyan materially adversely impacted by such market conditions. Also, our ability to access equity markets as a source of funds may be affected by our stock price as well as general market conditions. Loss of revenues from tenants would reduce the Company’s cash flow. Our tenants encounter significant macroeconomic, governmental and competitive forces. Adverse changes in consumer spending or consumer preferences for particular goods, services or store-based retailing could severely impact their ability to pay rent. Shifts from in-store to online shopping could increase due to changing consumer shopping patterns as well as the increase in consumer adoption and use of mobile electronic devices. This expansion of e-commerce could have an adverse impact on our tenant’s ongoing viability. The default, financial distress, bankruptcy or liquidation of one or more of our tenants could cause substantial vacancies in our property portfolio. Vacancies reduce our revenues, increase property expenses and could decrease the value of each vacant property. Upon the expiration of a lease, the tenant may choose not to renew the lease, and/or we may not be able to release the vacant property at a comparable lease rate or without incurring additional expenditures in connection with such renewal or re-leasing. The availability and timing of cash distributions is uncertain We expect to continue to pay quarterly distributions to our shareholders. 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 shareholders. We cannot assure our shareholders that sufficient funds will be available to pay distributions. The decision to declare and pay dividends on our common stock in the future, as well as the timing, amount, and composition of any such future dividends, will be at the sole discretion of our board of directors and will depend on our earnings, funds from operations, liquidity, financial condition, capital requirements, contractual prohibitions, or other limitations under our indebtedness, annual dividend requirements or the REIT provisions of the Internal Revenue Code of 1986, as amended (the “Code”), state law and such other factors as our board of directors deems relevant. Further, we may issue new shares of common stock as compensation to our employees or in connection with public offerings or acquisitions. Any future issuances may substantially increase the cash required to pay dividends at current or higher levels. Our actual dividend payable will be determined by our board of directors based upon the circumstances at the time of declaration. Any preferred shares we may offer may have a fixed dividend rate that would not increase with any increases in the dividend rate of our common stock. Conversely, payment of dividends on our common stock may be subject to payment in full of the dividends on any preferred shares and payment of interest on any debt securities we may offer. If we do not maintain or increase the dividend on our common stock, it could have an adverse effect on the market price of our shares. 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. We face risks relating to information technology and cybersecurity attacks, loss of confidential information and other business disruptions. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes and we rely on commercially available systems, software, tools and monitoring to provide infrastructure and security for processing, transmitting and storing information. Any failure, inadequacy or interruption could materially harm our business. Furthermore, our business is subject to risks from and may be impacted by cybersecurity attacks, including attempts to gain unauthorized access to our confidential data and other electronic security breaches. Such cyber-attacks can range from individual attempts to gain unauthorized access to our information technology systems to more sophisticated security threats. While we employ a number of measures to prevent, detect and mitigate these threats, there is no guarantee such efforts will be successful in preventing a cyber-attack. Cybersecurity incidents could cause operational interruption, damage to our business relationships, private data exposure (including personally identifiable information, or proprietary and confidential information, of ours and our employees, as well as third 8 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A 3 3 - F  ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Cyan ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A 2 22 General Real Estate Risk parties) and affect the efficiency of our business operations. Any such incidents could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information and reduce the benefits of our technologies. 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: (cid:120) Changes in general or local economic conditions; (cid:120) The attractiveness of our properties to potential tenants; (cid:120) Changes in supply of or demand for similar or competing properties in an area; (cid:120) Bankruptcies, financial difficulties or lease defaults by our tenants; (cid:120) Changes in operating costs and expense and our ability to control rents; (cid:120) Our ability to lease properties at favorable rental rates; (cid:120) Our ability to sell a property when we desire to do so at a favorable price; (cid:120) Unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions; (cid:120) 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 (cid:120) Unanticipated expenditures to comply with the Americans with Disabilities Act and other similar regulations. 2 3 - F Economic and financial market conditions have and may continue to exacerbate 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 generally be sold quickly, and we cannot assure you that we could always obtain a favorable price. 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 shareholders 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. 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 shareholders. This potential liability results from the following: 9 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 2 22 1 3 - F (cid:120) As owner, we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination; (cid:120) The law may impose clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination; (cid:120) 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; and (cid:120) 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. We own and may in the future acquire properties that will be operated as convenience stores with gas station facilities. The operation of convenience stores with gas station facilities at our properties will create additional environmental concerns. We require that the tenants who operate these facilities do so in material compliance with current laws and regulations. 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 are certain losses, including losses from environmental liabilities, 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. 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 shareholders 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 generally 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. Risks Related to Our Debt Financings Our level of indebtedness could materially and adversely affect our financial position, including reducing funds available for other business purposes and reducing our operational flexibility, and we may have future capital needs and may not be able to obtain additional financing on acceptable terms. At December 31, 2017, our ratio of total debt to total market capitalization (assuming conversion of OP Units into shares of common stock) was approximately 24.5%. Incurring substantial debt may adversely affect our business and operating results by: (cid:120) requiring us to use a substantial portion of our cash flow to pay interest and principal, which reduces the amount available for distributions, acquisitions and capital expenditures; (cid:120) making us more vulnerable to economic and industry downturns and reducing our flexibility to respond to (cid:120) changing business and economic conditions; requiring us to agree to less favorable terms, including higher interest rates, in order to incur additional debt, and otherwise limiting our ability to borrow for operations, working capital or to finance acquisitions in the future; or 10 7 1 0 2 , 1 3 r e b m e c e D n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A  ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Cyan ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 7 1 0 2 , 1 3 r e b m e c e D 2 n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R – I I I e l u d e h c S n o i t a r o p r o C y t l a e R e e r g A 0 3 - F (cid:120) limiting our flexibility in conducting our business, including our ability to finance or refinance our assets, contribute assets to joint ventures or sell assets as needed, which may place us at a disadvantage compared to competitors with less debt or debt with less restrictive terms. In addition, 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, (3) there is an increase in interest rates, (4) we default on our financial obligations and (5) debt service requirements increase. 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 consequential 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 on other properties resulting in multiple foreclosures. We generally intend to maintain a ratio of total indebtedness (including construction or acquisition financing) to total market capitalization of 65% or less. Nevertheless, we may operate with debt levels which are in excess of 65% of total market capitalization for extended periods of time. Our organizational 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 shareholders, 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 shareholders, 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 the financing agreements 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 financing agreements contain certain cross-default provisions which could be triggered in the event that we default on our other indebtedness. These cross-default provisions may require us to repay or restructure the revolving 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. Our unsecured revolving credit facility and certain term loan agreements contain various restrictive corporate covenants, including a maximum total leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum recourse secured debt ratio, a minimum net worth requirement and a maximum payout ratio. In addition, our unsecured revolving credit facility and certain term loan agreements have unencumbered pool covenants, which include a minimum number of eligible unencumbered assets, a maximum unencumbered leverage ratio and a minimum unencumbered interest coverage ratio. These covenants may restrict our ability to pursue certain business initiatives or certain transactions that might otherwise be advantageous. Furthermore, failure to meet certain of these financial covenants could cause an event of default under and/or accelerate some or all of such indebtedness which could have a material adverse effect on us. Credit market developments may reduce availability under our revolving credit facility. 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 revolving credit facility, including but not limited to: extending credit up to the maximum amount permitted by such 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 revolving credit facility, it could be difficult to replace our revolving credit facility on similar terms. Any such failure by any of the lenders under the revolving credit facility may impact our ability to finance our operating or investing activities. An increase in market interest rates could raise our interest costs on existing and future debt or adversely affect our stock price, and a decrease in interest rates may lead to additional competition for the acquisition of real estate or adversely affect our results of operations. Our interest costs for any new debt and our current debt obligations may rise if interest rates increase. This increased cost could make the financing of any new acquisition more expensive as well as lower our current period earnings. Rising interest rates could limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing. In addition, an increase in interest rates could decrease the access third parties have to credit, thereby decreasing the amount they are willing to pay to lease our assets and limit our ability 11 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 2 to reposition our portfolio promptly in response to changes in economic or other conditions. An increase in market interest rates may lead prospective purchasers of our common stock to expect a higher dividend yield, which could adversely affect the market price of our common stock. Decreases in interest rates may lead to additional competition for the acquisition of real estate due to a reduction in desirable alternative income-producing investments. Increased competition for the acquisition of real estate may lead to a decrease in the yields on real estate targeted for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our results of operations may be adversely affected. Our hedging strategies may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on your investment. We use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. These instruments involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes, that a court could rule that such agreements are not legally enforceable, and that we may have to post collateral to enter into hedging transactions, which we may lose it we are unable to honor our obligations. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the REIT income tests. In addition, the nature and timing of hedging transactions may influence the effectiveness of our hedging strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. Moreover, hedging strategies involve transaction and other costs. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses that may reduce the overall return on your investment. Risks Related to Our Corporate Structure Our charter, bylaws and Maryland law contain provisions that may delay, defer or prevent a change of control transaction. Our charter contains 9.8% ownership limits. 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 contains provisions that limit any person to actual or constructive ownership of no more than 9.8% (in value or in number of shares, whichever is more restrictive) of the outstanding shares of our common stock and no more than 9.8% (in value) of the aggregate of the outstanding shares of all classes and series of our stock. Our board of directors, in its sole discretion, may exempt, subject to the satisfaction of certain conditions, any person from the ownership limits. 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 limits may delay or impede, and we may use the ownership limits 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 shareholders. 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 the Company or make an acquisition more difficult, even when an acquisition may be viewed to be in the best interest of our shareholders. 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 the acquisition, after the person acquires more than 15% of our outstanding common stock, all other shareholders 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. On December 20, 2017, the Company entered into a third amendment to the plan to provide a limited exemption, which permitted an investor to become the beneficial owner of less than 20% of the common stock of the Company then outstanding rather than the 15% threshold otherwise applicable without becoming an Acquiring Person (as defined in the plan). 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 12 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 Earnings per Share - diluted $ 0.55 $ 0.56 $ 0.42 $ 0.55 2017 Three Months Ended September March 31 June 30 30 December 31 $ 26,560 $ 28,080 $ 30,387 $ 33,375 $ 14,768 $ 15,067 $ 12,283 $ 16,672 2016 Three Months Ended September March 31 June 30 30 December 31 $ 20,224 $ 21,844 $ 24,161 $ 25,299 $ 7,586 $ 10,828 $ 14,476 $ 12,906 Revenue Net Income Revenue Net Income Earnings per Share - diluted $ 0.36 $ 0.48 $ 0.61 $ 0.50 Note 14 – Commitments and Contingencies In the ordinary course of business, we are party to various legal actions which we believe are routine in nature and incidental to the operation of our business. We believe that the outcome of the proceedings will not have a material adverse effect upon our consolidated financial position or results of operations Note 15 – Subsequent Events In February 2018, the Company granted shares of restricted stock to employees under the 2014 Plan. The fair value of these grants was approximately $3.9 million. The grants were a mix of Performance Shares and restricted shares that vest over a five-year period based on continued service to the Company. There were no other reportable subsequent events or transactions as of February 22, 2018. F-29 3 ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 Shares Outstanding Weighted Average Grant Date Fair Value Unvested restricted stock at December 31, 2014 239 $ 26.24 Unvested restricted stock at December 31, 2015 213 $ 29.07 Restricted stock granted Restricted stock vested Restricted stock forfeited Restricted stock granted Restricted stock vested Restricted stock forfeited Restricted stock granted Restricted stock vested Restricted stock forfeited 86 $ 33.46 (80) $ 25.13 $ 29.54 (32) 93 $ 37.67 (72) $ 27.07 $ 35.58 (6) 88 $ 48.59 (78) $ 30.95 $ 39.68 (11) Unvested restricted stock at December 31, 2016 228 $ 33.02 Unvested restricted stock at December 31, 2017 227 $ 39.47 The intrinsic value of stock options exercised was $1.1 million, $0.7 million and $0.0 million during the years ended December 31, 2017, 2016 and 2015, respectively. Note 12 – Profit-Sharing Plan 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 2017, 2016, or 2015. Note 13 – Quarterly Financial Data (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, 2016 through December 31, 2017. Certain amounts have been reclassified to conform to the current presentation of discontinued operations: F-28 transaction or change of control that might involve a premium price for our common stock or otherwise be viewed to be in the best interest of our shareholders. 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: (cid:120) (cid:120) “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 shareholders 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 Maryland General Corporation Law, or 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 Richard Agree, Edward Rosenberg, any spouses or the foregoing, any brothers or sisters of the foregoing, any ancestors of the foregoing, any other lineal descendants of any of the foregoing, any estates of any of the foregoing, any trusts established for the benefit of any of the foregoing and any other entity controlled by any of the foregoing, 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 MGCL, permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to implement certain 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 the 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 viewed to be in the best interest of our shareholders. 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 could include classes or series of preferred stock, common stock and senior or subordinated notes. Our ability to raise additional capital may be restricted at a time when we would like or need, including as a result of market conditions. Future market dislocations could cause us to seek sources of potentially less attractive capital and impact our flexibility to react to changing economic and business conditions. All debt securities and other borrowings, as well as all classes or series of preferred stock, will be senior to our common stock in a liquidation of our company. Additional equity offerings could dilute our shareholders’ equity and reduce the market price of shares of our common stock. In addition, depending on the terms and pricing of an additional offering of our common stock and the value of our properties, our shareholders may experience dilution in both the book value and fair value of their shares. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after an offering or the perception that such sales could occur, 13 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Cyan ] 24 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT 3 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] and this could materially and adversely affect our ability to raise capital through future offerings of equity or equity- related securities. In addition, we may issue preferred stock or other securities convertible into equity securities with a distribution preference or a liquidation preference that may limit our ability to make distributions on our common stock. 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: (cid:120) Changes in interest rates; (cid:120) Our financial condition and operating performance and the performance of other similar companies; (cid:120) Actual or anticipated variations in our quarterly results of operations; (cid:120) The extent of investor interest in our company, real estate generally or commercial real estate specifically; (cid:120) 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; (cid:120) Changes in expectations of future financial performance or changes in estimates of securities analysts; (cid:120) Fluctuations in stock market prices and volumes; and (cid:120) Announcements by us or our competitors of acquisitions, investments or strategic alliances. An officer and director may have interests that conflict with the interests of shareholders. An officer and member of our board of directors owns OP units in the Operating Partnership. This individual may have personal interests that conflict with the interests of our shareholders with respect to business decisions affecting us and the Operating Partnership, such as interests in the timing and pricing of property sales or refinancings in order to obtain favorable tax treatment. Federal Income Tax Risks Complying with REIT requirements may cause us to forego otherwise attractive opportunities. To qualify as a REIT for federal income tax purposes we must continually satisfy numerous income, asset and other tests, thus having to forego 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 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. Additionally, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the approval of our stockholders. A REIT generally is not taxed at the corporate level on income it distributes to its shareholders, as long as it distributes annually at least 90% of its taxable income to its shareholders. 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: (cid:120) We would not be allowed a deduction for dividends paid to shareholders in computing our taxable income and would be subject to federal income tax at regular corporate rates. (cid:120) We could be subject to the federal alternative minimum tax and possibly increased state and local taxes. (cid:120) 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 failed to qualify. Agree Realty Corporation December 31, 2017 Total Fair Value Level 2 Notes to Consolidated Financial Statements December 31, 2017 Derivative assets - interest rate swaps $ 1,592 $ 1,592 Derivative liabilities - interest rate swaps $ 242 $ 242 December 31, 2016 Derivative assets - interest rate swaps Derivative liabilities - interest rate swaps $ 1,409 $ 1,994 $ 1,409 $ 1,994 The carrying values of cash and cash equivalents, receivables and accounts payable and accrued liabilities are reasonable estimates of their fair values because of the short maturity of these financial instruments. The Company estimated the fair value of our debt based on our incremental borrowing rates for similar types of borrowing arrangements with the same remaining maturity and on the discounted estimated future cash payments to be made for other debt. The discount rate used to calculate the fair value of debt approximates current lending rates for loans and assumes the debt is outstanding through maturity. Since such amounts are estimates that are based on limited available market information for similar transactions, which is a Level 2 non-recurring measurement, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument. Fixed rate debt (including variable rate debt swapped to fixed, excluding the value of the derivatives) with carrying values of $505.6 million and $386.9 million as of December 31, 2017 and December 31, 2016, respectively, had fair values of approximately $516.5 million and $401.4 million, respectively. Variable rate debt’s fair value is estimated to be equal to the carrying values of $14.0 million as of December 31, 2017 and December 31, 2016. Note 11 – Equity Incentive Plan shares of common stock. of common stock. In 2005, the Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”), which replaced a stock incentive plan established in 1994. The 2005 Plan authorized the issuance of a maximum of 1,000,000 In 2014, the Company’s stockholders approved the 2014 Omnibus Incentive Plan (the “2014 Plan”), which replaced the 2005 Equity Incentive Plan. The 2014 Plan authorizes the issuance of a maximum of 700,000 shares No options were granted during 2017, 2016 or 2015. Restricted common stock has been granted to certain employees under the 2014 Plan. As of December 31, 2017, there was $6.7 million of unrecognized compensation costs related to the outstanding restricted stock, which is expected to be recognized over a weighted average period of 3.5 years. The Company used 0% for both the discount factor and forfeiture rate for determining the fair value of restricted stock. The holder of a restricted share award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The Company granted 88,466, 93,363 and 85,597 shares of restricted stock in 2017, 2016 and 2015, respectively to employees and Directors. The restricted shares vest over a five- year period based on continued service to the Company. Restricted share activity is summarized as follows (in thousands, except per share data): 14 F-27 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Cyan ] 24 Page 3 ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Note 10 – Fair Value Measurements Assets and Liabilities Measured at Fair Value Notes to Consolidated Financial Statements December 31, 2017 The Company accounts for fair values in accordance with FASB Accounting Standards Codification Topic 820 Fair Value Measurements and Disclosure (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls, is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Derivative Financial Instruments Currently, the Company uses interest rate swap agreements to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016 (in thousands): 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 affect the market price for our common stock. U.S. federal tax reform legislation could affect REITs generally, the geographic markets in which we operate, our stock and our results of operations, both positively and negatively in ways that are difficult to anticipate. Changes to the federal income tax laws are proposed regularly. Additionally, the REIT rules are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Department of the Treasury, which may result in revisions to regulations and interpretations in addition to statutory changes. If enacted, certain such changes could have an adverse impact on our business and financial results. In particular, H.R. 1, which generally takes effect for taxable years beginning on or after January 1, 2018 (subject to certain exceptions), makes many significant changes to the federal income tax laws that will profoundly impact the taxation of individuals, corporations (both regular C corporations as well as corporations that have elected to be taxed as REITs), and the taxation of taxpayers with overseas assets and operations. A number of changes that affect non- corporate taxpayers will expire at the end of 2025 unless Congress acts to extend them. These changes will impact us and our shareholders in various ways, some of which are adverse or potentially adverse compared to prior law. To date, the IRS has issued only limited guidance with respect to certain of the new provisions, and there are numerous interpretive issues that will require guidance. It is highly likely that technical corrections legislation will be needed to clarify certain aspects of the new law and give proper effect to Congressional intent. There can be no assurance, however, that technical clarifications or changes needed to prevent unintended or unforeseen tax consequences will be enacted by Congress in the near future. In addition, while certain elements of tax reform legislation would not impact us directly as a REIT, they could impact the geographic markets in which we operate, the tenants that populate our shopping centers and the customers who frequent our properties in ways, both positive and negative, that are difficult to anticipate. Other legislative proposals could be enacted in the future that could affect REITs and their shareholders. Prospective investors are urged to consult their tax advisors regarding the effect of H.R. 1 and any other potential tax law changes on an investment in 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 law that prevents 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 shareholders. Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments. In order to qualify as a REIT, at least 75% of the value of our assets must consist of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities, securities of TRSs and qualified real estate assets) cannot include more than 10% of the voting securities or 10% of the value of all securities, of any one issuer. In addition, in general, no more than 5% of the total value of our assets (other than government securities, securities of TRSs and qualified real estate assets) can consist of securities of any one issuer, and no more than 20% of the total value of our assets can be represented by one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. 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 that 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. F-26 15 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Cyan ] 24 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT Our ownership of and relationship with our TRSs 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 20% 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. Our TRSs will pay federal, state and local income tax on their taxable income, and their 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 20% limitation discussed above or to avoid application of the 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 remain qualified 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 Internal Revenue Service 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 TRSs, or through entities that are disregarded for federal income tax purposes as entities separate from our TRSs, 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 shareholders. Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations. The maximum federal income tax rate applicable to “qualified dividend income” payable by non-REIT corporations to certain non-corporate U.S. stockholders is generally 20% and a 3.8% Medicare tax may also apply. Dividends paid by REITs, however, generally are not eligible for the reduced rates applicable to qualified dividend income. Commencing with taxable years beginning on or after January 1, 2018 and continuing through 2025, H.R. 1 temporarily reduces the effective tax rate on ordinary REIT dividends (i.e., dividends other than capital gain dividends and dividends attributable to certain qualified dividend income received by us) for U.S. holders of our common stock that are individuals, estates or trusts by permitting such holders to claim a deduction in determining their taxable income equal to 20% of any such dividends they receive. Taking into account H.R. 1’s reduction in the maximum individual federal income tax rate from 39.6% to 37%, this results in a maximum effective rate of regular income tax on ordinary REIT dividends of 29.6% through 2025 (as compared to the 20% maximum federal income tax rate applicable to qualified dividend income received from a non-REIT corporation). The more favorable rates applicable to regular corporate distributions could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay distributions. This could materially and adversely affect the value of the stock of REITs, including our common stock. 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Cyan ] 24 Page Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities. The REIT provisions of the 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 2015. 16 F-25 3 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 The table below presents a gross presentation of the effects of offsetting and a net presentation of the Company’s derivatives as of December 31, 2017 and December 31, 2016. The gross amounts of derivative assets or liabilities can be reconciled to the Tabular Disclosure of Fair Values of Derivative Instruments above, which also provides the location that derivative assets and liabilities are presented on the consolidated balance sheets (in thousands): Gross Amounts Not Offset in the Statement of Financial Position Gross Amounts Assets presented Net Amounts of Gross Amounts of Recognized Offset in the Statement of Assets Financial Position in the statement of Financial Position Financial Instruments Cash Collateral Received Net Amount Derivatives $ 1,592 $ - $ 1,592 $ (42) $ - $ 1,550 Gross Amounts Not Offset in the Statement of Financial Position Gross Amounts Liabilities Net Amounts of Gross Amounts of Recognized Offset in the Statement of presented in the statement of Liabilities Financial Position Financial Position Financial Instruments Cash Collateral Received Net Amount Derivatives $ 242 $ - $ 242 $ (42) $ - $ 200 Gross Amounts Not Offset in the Statement of Financial Position Gross Amounts Assets presented Net Amounts of Gross Amounts of Recognized Offset in the Statement of Assets Financial Position in the statement of Financial Position Financial Instruments Cash Collateral Received Net Amount Derivatives $ 1,409 $ - $ 1,409 $ (50) $ - $ 1,359 Offsetting of Derivative Assets As of December 31, 2017 Offsetting of Derivative Liabilities As of December 31, 2017 Offsetting of Derivative Assets As of December 31, 2016 Offsetting of Derivative Liabilities As of December 31, 2016 Gross Amounts Not Offset in the Statement of Financial Position Gross Amounts Liabilities Net Amounts of Gross Amounts of Recognized Offset in the Statement of presented in the statement of Liabilities Financial Position Financial Position Financial Instruments Cash Collateral Received Net Amount Derivatives $ 1,994 $ - $ 1,994 $ (50) $ - $ 1,944 Note 9 – Discontinued Operations There were no properties classified as discontinued operations for the years ended December 31, 2017, 2016 and Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 Number of Instruments Notional December 31, December 31, December 31, December 31, 2017 2016 Interest Rate Derivatives Interest Rate Swap 2017 5 2016 5 $ 184,304 $ 185,044 The table below presents the estimated fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance sheets (in thousands). Interest Rate Swaps $ 1,592 $ 1,409 Asset Derivatives December 31, 2017 Fair Value December 31, 2016 Fair Value Liability Derivatives December 31, 2017 Fair Value December 31, 2016 Fair Value Derivatives designated as cash flow hedges: Derivatives designated as cash flow hedges: thousands). Interest Rate Swaps $ 242 $ 1,994 The table below presents the effect of the Company’s derivative financial instruments in the consolidated statements of operations and other comprehensive loss for the years ended December 31, 2017 and 2016 (in Derivatives in Cash Flow Hedging Relationships in OCI on Derivative (Effective Portion) (Effective Portion) (Effective Portion) Amount of Income/(Loss) Recognized into Income from Accumulated OCI into Expense Location of Income/(Loss) Reclassifed from Accumulated OCI Twelve months ended December 31 2017 2016 2017 2016 Interest rate swaps $ 1,935 $ 2,618 Interest Expense (1,495) $ The Company does not use derivative instruments for trading or other speculative purposes and did not have any other derivative instruments or hedging activities as of December 31, 2017. Credit-risk-related Contingent Features The Company has agreements with two of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. As of December 31, 2017, the fair value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $0.2 million. As of December 31, 2017, the Company has not posted any collateral related to these net liability positions. If the Company had breached any of these provisions as of December 31, 2017, it could have been required to settle its obligations under the agreements at their termination value of $0.2 million. Although the derivative contracts are subject to master netting arrangements, which serve as credit mitigants to both us and our counterparties under certain situations, we do not net our derivative fair values or any existing rights or obligations to cash collateral on the consolidated balance sheets. F-24 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 There are no unresolved staff comments. Item 2: Properties As of December 31, 2017, our portfolio consisted of 436 properties located in 43 states and totaling approximately 8.7 million square feet of gross leasable area. Our portfolio included 433 net lease properties, which contributed approximately 98.5% of annualized base rent, and three community shopping centers, which generated the remaining 1.5% of annualized base rent. As of December 31, 2017, our portfolio was approximately 99.7% leased and had a weighted average remaining lease term of approximately 10.2 years. A significant majority of our properties are leased to national tenants and approximately 43.9% of our annualized base rent was derived from tenants, or parents thereof, with an investment grade credit rating. Substantially all of our tenants are subject to net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, our tenants are typically subject to future rent increases based on fixed amounts or increases in the consumer price index and many leases provide for additional rent calculated as a percentage of the tenants’ gross sales above a specified level. Property Type Summary The following table presents certain information about our properties as of December 31, 2017: Property Type Retail Net Lease Retail Net Lease (ground leases) Total Retail Net Lease Community Shopping Centers Total Portfolio Number of % of Ann. Annualized Properties Base Rent (1) Base Rent 90.6% 7.9% 98.5% 1.5% 100.0% $108,066 9,403 $117,469 1,740 $119,209 392 41 433 3 436 % Investment Grade Rated (2) 40.6% 84.8% 44.2% 28.3% 43.9% Remaining Wtd. Avg. Lease Term 10.2 yrs 11.9 yrs 10.3 yrs 4.9 yrs 10.2 yrs Annualized base rent is in thousands. (1) Represents annualized straight-line rent as of December 31, 2017. (2) Reflects tenants, or parent entities thereof, w ith investment grade credit ratings from Standard & Poors, Moody's, Fitch and/or NAIC. 17 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Cyan ] 24 Page 3 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] 3 ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Tenant Diversification The following table presents annualized base rents for all tenants that generated 1.5% or greater of our total annualized base rent as of December 31, 2017: ($ in thousands) Tenant / Concept Walgreens Walmart LA Fitness Lowe's TJX Companies CVS Wawa Mister Car Wash Smart & Final Dollar General PetSmart Tractor Supply Hobby Lobby Michaels Dave & Buster's Academy Sports Dollar Tree AutoZone Rite Aid Other(2) Total Annualized Base Rent (1) 9,215 $ 4,224 4,224 4,215 3,652 3,004 2,664 2,580 2,475 2,415 2,234 2,179 2,176 2,072 2,058 1,982 1,939 1,909 1,886 62,106 119,209 $ % of Ann. Base Rent 7.7% 3.5% 3.5% 3.5% 3.1% 2.5% 2.2% 2.2% 2.1% 2.0% 1.9% 1.8% 1.8% 1.7% 1.7% 1.7% 1.6% 1.6% 1.6% 52.3% 100.0% (1) Represents annualized straight-line rent as of December 31, 2017. (2) Includes tenants generating less than 1.5% of annualized base rent. Significant Tenants Walgreens Co. (“Walgreens”) operates the second largest drugstore chain in the United States and trades, through its holding company Walgreens Boot Alliance, Inc.(“WBA”), on the Nasdaq stock exchange under the symbol “WBA.” For its fiscal year ended August 31, 2017, Walgreens reported total assets of approximately $66.0 billion, annual net sales of $118.2 billion, annual net income of $4.1 billion and shareholders’ equity of $28.3 billion. As of August 31, 2017, Walgreens operated 8,100 locations in 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. On June 28, 2017, WBA entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Rite Aid Corporation (“Rite Aid”), pursuant to which WBA agreed, subject to the terms and conditions thereof, to acquire 2,186 stores, three distribution centers and related inventory from Rite Aid. On September 19, 2017, WBA announced it had secured regulatory clearance for an amended and restated asset purchase agreement (the “Amended and Restated Asset Purchase Agreement”) to purchase 1,932 stores, three distribution centers and related inventory from Rite Aid for $4.4 billion in cash and other consideration. Ownership of stores is expected to be transferred in phases, with the goal being to complete the store transfers in spring 2018. These transfers remain subject to closing conditions as set forth in the Amended and Restated Asset Purchase Agreement. The information set forth above was derived from the Annual Report on Form 10-K filed by Walgreens and WBA with respect to WBA’s 2017 fiscal year. Additional information regarding Walgreens and Walgreens Boots Alliance, Inc. can be found in their 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. Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements and add stability to interest expense. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreement without exchange of the underlying notional amount. In April 2012, the Company entered into an amortizing forward-starting interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $22.3 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.92%. This swap effectively converted $22.3 million of variable-rate borrowings to fixed-rate borrowings from July 1, 2013 to May 1, 2019. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.0 million. In December 2012, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $25.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 0.89%. The notional amount as of December 31, 2017 is $19.3 million. This swap effectively converted $25.0 million of variable-rate borrowings to fixed-rate borrowings from December 6, 2012 to April 4, 2018. As of December 31, 2017, this interest rate swap was valued as an asset of approximately $0.0 million. In September 2013, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.20%. This swap effectively converted $35.0 million of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.2 million. In July 2014, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.09%. This swap effectively converted $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.1 million. In September 2016, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $40.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.40%. This swap effectively converted $40.0 million of variable-rate borrowings to fixed-rate borrowings from August 1, 2016 to July 1, 2023. As of December 31, 2017, this interest rate swap was valued as an asset of approximately $1.5 million. Companies are required to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. The Company has designated these derivative instruments as cash flow hedges. As such, the effective portion of changes in the fair value of the derivatives designated, and that qualify as cash flow hedges, is recorded as a component of Other Comprehensive Income (Loss). The ineffective portion of the change in fair value of the derivative instrument is recognized directly in interest expense. For the years ended December 31, 2017 and 2016, the Company has not recorded any hedge ineffectiveness in earnings. Amounts in Accumulated Other Comprehensive Income (Loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $0.2 million will be reclassified as an increase to interest expense. The Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands, except number of instruments): 18 F-23 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Cyan ] 24 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Cyan Agree Realty Corporation Note 6 – Dividends and Distribution Payable Notes to Consolidated Financial Statements December 31, 2017 The Company declared dividends of $2.025, $1.920 and $1.845 per share during the years ended December 31, 2017, 2016 and 2015; the dividends have been reflected for federal income tax purposes as follows: Tenant Sector Diversification The following table presents annualized base rents for all sectors that generated 2.5% or greater of our total annualized base rents as of December 31, 2017: For the Year Ended December 31, 2017 2016 2015 Ordinary Income Return of Capital $ 1.695 $ 1.557 $ 1.519 0.330 0.363 0.326 Total $ 2.025 $ 1.920 $ 1.845 On December 5, 2017, the Company declared a dividend of $0.520 per share for the quarter ended December 31, 2017. The holders Operating Partnership Units were entitled to an equal distribution per Operating Partnership Unit held as of December 20, 2017. The dividends and distributions payable are recorded as liabilities in the Company's consolidated balance sheet at December 31, 2017. The dividend has been reflected as a reduction of stockholders' equity and the distribution has been reflected as a reduction of the limited partners' non-controlling interest. These amounts were paid on January 3, 2018. Note 7 – Income Taxes (not presented in thousands) The Company is subject to the provisions of Financial Accounting Standards Board Accounting Standard Codification 740-10 (“FASB ASC 740-10”) 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. The Company’s Federal income tax returns are open for examination by taxing authorities for all tax years after December 31, 2014. The Company has elected to record related interest and penalties, if any, as income tax expense on the consolidated statements of operations and comprehensive 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, 2017 and 2016, the Company had accrued a deferred income tax liability in the amount of $475,000 and $705,000, respectively. 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 was accrued within the TRS entities described above. During the years ended December 31, 2017 and 2016, the Company recognized total federal and state tax expense of approximately $227,000 and $157,000, respectively, which are included in general and administrative expenses in the consolidated statements of operations and comprehensive income. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect 2017, including but not limited to reducing the U.S. federal corporate rate from 35 percent to 21 percent. In connection with our initial analysis of the impact of the Tax Act, we have recorded a discrete net tax benefit related to one of the Company’s TRS entities reducing the deferred income tax liability by $230,000 in the period ending December 31, 2017. This is included in general and administrative expenses in the consolidated statements of operations and comprehensive income. Note 8 – Derivative Instruments and Hedging Activity The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risk, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and, to a limited extent, the use of derivative instruments. For additional information regarding the leveling of our derivatives, (refer to Note 10 – Fair Value Measurements.) F-22 ($ in thousands) Tenant Sector Pharmacy Grocery Stores Health & Fitness Tire & Auto Service Off-Price Retail Restaurants - Quick Service Home Improvement Convenience Stores General Merchandise Crafts and Novelties Auto Parts Specialty Retail Warehouse Clubs Farm and Rural Supply Sporting Goods Dollar Stores Home Furnishings Health Services Other(2) Total Annualized Base Rent (1) $14,694 9,136 6,938 6,534 6,405 6,120 5,551 5,298 4,643 4,539 4,370 4,261 3,749 3,361 3,171 3,145 3,120 3,066 21,108 $119,209 % of Ann. Base Rent 12.3% 7.7% 5.8% 5.5% 5.4% 5.1% 4.7% 4.4% 3.9% 3.8% 3.7% 3.6% 3.1% 2.8% 2.7% 2.6% 2.6% 2.6% 17.7% 100.0% (1) Represents annualized straight-line rent as of December 31, 2017. (2) Includes sectors generating less than 2.5% of annualized base rent. 19 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] 3 ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 3 ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Cyan Geographic Diversification The following table presents annualized base rents, by state, for our portfolio as of December 31, 2017: The following table presents scheduled principal payments related to our debt as of December 31, 2017 (in Notes to Consolidated Financial Statements December 31, 2017 ($ in thousands) Tenant Sector Michigan Texas Florida Illinois Ohio Pennsylvania New Jersey Louisiana California Kentucky Missouri Mississippi Wisconsin Georgia Kansas North Carolina Colorado Indiana Tennessee Alabama South Carolina Virginia Minnesota Utah Oregon New York North Dakota Oklahoma Arizona New Mexico Iowa Delaware Arkansas Maine Connecticut West Virginia Nevada Washington Maryland South Dakota Montana New Hampshire Nebraska Total Annualized Base Rent (1) $14,394 10,112 8,839 8,190 6,816 4,646 4,352 3,853 3,697 3,640 3,387 3,283 3,258 3,204 2,979 2,591 2,571 2,366 2,149 2,087 2,031 1,990 1,794 1,709 1,569 1,551 1,455 1,320 1,276 1,098 1,045 1,010 991 792 585 529 487 413 388 326 249 107 80 $119,209 % of Ann. Base Rent 12.1% 8.5% 7.4% 6.9% 5.7% 3.9% 3.7% 3.2% 3.1% 3.1% 2.8% 2.8% 2.7% 2.7% 2.5% 2.2% 2.2% 2.0% 1.8% 1.7% 1.7% 1.7% 1.5% 1.4% 1.3% 1.3% 1.2% 1.1% 1.1% 0.9% 0.9% 0.8% 0.8% 0.7% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.2% 0.1% 0.1% 100% (1) Represents annualized straight-line rent as of December 31, 2017. 20 F-21 Agree Realty Corporation Debt Maturities thousands): 2018 2019 2020 2021 (1) 2022 Thereafter Total Scheduled Principal Balloon Payment $ 3,336 $ 25,000 $ 28,336 2,751 1,092 998 1,060 3,687 40,044 2,775 14,000 - 427,656 Total 42,795 3,867 14,998 1,060 431,343 $ 12,924 $ 509,475 $ 522,399 (1) The balloon payment balance includes the balance outstanding under the Credit Facility as of December 31, 2017. The Credit Facility matures in January 2021, with options to extend the maturity for one year at the Company’s election, subject to certain conditions. Note 5 – Common Stock In April 2017, the Company entered into a new $200.0 million at-the-market equity program (“ATM program”) through which the Company may, from time to time, sell shares of common stock. The Company uses the proceeds generated from its ATM program for general corporate purposes, including funding our investment activity, the repayment or refinancing of outstanding indebtedness, working capital and other general purposes. During the year ended December 31, 2017, the Company issued 2,368,359 shares of common stock under its ATM program at an average price of $49.17, realizing gross proceeds of approximately $116.5 million. The Company had approximately $83.5 million remaining under the ATM program as of December 31, 2017. In May 2017, the Company filed an automatic shelf registration statement on Form S-3, registering an unspecified amount at an indeterminant aggregate initial offering price of common stock, preferred stock, depositary shares and warrants. The Company may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. In June 2017, the Company completed a follow-on underwritten offering of 2,415,000 shares of common stock. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $108.0 million, after deducting the underwriting discount. The proceeds from the offering were used to repay borrowings under our revolving credit facility to fund property acquisitions and for general corporate purposes. In October 2016, under a previously filed shelf registration, the Company completed a follow-on underwritten offering of 2,087,250 shares of common stock. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $95.0 million after deducting the underwriting discount. The proceeds from the offering were used to repay borrowings under our revolving credit facility to fund property acquisitions and for general corporate purposes. In May 2016, under a previously filed shelf registration, the Company completed a follow-on underwritten offering of 2,875,000 shares of common stock. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $109.6 million after deducting the underwriting discount. The proceeds from the offering were used to repay borrowings under our revolving credit facility to fund property acquisitions and for general corporate purposes.  ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Cyan Lease Expirations The following table presents contractual lease expirations within the Company’s portfolio as of December 31, 2017, assuming that no tenants exercise renewal options: Gross Leasable Area % of Total ($ and GLA in thousands) Annualized Base Rent (1) Year 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Thereafter Total Number of Leases 9 12 18 29 24 39 38 38 47 38 206 498 $ Dollars 1,130 2,681 3,206 5,905 4,284 6,804 11,037 8,915 7,155 9,716 58,376 $119,209 % of Total 0.9% 2.2% 2.7% 5.0% 3.6% 5.7% 9.3% 7.5% 6.0% 8.2% 48.9% 100.0% Square Feet 255 138 237 375 394 659 1,069 626 682 814 3,414 8,663 2.9% 1.6% 2.7% 4.3% 4.6% 7.6% 12.3% 7.2% 7.9% 9.4% 39.5% 100.0% Community Shopping Centers Our three community shopping centers range in size from 20,000 to 241,458 square feet of GLA. The location and primary occupancy information with respect to the community shopping centers as of December 31, 2017 are set forth below: ($ and GLA in thousands) Property Capital Plaza Location Frankfort, KY Year Completed / Renovated 1978 / 2006 Central Michigan Commons Mt. Pleasant, MI 1973 / 1997 West Frankfort Plaza West Frankfort, IL 1982 / N/A Totals (1) Represents annualized straight-line rent as of December 31, 2017. (2) Calculated as total annualized base rent divided by leased GLA. (3) Only the tenant has the option to extend a lease beyond the initial term. Item 3: Legal Proceedings Gross Leasable Area (Sq. Ft.) 116 241 20 377 Annualized Base Rent (1) $634 Annualized Base Rent per Sq. Ft (2) $5.46 Percent Leased at December 31, 2017 100% $1,015 $4.63 91% Anchor Tenants (Lease Expiration / Option Expiration) (3) Kmart (2018 / 2053) Walgreens (2032 / 2052) Kmart (2018 / 2048) JC Penney (2020 / 2035) Staples (2020 / 2030) $91 $6.53 $1,740 $4.62 70% 93% 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. F-20 21 ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation 2019 Term Loan 2023 Term Loan 2024 Term Loans Total Principal Notes to Consolidated Financial Statements December 31, 2017 December 31, 2017 December 31, 2016 $ 19,304 $ 20,044 40,000 100,000 159,304 (1,133) 40,000 100,000 160,044 (1,365) Unamortized debt issuance costs Total $ 158,171 $ 158,679 3 The amended and restated credit agreement, described below, extended the maturity dates of the $65.0 million unsecured term loan facility and $35.0 million unsecured term loan facility (together, the “2024 Term Loan Facilities”) to January 2024. In connection with entering into the amended and restated credit agreement, the prior notes evidencing the existing $65.0 million unsecured term loan facility and $35.0 million unsecured term loan facility were canceled and new notes evidencing the 2024 Term Loan Facilities were executed. Borrowings under the unsecured 2024 Term Loan Facilities bear interest at a variable LIBOR plus 165 to 235 basis points, depending on the Company's leverage ratio. The Company utilized existing interest rate swaps to effectively fix the LIBOR rate (refer to Note 8 – Derivative Instruments and Hedging Activity). In July 2016, the Company completed a $40.0 million unsecured term loan facility that matures July 2023 (the “2023 Term Loan”). Borrowings under the 2023 Term Loan are priced at LIBOR plus 165 to 225 basis points, depending on the Company’s leverage. The Company entered into an interest rate swap to fix LIBOR at 140 basis points until maturity. As of December 31, 2017, $40.0 million was outstanding under the 2023 Term Loan, which was subject to an all-in interest rate of 3.05%. In August 2016, the Company entered into a $20.3 million unsecured amortizing term loan that matures May 2019 (the “2019 Term Loan”). Borrowings under the 2019 Term Loan are priced at LIBOR plus 170 basis points. In order to fix LIBOR on the 2019 Term Loan at 1.92% until maturity, the Company had an interest rate swap agreement in place, which was assigned by the lender under the Mortgage Note to the 2019 Term Loan lender. As of December 31, 2017, $19.3 million was outstanding under the 2019 Term Loan bearing an all-in interest rate of 3.62%. Senior Unsecured Revolving Credit Facility In December 2016, the Company amended and restated the credit agreement that governs the Company's senior unsecured revolving credit facility and the Company's unsecured term loan facility to increase the aggregate borrowing capacity to $350.0 million. The agreement provides for a $250.0 million unsecured revolving credit facility, a $65.0 million unsecured term loan facility and a $35.0 million unsecured term loan facility (Referenced above as 2024 Term Loan Facilities). The unsecured revolving credit facility matures January 2021 with options to extend the maturity date to January 2022. The 2024 Term Loan Facilities mature January 2024. The Company has the ability to increase the aggregate borrowing capacity under the credit agreement up to $500.0 million, subject to lender approval. Borrowings under the revolving credit facility bear interest at LIBOR plus 130 to 195 basis points, depending on the Company’s leverage ratio. Additionally, the Company is required to pay an unused commitment fee at an annual rate of 15 or 25 basis points of the unused portion of the revolving credit facility, depending on the amount of borrowings outstanding. The credit agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a maximum percentage of secured debt to total asset value. As of December 31, 2017 and December 31, 2016, the Company had $14.0 million of outstanding borrowings under the revolving credit facility, respectively, bearing weighted average interest rates of approximately 2.6% and 1.9%, respectively. As of December 31, 2017, $236.0 million was available for borrowing under the revolving credit facility and the Company was in compliance with the credit agreement covenants. Concurrent with the amendment and restatement of the Company’s senior unsecured revolving credit facility, conforming changes were made to the 2023 Term Loan and 2019 Term Loan. DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] 3 Item 4: Mine Safety Disclosures Not applicable. 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 NYSE under the symbol “ADC.” The following table sets forth the high and low closing prices of our common stock, as reported on the NYSE, 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, 2017 June 30, 2017 September 30, 2017 December 31, 2017 March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 High $50.74 $51.10 $51.02 $52.69 $39.01 $48.24 $50.80 $49.25 Low $45.23 $44.83 $45.62 $47.12 $32.49 $38.26 $46.02 $42.44 Dividends per share declared $0.495 $0.505 $0.505 $0.520 $0.465 $0.480 $0.480 $0.495 As of February 20, 2018, the reported closing sale price per share of our common stock on the NYSE was $45.83. At February 20, 2018, there were 30,992,597 shares of our common stock issued and outstanding which were held by approximately 132 shareholders of record. The number of shareholders of record does not reflect persons or entities that held their shares in nominee or “street” name. In addition, at February 20, 2018 there were 347,619 outstanding OP Units 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 2017, we declared $2.025 per share of common stock in dividends. Of the $2.025, 85.1% represented ordinary income, and 14.9% represented return of capital, for tax purposes. For 2016, we declared $1.92 per share of common stock in dividends. Of the $1.92, 81.0% represented ordinary income, and 19.0% represented return of capital, for tax purposes. We intend to continue to declare quarterly dividends. However, our distributions are determined by our board of directors and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Code and such other factors as the 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 shareholders, as well as meet certain other 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 shareholders of record on a specified date during such period and paid during January of the following year. Such distributions are treated for REIT tax purposes as paid by us and received by our shareholders 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. For information about our equity compensation plan, please see “Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K. Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 or grossly negligent conduct by the borrower that harms the property or results in a loss to the lender, filing of a bankruptcy petition by the borrower, either directly or indirectly, and certain environmental liabilities. At December 31, 2017, there were no mortgage loans with partial recourse to us. We have entered into mortgage loans which are secured by multiple properties and contain cross-default and cross-collateralization provisions. Cross-collateralization provisions allow a lender to foreclose on multiple properties in the event that we default under the loan. Cross-default provisions allow a lender to foreclose on the related property in the event a default is declared under another loan. The Company was in compliance with covenant terms for all mortgages payable at December 31, 2017. Senior Unsecured Notes December 31, 2017, and 2016 (in thousands): The following table presents the Senior Unsecured Notes balance net of unamortized debt issuance costs as of December 31, 2017 December 31, 2016 2025 Senior Unsecured Notes $ 2027 Senior Unsecured Notes 2028 Senior Unsecured Notes 2029 Senior Unsecured Notes Total Principal Unamortized debt issuance costs Total $ $ 50,000 50,000 60,000 100,000 260,000 (878) 259,122 $ 50,000 50,000 60,000 - 160,000 (824) 159,176 In May 2015, the Company completed a private placement of $100.0 million principal amount of senior unsecured notes. The senior unsecured notes were sold in two series; $50.0 million of 4.16% notes due May 2025 and $50.0 million of 4.26% notes due May 2027. The weighted average term of the senior unsecured notes is 11 years and the weighted average interest rate is 4.21%. In July 2016, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $60.0 million aggregate principal amount of our 4.42% senior unsecured notes due July 2028. The senior unsecured notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act. In August 2017, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $100.0 million aggregate principal amount of our 4.19% senior unsecured notes due September 2029. The senior unsecured notes are guaranteed by the Company. The closing of the private placement was consummated in September 2017; and, on that date, the Operating Partnership issued the senior unsecured notes. The senior unsecured notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act. Unsecured Term Loan Facilities December 31, 2017 and 2016 (in thousands): The following table presents the Unsecured Term Loans balance net of unamortized debt issuance costs as of 22 F-19  ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Cyan ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Mortgage Notes Payable Notes to Consolidated Financial Statements December 31, 2017 As of December 31, 2017, the Company had total gross mortgage indebtedness of $89.1 million which was collateralized by related real estate and tenants’ leases with an aggregate net book value of $142.1 million. Including mortgages that have been swapped to a fixed interest rate, the weighted average interest rate on the Company’s mortgage notes payable was 3.74% as of December 31, 2017 and 3.97% as of December 31, 2016. In December 2017, the Company assumed an interest only mortgage note for $21.5 million with PNC Bank, National Association in connection with an acquisition. The mortgage note is due October 2019, secured by a multi-tenant property and has a fixed interest rate of 3.32%. 3 Mortgages payable consisted of the following: (not presented in thousands) Note payable in monthly installments of interest only at 2.49% with a balloon payment due April 4, 2018 LIBOR plus 160 basis points, swapped to a fixed rate of $ 25,000 $ 25,000 December 31, 2017 December 31, 2016 (in thousands) Note payable in monthly installments of interest only at 3.32% per annum, with a balloon payment due October 2019 21,500 - Note payable in monthly installments of $153,838, including interest at 6.90% per annum, with the final monthly payment due January 2020 Note payable in monthly installments of $23,004, including interest at 6.24% per annum, with a balloon payment of $2,781,819 due February 2020 Note payable in monthly installments of interest only at 3.60% per annum, with a balloon payment due January 1, 2023 Note payable in monthly installments of $35,673, including interest at 5.01% per annum, with a balloon payment of $4,034,627 due September 2023 Note payable in monthly installments of $91,675 including interest at 6.27% per annum, with a final monthly payment due July 2026 Total principal Total Unamortized debt issuance costs 3,573 5,114 2,963 3,049 23,640 23,640 5,131 5,294 7,288 7,910 89,095 (825) 70,007 (940) $ 88,270 $ 69,067 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 the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on 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, 2013 through 2017 and operating data for each of the periods presented were derived from our audited financial statements. (in thousands, except per share information and number of properties) 2017 Year Ended December 31, 2015 2016 2014 2013 Operating Data Total revenues Expenses Property costs (1) General and administrative Interest Depreciation and amortization Impairments Total Expenses Income From Operations Gain (loss) on extinguishment of debt Gain (loss) on sale of assets Income From Continuing Operations Gain on sale of asset from discontinued operations Income (loss) from discontinued operations Net income Less net income attributable to non-controlling interest Net income attributable to Agree Realty Corporation Share Data Weighted average common shares - diluted Net income per share - diluted Cash dividends per share Balance Sheet Data Real Estate (before accumulated depreciation) Total Assets Total Debt, including accrued interest Other Data Number of Properties Gross Leasable Area (Sq. Ft.) Percentage Leased $ 116,902 $ 91,527 $ 69,966 $ 53,559 $ 43,518 12,467 9,949 18,137 31,752 - 72,305 44,597 - 14,193 58,790 - - 58,790 678 $ 58,112 27,700 $ 2.08 $ 2.03 $1,299,255 $1,497,041 $ 525,811 436 8,663 100% 8,596 8,015 15,343 23,407 - 55,361 36,166 (333) 9,964 45,797 - - 45,797 679 $ 45,118 22,960 $ 1.95 $ 1.92 $1,019,957 $1,141,972 $ 406,261 366 7,033 100% 6,379 6,988 12,305 16,486 - 42,158 27,808 (181) 12,135 39,762 - - 39,762 744 $ 39,018 18,065 $ 2.15 $ 1.85 $ 755,849 $ 807,042 $ 320,547 278 5,207 99% 4,916 6,629 8,587 11,103 3,020 34,255 19,304 - (528) 18,776 123 14 18,913 425 $ 18,488 14,967 $ 1.22 $ 1.74 $ 589,147 $ 606,415 $ 222,483 209 4,315 99% 3,656 5,952 6,475 8,489 - 24,572 18,946 - - 18,946 946 298 20,190 515 $ 19,675 13,158 $ 1.47 $ 1.64 $ 471,366 $ 471,327 $ 158,869 130 3,662 98% (1) Property costs include real estate taxes, insurance, maintenance and land lease expense. The mortgage loans encumbering our properties are generally non-recourse, subject to certain exceptions for which we would be liable for any resulting losses incurred by the lender. These exceptions vary from loan to loan, but generally include fraud or material misrepresentations, misstatements or omissions by the borrower, intentional F-18 23 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] 3 Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements, and related notes thereto, included elsewhere in this Annual Report on Form 10-K and the “-Special Note Regarding Forward-Looking Statements” in “Item 1A – Risk Factors” above. Overview We are a fully integrated REIT primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. We were founded in 1971 by our current Executive Chairman, Richard Agree, and our common stock was listed on the NYSE in 1994. 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 98.8% interest as of December 31, 2017. As of December 31, 2017, our portfolio consisted of 436 properties located in 43 states and totaling approximately 8.7 million square feet of gross leasable area. As of December 31, 2017, our portfolio was approximately 99.7% leased and had a weighted average remaining lease term of approximately 10.2 years. Substantially all of our tenants are subject to net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 1994. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes and we intend to continue operating in such a manner. Recent Accounting Pronouncements In August 2017, the Financial Accounting Standards Board (”FASB”) issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). The objective of ASU 2017-12 is to expand hedge accounting for both financial (interest rate) and commodity risks, and create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. ASU 2017-12 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company is in the process of determining the impact that the implementation of ASU 2017-12 will have on the Company’s financial statements. In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). The objective of ASU 2017-09 is to provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. ASU 2017-09 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company has evaluated the impact that ASU 2017-09 will have on the Company’s financial statements, and concluded the implementation of ASU 2017-09 has no material impact on the financial statements. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations: Clarifying the Definition of a Business” (“ASU 2017-01”). The objective of ASU 2017-01 is to clarify the definition of a business by adding guidance on how entities should evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company has early adopted and the guidance has no material impact on the Company’s financial statements. In February 2016, the FASB issued ASU No. 2016-02 “Leases” (“ASU 2016-02”). The new standard creates Topic 842, Leases, in FASB Accounting Standards Codification (FASB ASC) and supersedes FASB ASC 840, Leases. ASU 2016-02 requires a lessee to recognize the assets and liabilities that arise from leases (operating and finance). However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The main difference between the existing guidance on accounting for leases and the new standard is that operating leases will now be recorded in the statement of financial position as assets and liabilities. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. ASU 2016-02 is expected 24 Agree Realty Corporation Developments Notes to Consolidated Financial Statements December 31, 2017 During the fourth quarter of 2017, construction continued or commenced on seven development and Partner Capital Solutions (“PCS”) projects with anticipated total project costs of approximately $41.3 million. The projects consist of the Company’s first PCS project with Art Van Furniture in Canton, Michigan; four development projects with Mister Car Wash; one Burger King development in North Ridgeville, Ohio; and the Company’s third project with Camping World in Grand Rapids, Michigan. During the twelve months ended December 31, 2017, the Company had 11 development or PCS projects completed or under construction. Anticipated total costs for those projects are approximately $62.7 million and include the following completed or commenced projects: Tenant Camping World Burger King(1) Camping World Orchard Supply Mister Car Wash Mister Car Wash Art Van Furniture Burger King(2) Camping World Mister Car Wash Mister Car Wash Notes: Dispositions Impairments Note 4 – Debt Actual or Anticipated Rent Commencement Location Lease Structure Tyler, TX Heber, UT Georgetown, KY Boynton Beach, FL Urbandale, IA Bernalillo, NM Canton, MI North Ridgeville, OH Grand Rapids, MI Orlando, FL Tavares, FL Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Lease Term 20 Years 20 Years 20 Years 15 Years 20 years 20 years 20 years 20 years 20 years 20 years 20 years Q1 2017 Q1 2017 Q2 2017 Q3 2017 Q1 2018 Q1 2018 Q1 2018 Q1 2018 Q2 2018 Q3 2018 Q3 2018 Status Completed Completed Completed Completed Under Construction Under Construction Under Construction Under Construction Under Construction Under Construction Under Construction (cid:11)(cid:20)(cid:12)(cid:3)(cid:41)(cid:85)(cid:68)(cid:81)(cid:70)(cid:75)(cid:76)(cid:86)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:68)(cid:88)(cid:85)(cid:68)(cid:81)(cid:87)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:48)(cid:72)(cid:85)(cid:76)(cid:71)(cid:76)(cid:68)(cid:81)(cid:3)(cid:53)(cid:72)(cid:86)(cid:87)(cid:68)(cid:88)(cid:85)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:56)(cid:81)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:72)(cid:71)(cid:15)(cid:3)(cid:47)(cid:17)(cid:38)(cid:17)(cid:3)(cid:0) (2) Franchise restaurant operated by TOMS King, LLC. During 2017, the Company sold real estate properties for net proceeds of $44.3 million and a recorded net gain of $14.2 million (net of any expected losses on real estate held for sale). During 2016, the Company sold real estate properties for net proceeds of $27.9 million and a recorded net gain of $10.0 million (net of any expected losses on real estate held for sale). During 2015, the Company sold real estate properties for net proceeds of $28.1 million and a recorded net gain of $12.1 million (net of any expected losses on real estate held for sale). As a result of our review of Real Estate Investments we did not recognize any real estate impairment charges for the years ended December 31, 2017, 2016 and 2015. In April 2015, FASB issued ASU 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the gross carrying amount of that debt liability, consistent with debt discounts. We adopted ASU 2015-03, effective March 31, 2016, and applied the guidance retrospectively to our Mortgage Notes Payable, Unsecured Term Loans and Senior Unsecured Notes for all periods presented. Unamortized debt issuance costs of approximately $2.8 million and $3.1 million are included as an offset to the respective debt balances as of December 31, 2017 and 2016, respectively (previously included in Unamortized Deferred Expenses on our Consolidated Balance Sheets). As of December 31, 2017, we had total indebtedness of $522.4 million, including (i) $89.1 million of mortgage notes payable; (ii) $159.3 million of unsecured term loans; (iii) $260.0 million of senior unsecured notes; and (iv) $14.0 million of borrowings under our Credit Facility. F-17 4 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the current lease terms. In addition, this table does not include amounts for potential variable rent increases that are based on the Consumer Price Index (“CPI”) or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales. Of these future minimum rents, approximately 6.5% of the total is attributable to Walgreens as of December 31, 2017. The loss of this tenant or the inability of them to pay rent could have an adverse effect on the Company’s business. Deferred Revenue As of December 31, 2017, and December 31, 2016, there was $1.8 million and $1.8 million, respectively, in deferred revenues resulting from rents paid in advance. In July 2004, the Company’s tenant in a joint venture property located in Boynton Beach, FL repaid $4.0 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 company holding the property. Total assets of the property were approximately $4.0 million. The Company has treated the $4.0 million as deferred revenue and accordingly, will recognize rental income over the term of the related leases. The remaining deferred revenue for the Boynton Beach, FL property was fully recognized in 2016. Land Lease Obligations The Company is subject to land lease agreements for certain of its properties. Land lease expense was $0.7 million, $0.7 million, and $0.6 million for the years ending December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, future annual lease commitments under these agreements are as follows (in thousands): For the Year Ending December 31, $ 641 634 632 588 505 7,342 $ 10,342 to impact the Company’s consolidated financial statements as the Company has certain operating land lease arrangements for which it is the lessee. GAAP requires only capital (finance) leases to be recognized in the statement of financial position, and amounts related to operating leases largely are reflected in the financial statements as rent expense on the income statement and in disclosures to the financial statements. ASU 2016-02 is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018. Early adoption is permitted. The Company has engaged a professional services firm to assist in the implementation of ASU 2016-02. The Company anticipates that its retail leases where it is the lessor will continue to be accounted for as operating leases under the new standard. Therefore, the Company does not currently anticipate significant changes in the accounting for its lease revenues. The Company is also the lessee under various land lease arrangements and it will be required to recognize right of use assets and related lease liabilities on its consolidated balance sheets upon adoption. The Company will continue to evaluate the impact of adopting the new leases standard on its consolidated statements of income and comprehensive income and consolidated balance sheets. In May 2014, with subsequent updates issued in August 2015 and March, April and May 2016, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The update’s core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Companies are to use a five-step contract review model to ensure revenue is recognized, measured and disclosed in accordance with this principle. Those steps include the following: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to each performance obligation in the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation. The Company has identified four main revenue streams of which three of them originate from lease contracts and will be subject to Leases ASU 2016-02, Topic 842 effective for annual reporting periods (including interim periods) beginning after December 15, 2018. The revenue streams are: Revenue Recognition (ASU 2014-09, Topic 610-20): (cid:120) Gain (loss) on sale of real estate properties Leases (ASU 2016-02, Topic 842): During 2017, the Company purchased 79 retail net lease assets for approximately $338.0 million, including acquisition and closing costs. These properties are located in 27 states and 100% leased to 49 different tenants operating in 22 unique retail sectors for a weighted average lease term of approximately 11.1 years. None of the Company’s investments during 2017 caused any new or existing tenant to comprise 10% or more of the Company’s total assets or generate 10% or more of the Company’s total annualized base rent at December 31, (cid:120) Rental revenues (cid:120) Straight line rents (cid:120) Tenant recoveries The aggregate 2017 acquisitions were allocated approximately $94.1 million to land, $172.0 million to buildings and improvements, and $71.9 million to lease intangibles and other assets. The acquisitions were substantially all cash purchases and there was no contingent consideration associated with these acquisitions. In one acquisition, the Company assumed debt of $21.5 million. During 2016, the Company purchased 82 retail net lease assets for approximately $295.6 million, including acquisition and closing costs. These properties are located in 27 states and 100% leased to 49 different tenants operating in 22 unique retail sectors for a weighted average lease term of approximately 10.7 years. None of the Company’s investments during 2016 caused any new or existing tenant to comprise 10% or more of the Company’s total assets or generate 10% or more of the Company’s total annualized base rent at December 31, The aggregate 2016 acquisitions were allocated approximately $84.3 million to land, $170.0 million to buildings and improvements, and $41.3 million to lease intangibles and other assets. The acquisitions were substantially all cash purchases and there was no contingent consideration associated with these acquisitions. F-16 As of January 1, 2018, the Company will be accounting for the sale of real estate properties under Subtopic 610- 20which provides for revenue recognition based on transfer of ownership. All properties were non-financial real estate assets and thus not businesses which were sold to non-customers with no performance obligations. During the year ended December 31, 2017, the Company sold real estate properties for net proceeds of $44.3 million, and a recorded net gain of $14.2 million. Management has concluded that all of the Company’s material revenue streams falls outside of the scope of this guidance and currently recognizes revenue from its contracts with customers at a point in time and does not anticipate any changes. The Company intends to implement the standard under the modified retrospective method and does not anticipate recording any cumulative effect recognized in retained earnings as of the date of adoption (January 1, 2018). Critical Accounting Policies Our accounting policies are determined in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that are subjective in nature and, as a result, our actual results could differ materially from our estimates. Set forth below are the more critical accounting policies that require management judgment and estimates in the preparation of our consolidated financial statements. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 to our consolidated financial statements. 25 2018 2019 2020 2021 2022 Total Thereafter Acquisitions 2017. 2016. 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT 4 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] Revenue Recognition We lease real estate to our tenants under long-term net leases which we account for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. Rental increases based upon changes in the consumer price indexes, or other variable factors, are recognized only after changes in such factors have occurred and are then applied according to the lease agreements. Certain leases also provide for additional rent based on tenants’ sales volumes. These rents are recognized when determinable by us after the tenant exceeds a sales breakpoint. Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses are generally included in operating costs reimbursement in the period when such expenses are recorded. Real Estate Investments We record the acquisition of real estate at cost, including acquisition and closing costs. For properties developed by us, all direct and indirect costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed. Accounting for Acquisitions of Real Estate The acquisition of property for investment purposes is typically accounted for as an asset acquisition. We allocate the purchase price to land, building and identified intangible assets and liabilities, based in each case on their relative estimated fair values and without giving rise to goodwill. Intangible assets and liabilities represent the value of in-place leases and above- or below-market leases. In making estimates of fair values, we may use a number of sources, including data provided by independent third parties, as well as information obtained by the Company as a result our due diligence, including expected future cash flows of the property and various characteristics of the markets where the property is located. Depreciation Our real estate portfolio is depreciated using the straight-line method over the estimated remaining useful life of the properties, which are generally 40 years for buildings and 10 to 20 years for improvements. Properties classified as “held for sale” and properties under development are not depreciated. Impairments We review our real estate investments periodically for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Events or circumstances that may occur include, but are not limited to, significant changes in real estate market conditions or our ability to re-lease or sell properties that are 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. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows and an impairment charge is recorded in the amount by which the carrying value of the asset exceeds its estimated fair value. Results of Operations Comparison of Year Ended December 31, 2017 to Year Ended December 31, 2016 Minimum rental income increased $21.1 million, or 25%, to $105.1 million in 2017, compared to $84.0 million in 2016. Approximately $22.4 million of the increase was due to the acquisition of 79 properties in 2017 and the full year impact of 82 properties acquired in 2016. Approximately $2.2 million of the increase was attributable to four development projects completed in 2017 and the full year impact of nine development projects completed in 2016. These increases were partially offset by approximately a $2.1 million reduction in minimum rental income from properties sold during 2017 that were owned for all or part of 2016. Percentage rents remained consistent with prior periods. The years ended December 31, 2017 and 2016 totaled $0.2 million. Operating cost reimbursements increased $3.5 million, or 48%, to $10.8 million in 2017, compared to $7.3 million in 2016. Operating cost reimbursements increased primarily due to higher levels of recoverable property operating expenses, including real estate taxes, and increased property count. The portfolio recovery rate remained consistent at 91% in 2017 and 2016 due to the factors discussed above. Other income increased $0.5 million in 2017 compared to $0.0 million in 2016. 26 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 The Company has identified four main revenue streams of which three of them originate from lease contracts and will be subject to Leases ASU 2016-02, Topic 842 effective for annual reporting periods (including interim periods) beginning after December 15, 2018. The revenue streams are: Revenue Recognition (ASU 2014-09, Topic 610-20): (cid:120) Gain (loss) on sale of real estate properties Leases (ASU 2016-02, Topic 842): (cid:120) Rental revenues (cid:120) Straight line rents (cid:120) Tenant recoveries As of January 1, 2018, the Company will be accounting for the sale of real estate properties under Subtopic 610- 20 which provides for revenue recognition based on transfer of ownership. All properties were non-financial real estate assets and thus not businesses which were sold to non-customers with no performance obligations. During the year ended December 31, 2017, the Company sold real estate properties for net proceeds of $44.3 million, and a recorded net gain of $14.2 million. Management has concluded that all of the Company’s material revenue streams falls outside of the scope of this guidance and currently recognizes revenue from its contracts with customers at a point in time and does not anticipate any changes. The Company intends to implement the standard under the modified retrospective method and does not anticipate any cumulative effect recognized in retained earnings at the date of adoption (January 1, 2018). Note 3 – Real Estate Investments Real Estate Portfolio As of December 31, 2017, the Company owned 436 properties, with a total gross leasable area of approximately 8.7 million square feet. Net Real Estate Investments totaled $1.2 billion as of December 31, 2017. As of December 31, 2016, the Company owned 366 properties, with a total gross leasable area of 7.0 million square feet. Net Real Estate Investments totaled $950.3 million as of December 31, 2016. Tenant Leases The properties that the Company owns are typically leased to tenants under long term operating leases. The leases are generally net leases which typically require the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. Certain of our properties are subject to leases under which we retain responsibility for specific costs and expenses of the property. The leases typically provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term. As of December 31, 2017, the future minimum lease payments to be received under the terms of all non- cancellable tenant leases is as follows (in thousands): For the Year Ending December 31, 2018 2019 2020 2021 2022 Total Thereafter $ 114,983 114,338 112,189 108,576 104,531 682,299 $ 1,236,916 F-15 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Cyan ] 32 Page 4 44 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 objective of ASU 2017-12 is to expand hedge accounting for both financial (interest rate) and commodity risks, and create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. ASU 2017-12 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company is in the process of determining the impact that the implementation of ASU 2017-12 will have on the Company’s financial statements. In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). The objective of ASU 2017-09 is to provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. ASU 2017-09 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company has evaluated the impact that ASU 2017-09 will have on the Company’s financial statements, and concluded the implementation of ASU 2017-09 has no material impact on the financial statements. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations: Clarifying the Definition of a Business” (“ASU 2017-01”). The objective of ASU 2017-01 is to clarify the definition of a business by adding guidance on how entities should evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company has early adopted and the guidance has no material impact on the financial statements. In February 2016, the FASB issued ASU No. 2016-02 “Leases” (“ASU 2016-02”). The new standard creates Topic 842, Leases, in FASB Accounting Standards Codification (FASB ASC) and supersedes FASB ASC 840, Leases. ASU 2016-02 requires a lessee to recognize the assets and liabilities that arise from leases (operating and finance). However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities. The main difference between the existing guidance on accounting for leases and the new standard is that operating leases will now be recorded in the statement of financial position as assets and liabilities. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. ASU 2016-02 is expected to impact the Company’s consolidated financial statements as the Company has certain operating land lease arrangements for which it is the lessee. GAAP requires only capital (finance) leases to be recognized in the statement of financial position, and amounts related to operating leases largely are reflected in the financial statements as rent expense on the income statement and in disclosures to the financial statements. ASU 2016-02 is effective for annual reporting periods (including interim periods within those annual periods) beginning after December 15, 2018. Early adoption is permitted. The Company has engaged a professional services firm to assist in the implementation of ASU 2016-02. The Company anticipates that its retail leases where it is the lessor will continue to be accounted for as operating leases under the new standard. Therefore, the Company does not currently anticipate significant changes in the accounting for its lease revenues. The Company is also the lessee under various land lease arrangements and it will be required to recognize right of use assets and related lease liabilities on its consolidated balance sheets upon adoption. The Company will continue to evaluate the impact of adopting the new leases standard on its consolidated statements of income and comprehensive income and consolidated balance sheets. In May 2014, with subsequent updates issued in August 2015 and March, April and May 2016, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The update’s core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Companies are to use a five-step contract review model to ensure revenue is recognized, measured and disclosed in accordance with this principle. Those steps are (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to each performance obligation in the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation. F-14 Real estate taxes increased $2.7 million, or 50%, to $8.2 million in 2017, compared to $5.5 million in 2016. The increase was due to the ownership of additional properties in 2017 compared to 2016 for which we remit real estate taxes and are subsequently reimbursed by tenants. Property operating expenses increased $1.1 million, or 45%, to $3.6 million in 2017, compared to $2.5 million in 2016. The increase was primarily due to the ownership of additional properties in 2017 compared to 2016 which contributed to higher property maintenance, utilities and insurance expenses. Our tenants subsequently reimbursed us for the majority of these expenses. Land lease payments remained consistent with prior periods. The years ended December 31, 2017 and 2016 totaled approximately $0.7 million. General and administrative expenses increased $1.9 million, or 36%, to $9.9 million in 2017, compared to $8.0 million in 2016. The increase was primarily the result of increased employee headcount and associated professional costs and was partially offset by a one-time credit of $0.2 million to reflect a reduction in the company’s deferred tax liability due to new tax legislation. General and administrative expenses as a percentage of total revenue decreased to 8.5% for 2017 from 8.8% in 2016. Depreciation and amortization increased $8.4 million, or 35%, to $31.8 million in 2017, compared to $23.4 million in 2016. The increase was due to the ownership of additional properties in 2017 compared to 2016. We recorded no impairment charges during 2017 or 2016. Interest expense increased $2.8 million, or 18%, to $18.1 million in 2017, from $15.3 million in 2016. The increase in interest expense was primarily a result of higher levels of borrowings to finance the acquisition and development of additional properties. The Company also issued $100.0 million senior unsecured notes in September 2017. Higher interest expense was also attributable to the full year interest impact of debt issuances in 2016. During 2017, the Company sold real estate properties for net proceeds of $44.3 million and recorded a net gain of $14.2 million (net of any expected losses on real estate held for sale). We had no income from discontinued operations in 2017 or 2016. Net Income increased $13.0 million, or 29%, to $58.8 million in 2017, from $45.8 million in 2016 for the reasons set forth above. Comparison of Year Ended December 31, 2016 to Year Ended December 31, 2015 Minimum rental income increased $19.7 million, or 31%, to $84.0 million in 2016, compared to $64.3 million in 2015. Approximately $20.2 million of the increase is due to the acquisition of 82 properties in 2016 and the full year impact of 73 properties acquired in 2015. Approximately $1.2 million of the increase was attributable to nine development projects completed in 2016 and the full year impact of one development project completed in 2015, and approximately a $0.4 million increase due to other minimum rental income adjustments. These increases were partially offset by approximately a $2.1 million reduction in minimum rental income from properties sold during 2016 that were owned for all of part of 2015. Percentage rents remained consistent with prior periods. The years ended December 31, 2016 and 2015 totaled $0.2 million. Operating cost reimbursements increased $2.0 million, or 38%, to $7.3 million in 2016, compared to $5.3 million in 2015. Operating cost reimbursements increased due to higher levels of recoverable property operating expenses, including real estate taxes, acquisition, disposition, and development activity. The portfolio recovery rate remained consistent at 91% for both 2016 and 2015, respectively. Other income remained consistent with prior periods. Real estate taxes increased $1.5 million, or 36%, to $5.5 million in 2016, compared to $4.0 million in 2015. The increase was due to the ownership of additional properties in 2016 compared to 2015 for which we remit real estate taxes and are subsequently reimbursed by tenants. 27 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT 4 44 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] Property operating expenses increased $0.7 million, or 40%, to $2.5 million in 2016, compared to $1.8 million in 2015. The increase was primarily due to the ownership of additional properties in 2016 compared to 2015 which contributed to higher property maintenance, utilities and insurance expenses. Our tenants subsequently reimbursed us for the majority of these expenses. Land lease payments increased $0.1 million, or 8%, to $0.7 million in 2016, compared to $0.6 million in 2015. General and administrative expenses increased $1.0 million, or 15%, to $8.0 million in 2016, compared to $7.0 million in 2015. The increase was primarily the result of increased employee headcount and associated professional costs. General and administrative expenses as a percentage of total revenue decreased to 8.8% for 2016 from 10.0% in 2015. Depreciation and amortization increased $6.9 million, or 42%, to $23.4 million in 2016, compared to $16.5 million in 2015. We recorded no impairment charges during 2016 or 2015. Interest expense increased $3.0 million, or 25%, to $15.3 million in 2016, from $12.3 million in 2015. The increase in interest expense was primarily a result of an additional borrowing and debt issuance in 2016, including the $40.0 million unsecured term loan facility we entered into in July 2016 and $60.0 million senior unsecured notes issued in July 2016, which were offset by the repayment of the $8.6 million portfolio mortgage loan in March 2016. During 2016, the Company sold real estate properties for net proceeds of $28.9 million and a recorded net gain of $10.0 million (net of any expected losses on real estate held for sale). We had no income from discontinued operations in 2016 or 2015. Net Income increased $6.0 million, or 15%, to $45.8 million in 2016, from $39.8 million in 2015 for the reasons set forth above. Liquidity and Capital Resources Our principal demands for funds include payment of operating expenses, payment of principal and interest on our outstanding indebtedness, distributions to our shareholders and future property acquisitions and development. We expect to meet our short-term liquidity requirements through cash provided from operations and borrowings under our revolving credit facility. As of December 31, 2017, available cash and cash equivalents was $50.8 million. As of December 31, 2017 we had $14.0 million outstanding on our revolving credit facility and $236.0 million was available for future borrowings, subject to our compliance with covenants. We anticipate funding our long-term capital needs through cash provided from operations, borrowings under our revolving credit facility, the issuance of debt and common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity. In August 2017, the Company entered into an uncommitted and unsecured $100 million private placement shelf agreement (the “AIG Shelf Agreement”) with AIG Asset Management (U.S.), LLC (“AIG”) and each AIG Affiliate named therein. The AIG Shelf Agreement allows us to issue senior unsecured notes to AIG at terms to be agreed upon at the time of any issuance during a three year issuance period ending in August 2020. As of December 31, 2017, no notes had been issued under the AIG Shelf Agreement. In August 2017, the Company entered into an uncommitted and unsecured $100 million private placement shelf agreement (the “TIAA Shelf Agreement”) with Teachers Insurance and Annuity Association of America (“TIAA”) and each TIAA Affiliate named therein. The TIAA Shelf Agreement allows us to issue senior unsecured notes to TIAA at terms to be agreed upon at the time of any issuance during a three year issuance period ending in August 2020. As of December 31, 2017, no notes had been issued under the TIAA Shelf Agreement. We continually evaluate alternative financing and believe that we can obtain financing on reasonable terms. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to us. 28 earnings per share is computed by dividing net income (less income attributable to unvested restricted stock), by the weighted average common and potentially dilutive common shares outstanding in accordance with the treasury Notes to Consolidated Financial Statements December 31, 2017 Agree Realty Corporation 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, 2017 2016 2015 Weighted average number of common shares outstanding Less: Unvested restricted stock Weighted average number of common shares outstanding used in basic earnings per share 27,852,231 (227,129) 23,096,267 (227,531) 18,215,628 (212,506) 27,625,102 22,868,736 18,003,122 Weighted average number of common shares outstanding used in basic earnings per share Effect of dilutive securities: restricted stock Weighted average number of common shares outstanding used in diluted earnings per share 27,625,102 75,245 22,868,736 91,063 18,003,122 62,293 27,700,347 22,959,799 18,065,415 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% 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, 2017, 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 7). All provisions for federal income taxes in the accompanying consolidated financial statements are attributable to the Company’s TRS. Fair Values of Financial Instruments The Company’s estimates of fair value of financial and non-financial assets and liabilities are based on the framework established in the fair value accounting guidance. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. The guidance describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels: Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities. Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques. Recent Accounting Pronouncements In August 2017, the Financial Accounting Standards Board (”FASB”) issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). The F-13 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Cyan ] 32 Page Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 In addition, many of the Company’s leases contain rent escalations for which we recognize revenue on a straight- line basis over the non-cancelable lease term. This method results in rental revenue in the early years of a lease being higher than actual cash received, creating a straight-line rent receivable asset which is included in the Accounts Receivable - Tenants line item in our consolidated balance sheet. The balance of straight-line rent receivables at December 31, 2017 and December 31, 2016 was $12.9 million and $9.6 million, respectively. To the extent any of the tenants under these leases become unable to pay their contractual cash rents, the Company may be required to write down the straight-line rent receivable from those tenants, which would reduce operating income. Sales Tax taxing authorities. The Company collects various taxes from tenants and remits these amounts, on a net basis, to the applicable Unamortized Deferred Expenses Deferred expenses include debt financing costs related to the line of credit, leasing costs and lease intangibles. The expenses are amortized as follows: (i) debt financing costs related to the line of credit on a straight-line basis to interest expense over the term of the related loan, which approximates the effective interest method; (ii) leasing costs on a straight-line basis to depreciation and amortization over the term of the related lease entered into; and (iii) lease intangibles on a straight-line basis to depreciation and amortization over the remaining term of the related lease acquired. The following schedule summarizes the Company’s amortization of deferred expenses for the years ended December 31, 2017, 2016 and 2015, respectively (in thousands): For the Year Ended December 31, 2017 2016 2015 Credit Facility Financing Costs $ 405 $ 228 $ 225 Leasing Costs Lease Intangibles (Asset) Lease Intangibles (Liability) Total 161 16,060 (4,275) 124 11,093 (3,083) 97 6,598 (1,739) $ 12,351 $ 8,362 $ 5,181 The following schedule represents estimated future amortization of deferred expenses as of December 31, 2017 (in thousands): Year Ending December 31, 2018 2019 2020 2021 2022 Thereafter Total Credit Facility Financing Costs $ 394 $ 380 $ 379 $ 21 $ - $ - $ 1,174 Leasing Costs Lease Intangibles (Asset) Lease Intangibles (Liability) Total 179 20,151 (4,403) 221 19,383 (4,329) 210 18,917 (4,229) 195 18,241 (3,944) 208 17,161 (3,044) 570 101,305 (10,401) 1,583 195,158 (30,350) $ 16,321 $ 15,655 $ 15,277 $ 14,513 $ 14,325 $ 91,474 $ 167,565 Revenue Recognition The Company leases real estate to its tenants under long-term net leases which we account for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight- line basis over the lease term. Rental increases based upon changes in the consumer price indexes, or other variable factors, are recognized only after changes in such factors have occurred and are then applied according to the lease agreements. Certain leases also provide for additional rent based on tenants’ sales volumes. These rents are recognized when determinable after the tenant exceeds a sales breakpoint. Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses are generally included in operating costs reimbursement in the period when such expenses are recorded. Earnings per Share Earnings per share have been computed by dividing the net income (less income attributable to unvested restricted stock), by the weighted average number of common shares outstanding (less unvested restricted stock). Diluted F-12 Capitalization As of December 31, 2017, our total market capitalization was approximately $2.1 billion. Market capitalization consisted of $1.6 billion of shares of our common stock (based on the December 29, 2017 closing price of our common stock on the NYSE of $51.44 per share and assuming the conversion of OP Units) and $522.4 million of total debt including (i) $14.0 million of borrowings under our revolving credit facility; (ii) $159.3 million of unsecured term loans; (iii) $260.0 million of senior unsecured notes; and (iv) $89.1 million of mortgage notes payable. Our ratio of total debt to total market capitalization was 24.5% at December 31, 2017. At December 31, 2017, the non-controlling interest in our Operating Partnership consisted of a 1.2% ownership interest in the Operating Partnership held by third parties. The OP Units may, under certain circumstances, be exchanged for our shares of common stock on a one-for-one basis. We, as sole general partner of the Operating Partnership, have the option to settle exchanged OP Units held by others for cash based on the current trading price of our shares. Assuming the exchange of all OP Units, there would have been 31,352,519 shares of common stock outstanding at December 31, 2017. Debt The below table summarizes the Company’s outstanding debt for the periods ended December 31, 2017 and December 31, 2016 (in thousands): Senior Unsecured Revolving Credit Facility Credit Facility (1) Total Credit Facility Interest Rate 2.87% Maturity January 2021 Principal Amount Outstanding December 31, 2017 $ 14,000 $ 14,000 December 31, 2016 $ 14,000 $ 14,000 Unsecured Term Loans (2) 2019 Term Loan 2023 Term Loan 2024 Term Loan Facility 2024 Term Loan Facility Total Unsecured Term Loans Senior Unsecured Notes (2) 2025 Senior Unsecured Notes 2027 Senior Unsecured Notes 2028 Senior Unsecured Notes 2029 Senior Unsecured Notes Total Senior Unsecured Notes Mortgage Notes Payable (2) Secured Term Loan Single Asset Mortgage Loan Portfolio Mortgage Loan Single Asset Mortgage Loan CMBS Portfolio Loan Single Asset Mortgage Loan Portfolio Credit Tenant Lease Total Mortgage Notes Payable 3.62% 3.05% 3.74% 3.85% May 2019 July 2023 January 2024 January 2024 4.16% 4.26% 4.42% 4.19% May 2025 May 2027 July 2028 September 2029 2.49% 3.32% 6.90% 6.24% 3.60% 5.01% 6.27% April 2018 October 2019 January 2020 February 2020 January 2023 September 2023 July 2026 $ $ $ $ $ $ $ $ $ $ 19,304 40,000 65,000 35,000 159,304 50,000 50,000 60,000 100,000 260,000 25,000 21,500 3,573 2,963 23,640 5,131 7,288 89,095 20,044 40,000 65,000 35,000 160,044 50,000 50,000 60,000 - 160,000 25,000 - 5,114 3,049 23,640 5,294 7,910 70,007 $ $ Total Principal Amount Outstanding $ 522,399 $ 404,051 (1) The annual interest rate of the Credit Facility assumes one month LIBOR as of December 31, 2017 of 1.57%. (2) Interest rate includes the effects of variable interest rates that have been swapped to fixed interest rates. Senior Unsecured Revolving Credit Facility In December 2016, the Company amended and restated the credit agreement that governs our senior unsecured revolving credit facility and unsecured term loan facility to increase the aggregate borrowing capacity to $350.0 million. The agreement provides for a $250.0 million unsecured revolving credit facility, a $65.0 million unsecured term loan facility and a $35.0 million unsecured term loan facility. The unsecured revolving credit facility matures in January 2021 with options to extend the maturity date to January 2022. The unsecured term loan facilities mature in January 2024. We have the ability to increase the aggregate borrowing capacity under the credit agreement up 29 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Cyan ] 32 Page 4 44 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 44 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 to $500.0 million, subject to lender approval. Borrowings under the revolving credit facility bear interest at LIBOR plus 130 to 195 basis points, depending on our leverage ratio. Additionally, we are required to pay an unused commitment fee at an annual rate of 15 or 25 basis points on the unused portion of the revolving credit facility, depending on the amount of borrowings outstanding. The credit agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio and a maximum percentage of secured debt to total asset value. Unsecured Term Loan Facilities In July 2016, the Company entered into a $40.0 million unsecured term loan facility that matures in July 2023 (the “2023 Term Loan”). Borrowings under the 2023 Term Loan are priced at LIBOR plus 165 to 225 basis points, depending on the Company’s leverage. The Company entered into an interest rate swap to fix LIBOR at 1.40% until maturity. As of December 31, 2017, $40.0 million was outstanding under the 2023 Term Loan, which was subject to an all-in interest rate of 3.05%. In August 2016, the Company entered into a $20.3 million unsecured amortizing term loan that matures in May 2019 (the “2019 Term Loan”). Borrowings under the 2019 Term Loan are priced at LIBOR plus 170 basis points. In order to fix LIBOR on the 2019 Term Loan at 1.92% until maturity, the Company had an interest rate swap agreement in place, which was assigned by the lender under the previously secured facility to the 2019 Term Loan lender. As of December 31, 2017, $19.3 million was outstanding under the 2019 Term Loan bearing an all-in interest rate of 3.62%. The amended and restated credit agreement, described above, extended the maturity dates of the $65.0 million unsecured term loan facility and $35.0 million unsecured term loan facility (together, the “2024 Term Loan Facilities”) to January 2024. In connection with entering into the amended and restated credit agreement, the prior notes evidencing the existing $65.0 million unsecured term loan facility and $35.0 million unsecured term loan facility were canceled and new notes evidencing the 2024 Term Loan Facilities were executed. Borrowings under the unsecured 2024 Term Loan Facilities bear interest at a variable LIBOR plus 165 to 235 basis points, depending on the Company's leverage ratio. The Company utilized existing interest rate swaps to effectively fix the LIBOR rate (refer to Note 8 – Derivative Instruments and Hedging Activity). Senior Unsecured Notes In May 2015, the Company completed a private placement of $100.0 million principal amount of senior unsecured notes. The senior unsecured notes were sold in two series; $50.0 million of 4.16% notes due in May 2025 and $50.0 million of 4.26% notes due in May 2027. The weighted average term of the senior unsecured notes is 11 years and the weighted average interest rate is 4.21%. In July 2016, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $60.0 million aggregate principal amount of our 4.42% senior unsecured notes due July 28, 2028. The senior unsecured notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act. In August 2017, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $100.0 million aggregate principal amount of our 4.19% senior unsecured notes due September 2029. The senior unsecured notes are guaranteed by the Company. The closing of the private placement was consummated in September 2017, and, on that date, the Operating Partnership issued the senior unsecured notes. The senior unsecured notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act. Mortgage Notes Payable As of December 31, 2017, we had total gross mortgage indebtedness of $89.1 million, with a weighted average term to maturity of 3.0 years. Including our mortgages that have been swapped to a fixed interest rate, our weighted average interest rate on mortgage debt was 3.74%. In December 2017, the Company assumed an interest only mortgage note for $21.5 million with PNC Bank, National Association. The mortgage note is due October 2019, secured by a multi-tenant property and has a fixed interest rate of 3.32%. 30 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 represent the value of in-place leases and above- or below-market leases. In making estimates of fair values, the Company may use a number of sources, including data provided by independent third parties, as well as information obtained by the Company as a result of its due diligence, including expected future cash flows of the property and various characteristics of the markets where the property is located. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, in-place lease intangibles are valued based on the Company’s estimates of costs related to tenant acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. Above- and below- market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition and the Company’s estimate of current market lease rates for the property. The capitalized above- and below-market lease intangibles are amortized over the non-cancelable term of the lease unless the Company believes it is reasonably certain that the tenant will renew the lease for an option term whereby the Company amortizes the value attributable to the renewal over the renewal period. Depreciation Impairments The fair value of identified intangible assets and liabilities acquired is amortized to depreciation and amortization over the remaining term of the related leases. The Company’s real estate portfolio is depreciated using the straight-line method over the estimated remaining useful life of the properties, which are generally 40 years for buildings and 10 to 20 years for improvements. Properties classified as “held for sale” and properties under development are not depreciated. The Company reviews its real estate investments periodically for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Events or circumstances that may occur include, but are not limited to, significant changes in real estate market conditions or our ability to re-lease or sell properties that are 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. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows and an impairment charge is recorded in the amount by which the carrying value of the asset exceeds its estimated 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. Cash and cash equivalents consist of cash and money market accounts. 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. We had $57.5 million and $32.4 million in cash and cash held in escrow as of December 31, 2017 and December 31, 2016, respectively, in excess of the FDIC insured limit. Accounts Receivable – Tenants The Company reviews its rent receivables for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. In the event that the collectability of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific rent receivable will be made. For accrued rental revenues related to the straight-line method of reporting rental revenue, the Company performs a periodic review of receivable balances to assess the risk of uncollectible amounts and establish appropriate provisions. The Company’s leases provide for reimbursement from tenants for common area maintenance (“CAM”), insurance, real estate taxes and other operating expenses ("Operating Cost Reimbursement Revenue"). A portion of our Operating Cost Reimbursement Revenue is estimated each period and is recognized as revenue in the period the recoverable costs are incurred and accrued. Receivables from Operating Cost Reimbursement Revenue are included in our Accounts Receivable - Tenants line item in our consolidated balance sheets. The balance of unbilled Operating Cost Reimbursement Receivable at December 31, 2017 and December 31, 2016 was $1.4 million and $1.1 million, respectively. F-11 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT Agree Realty Corporation Note 1 – Organization Notes to Consolidated Financial Statements December 31, 2017 Agree Realty Corporation (the “Company”), a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. The Company was founded in 1971 by its current Executive Chairman, Richard Agree, and our common stock was listed on the New York Stock Exchange (“NYSE”) in 1994. Our assets are held by, and all of our operations are conducted through, directly or indirectly, Agree Limited Partnership (the “Operating Partnership”), of which Agree Realty Corporation is the sole general partner and in which it held a 98.8% interest as of December 31, 2017. Under the partnership agreement of the Operating Partnership, Agree Realty Corporation, as the sole general partner, has exclusive responsibility and discretion in the management and control of the Operating Partnership. The terms “Agree Realty,” the "Company," “Management,” "we,” “our” or "us" refer to Agree Realty Corporation and all of its consolidated subsidiaries, including the Operating Partnership. Note 2 – Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of Agree Realty Corporation include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries. The Company, as the sole general partner, held 98.8% and 98.7% of the Operating Partnership as of December 31, 2017 and 2016, respectively. All material intercompany accounts and transactions are eliminated. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) 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. Use of Estimates Reclassifications Certain reclassifications of prior period amounts have been made in the consolidated financial statements and footnotes in order to conform to the current presentation. Prepaid rents are presented on the Balance Sheet as Deferred Revenue; in previously filed reports prepaid rents were presented in Accounts Payable - Operating. The classification of below-market lease intangibles are presented net of accumulated amortization as a Liability; in previously filed reports below-market lease intangibles were presented in Unamortized Deferred Expenses: Lease Intangibles, net with in-place and above-market lease intangibles. As of December 31, 2017, all fully amortized deferred credit facility financing costs attributable to the credit facility were written off. The Company is primarily in the business of acquiring, developing and managing retail real estate which is considered to be one reporting segment. The Company has no other reportable segments. Segment Reporting Real Estate Investments The Company records the acquisition of real estate at cost, including acquisition and closing costs. For properties developed by the Company, all direct and indirect costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed. Properties classified as “held for sale” are recorded at the lower of their carrying value or their fair value, less anticipated selling costs. Assets are generally classified as held for sale once management has actively engaged in marketing the asset and has received a firm purchase commitment that is expected to close within one year. Accounting for Acquisitions of Real Estate The acquisition of property for investment purposes is typically accounted for as an asset acquisition. The Company allocates the purchase price to land, buildings and identified intangible assets and liabilities, based in each case on their relative estimated fair values and without giving rise to goodwill. Intangible assets and liabilities F-10 We have entered into mortgage loans which are secured by multiple properties and contain cross-default and cross- collateralization provisions. Cross-collateralization provisions allow a lender to foreclose on multiple properties in the event that we default under the loan. Cross-default provisions allow a lender to foreclose on the related property in the event a default is declared under another loan. Contractual Obligations The following table summarizes our contractual obligations by due date as of December 31, 2017: Mortgage Notes Payable Revolving Credit Facility Unsecured Term Loans Senior Unsecured Notes Land Lease Obligations Estimated Interest Payments on Outstanding Debt Total Total 2018 $ $ 89,095 14,000 159,304 260,000 10,342 155,978 688,719 $ $ 27,576 - 761 - 641 20,270 49,248 2019-2020 $ 28,118 - 18,543 - 1,265 37,510 85,436 2021-2022 $ $ 2,058 14,000 - - 1,093 35,449 52,600 Thereafter $ 31,343 - 140,000 260,000 7,343 62,749 501,435 $ $ Estimated interest payments are based on (i) the stated rates for mortgage notes payable, including the effect of interest rate swaps and (ii) the stated rates for unsecured term loans, including the effect of interest rate swaps and assuming the interest rate in effect for the most recent quarter remains in effect through the respective maturity dates. Dividends During the quarter ended December 31, 2017, we declared a quarterly dividend of $0.520 per share. The cash dividend was paid on January 3, 2018 to holders of record on December 20, 2017. Inflation Our leases typically contain provisions to mitigate the adverse impact of inflation on our results of operations. Tenant leases generally provide for limited increases in rent as a result of fixed increases or increases in the consumer price index. Certain of our leases contain clauses enabling us to receive percentage rents based on tenants’ gross sales, which generally increase as prices rise. During times when inflation is greater than increases in rent, rent increases will not keep up with the rate of inflation. Substantially all of properties are leased to tenants under long-term, net leases which require the tenant to pay certain operating expenses for a property, thereby reducing our exposure to operating cost increases resulting from inflation. Inflation may have an adverse impact on our tenants. Funds from Operations Funds from Operations (“FFO”) is defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) to mean net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization and any impairment charges on a depreciable real estate asset, and after adjustments for unconsolidated partnerships and joint ventures. Management uses FFO as a supplemental measure to conduct and evaluate the Company’s business because there are certain limitations associated with using GAAP net income by itself as the primary measure of the Company’s 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 an alternative to net income as the primary indicator of the Company’s operating performance, or an alternative to cash flow as a measure of liquidity. Further, while the Company adheres to the NAREIT definition of FFO, its presentation of FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that all REITs may not use the same definition. Adjusted Funds from Operations (“AFFO”) is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. AFFO further adjusts FFO for certain non-cash items that reduce or increase net income in accordance with GAAP. Management considers AFFO a useful supplemental measure of the Company’s performance, however, AFFO should not be considered an alternative to net income as an indication of the Company’s performance, or to cash flow as a measure of liquidity or ability to make distributions. The 31 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Cyan ] 32 Page 4 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Company’s computation of AFFO may differ from the methodology for calculating AFFO used by other equity REITs, and therefore may not be comparable to such other REITs. Note that, during the year ended December 31, 2015, the Company adjusted its calculation of AFFO to exclude non-recurring capitalized building improvements and to include non-real estate related depreciation and amortization. Management believes that these changes provide a more useful measure of operating performance in the context of AFFO. The following table provides a reconciliation of net income to FFO for the years ended December 31, 2017, 2016 and 2015: Reconciliation from Net Income to Funds from Operations Net income Depreciation of real estate assets Amortization of leasing costs Amortization of lease intangibles Gain on sale of assets Funds from Operations December 31, 2017 58,790 $ 19,507 163 12,004 (14,193) 76,271 $ Year Ended December 31, 2016 45,797 $ 15,200 125 8,010 (9,964) 59,168 $ December 31, 2015 39,762 $ 11,466 98 4,859 (12,135) 44,050 $ Funds from Operations Per Share - Diluted $ 2.72 $ 2.54 $ 2.39 Weighted average shares and OP units outstanding Basic Diluted 27,972,721 28,047,966 23,216,355 23,307,418 18,350,741 18,413,034 The following table provides a reconciliation of net income to AFFO for the years ended December 31, 2017, 2016 and 2015: $ Reconciliation from Net Income to Adjusted Funds from Operations December 31, 2017 58,790 Net income 17,481 Cumulative adjustments to calculate FFO 76,271 Funds from Operations (3,548) Straight-line accrued rent - Deferred revenue recognition Deferred tax expense (benefit) (230) 2,589 Stock based compensation expense Amortization of financing costs 574 78 Non-real estate depreciation Loss on debt extinguishment - Adjusted Funds from Operations 75,734 $ $ $ Year Ended December 31, 2016 45,797 $ 13,371 59,168 (3,582) (541) - 2,441 516 72 333 58,407 $ $ December 31, 2015 39,762 $ 4,288 44,050 (2,450) (463) - 1,992 494 62 180 43,865 $ Adjusted Funds from Operations Per Share - Diluted $ 2.70 $ 2.51 $ 2.38 Additional supplemental disclosure Scheduled principal repayments Capitalized interest Capitalized building improvements $ $ $ 3,151 570 1,230 $ $ $ 2,954 210 541 $ $ $ 2,772 39 310 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, assuming no mortgage defaults. Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, beginning of period Cash and Cash Equivalents, end of period Supplemental Disclosure of Cash Flow Information Cash paid for interest (net of amounts capitalized) Cash paid (refunded) for income tax Supplemental Disclosure of Non-Cash Investing and Financing Activities Shares issued under equity incentive plans (in dollars) Dividends and limited partners' distributions declared and unpaid Real Estate acquisitions financed with debt assumption $ $ $ $ $ $ $ $ $ $ $ $ See accompanying notes to consolidated financial statements. 32 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT Cash Flows from Operating Activities Adjustments to reconcile net income to net cash provided by Net income operating activities: Depreciation Amortization Amortization from financing and credit facility costs Stock-based compensation Write-off of deferred costs (Gain) loss on sale of assets (Increase) decrease in accounts receivable (Increase) decrease in other assets Increase (decrease) in accounts payable Increase (decrease) in deferred revenue Increase (decrease) in accrued interest Increase (decrease) in deferred taxes Increase (decrease) in tenant deposits Net Cash Provided by Operating Activities Cash Flows from Investing Activities Acquisition of real estate investments and other assets Development of real estate investments and other assets (including capitalized interest of $570 in 2017, $210 in 2016, and $39 in 2015) Payment of leasing costs Cash held in escrows from sale of assets Net proceeds from sale of assets Net Cash Used In Investing Activities Cash Flows from Financing Activities Proceeds from common stock offerings, net Repurchase of common shares Unsecured revolving credit facility borrowings Unsecured revolving credit facility repayments Payments of mortgage notes payable Unsecured term loan proceeds Payments of unsecured term loans Senior unsecured notes proceeds Dividends paid Distributions to Non-Controlling Interest Debt extinguishment costs Payments for financing costs Net Cash Provided by Financing Activities AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Year Ended December 31, 2017 2016 2015 $ 58,790 $ 45,797 $ 39,762 (319,572) (297,868) (223,871) 15,274 8,133 720 2,257 333 (9,964) (4,117) (109) 1,984 115 1,247 - 65 61,735 (27,919) (686) - 28,919 (297,554) 228,011 (712) 252,000 (256,000) (31,578) 60,283 (239) 60,000 (42,058) (657) - (2,548) 266,502 30,683 2,712 33,395 13,822 153 3,517 13,124 - $ $ $ $ $ $ 11,530 4,956 689 1,992 181 (12,135) (2,911) (197) 1,043 (463) 241 - (8) 44,680 (6,970) (66) - 28,132 (202,775) 92,260 161,000 (158,000) (5,178) - - - 100,000 (32,992) (636) (150) (896) 155,408 (2,687) 5,399 2,712 11,548 155 2,864 9,758 - 19,586 12,166 979 2,393 - (14,193) (4,216) 444 5,265 14 1,202 (230) 3 82,203 (43,302) (568) (7,975) 44,343 (327,074) 222,695 (1,111) 203,000 (203,000) (2,412) - - (739) 100,000 (55,146) (695) (309) 262,283 17,412 33,395 50,807 17,331 257 4,298 16,303 21,500 F-9 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Cyan Balance, December 31, 2014 Issuance of common stock, net of issuance costs Issuance of restricted stock under the Omnibus Incentive Plan Forfeiture of restricted stock Vesting of restricted stock Dividends and distributions declared for the period Other comprehensive income (loss) - change in fair value of interest rate swaps Net income Balance, December 31, 2015 Issuance of common stock, net of issuance costs Repurchase of common shares Issuance of restricted stock under the Omnibus Incentive Plan Forfeiture of restricted stock Vesting of restricted stock Dividends and distributions declared for the period Other comprehensive income (loss) - change in fair value of interest rate swaps Net income Balance, December 31, 2016 Issuance of common stock, net of issuance costs Repurchase of common shares Issuance of restricted stock under the Omnibus Incentive Plan Forfeiture of restricted stock Vesting of restricted stock Dividends and distributions declared for the period Other comprehensive income (loss) - change in fair value of interest rate swaps Net income Balance, December 31, 2017 Common Stock Additional excess of net Comprehensive Non-Controlling Amount Paid-In Capital income Income (Loss) Interest Total Equity $ $ 388,263 $ (32,584) $ (2,060) $ 2,415 $ 356,035 Shares 17,539,946 3,043,812 85,597 (32,054) - - - - - 20,637,301 5,461,459 $ (20,569) 93,363 (6,577) 26,164,977 4,786,604 $ (23,925) 88,466 (11,222) - - - - - - - - - - - - - - - 1 1 2 1 - - - - - - - 3 - - - - - - - - 3 92,259 1,992 - - - - - - 228,010 (712) 2,257 222,695 (1,111) 2,393 - - - - - - - - - - - - - - - - (34,696) 39,018 - - - - - - - - - - - - (45,414) 45,118 (58,317) 58,112 - - - - - - - (1,070) - - - - - - - - - - - - - - 2,594 1,911 - - - - - (640) (23) 744 - - - - - - - - - - (667) 24 679 (705) 24 678 92,260 - - - 1,992 (35,336) (1,093) 39,762 228,011 (712) 2,257 (46,081) 2,618 45,797 222,695 (1,111) - - - - 2,393 (59,022) 1,935 58,790 $ 712,069 $ (28,558) $ (536) $ 2,532 $ 685,510 31,004,900 $ $ 936,046 $ (28,763) $ 1,375 $ 2,529 $ 911,190 See accompanying notes to consolidated financial statements. AGREE REALTY CORPORATION CONSOLIDATED STATEMENT OF EQUITY (In thousands, except share and per-share data) ($ in thousands) Mortgage Notes Payable Average Interest Rate Dividends in Other Accumulated Unsecured Revolving Credit Facility (1) Average Interest Rate Unsecured Term Loans Average Interest Rate Senior Unsecured Notes Average Interest Rate $ $ $ $ 2018 2019 2020 2021 2022 Thereafter Total 27,576 $ 2.87% 24,251 $ 3.69% 3,866 $ 6.21% 998 $ 6.02% 1,060 $ 6.02% 31,344 $ 4.09% 89,095 - $ - $ - $ 14,000 $ 2.63% - $ - $ 14,000 761 $ 3.62% 18,543 $ 3.62% - $ - $ - $ 140,000 $ 159,304 3.57% - $ - $ - $ - $ - $ 260,000 $ 260,000 4.25% $ 482,514 $ (28,262) $ (3,130) $ 2,496 $ 453,620 matures in January 2021, with options to extend the maturity for one year at the Company’s election, subject to certain conditions. (1) The balloon payment balance includes the balance outstanding under the Credit Facility as of December 31, 2017. The Credit Facility The fair value is estimated at $89.8 million and $426.7 million for mortgage notes payable and unsecured term loans and notes, respectively, as of December 31, 2017. The table above incorporates those exposures that exist as of December 31, 2017; 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 seek to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs by closely monitoring our variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous. From time to time, we may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements are intended to lessen the impact of rising interest rates, they also expose us to the risks that the other parties to the agreements will not perform, we could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow hedges under GAAP guidance. In April 2012, the Company entered into an amortizing forward-starting interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $22.3 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.92%. The notional amount as of December 31, 2017 was $19.3 million. This swap effectively converted $22.3 million of variable-rate borrowings to fixed-rate borrowings from July 1, 2013 to May 1, 2019. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.0 million. In December 2012, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $25.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 0.89%. This swap effectively converted $25.0 million of variable-rate borrowings to fixed-rate borrowings from December 6, 2012 to April 4, 2018. As of December 31, 2017, this interest rate swap was valued as an asset of approximately $0.0 million. In September 2013, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.20%. This swap effectively converted $35.0 million of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.2 million. In July 2014, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.09%. This swap effectively converted $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.1 million. F-8 33 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 4 ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Cyan CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands, except share and per-share data) AGREE REALTY CORPORATION For the Year Ended December 31, 2017 2016 2015 $ 105,074 $ $ In September 2016, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $40.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.40%. This swap effectively converted $40.0 million of variable-rate borrowings to fixed-rate borrowings from August 1, 2016 to July 1, 2023. As of December 31, 2017, this interest rate swap was valued as an asset of approximately $1.5 million. 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, 2017. As of December 31, 2017, a 100 basis point increase in interest rates on the portion of our debt bearing interest at variable rates would have resulted in an increase in interest expense of approximately $0.1 million. Item 8: Financial Statements and Supplementary Data The financial statements and supplementary data are listed in the Index to the Financial Statements and Financial Statement Schedules appearing on Page F-1 of this Annual Report on Form 10-K and are included in this Annual Report on Form 10-K following page F-1. Item 9: Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Income from Operations There are no disagreements with our independent registered public accounting firm on accounting matters or financial disclosure. 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 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 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 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: Revenues Minimum rents Percentage rents Other Total Revenues Operating cost reimbursement Operating Expenses Real estate taxes Property operating expenses Land lease expense General and administrative Depreciation and amortization Total Operating Expenses Other (Expense) Income Interest expense, net Gain (loss) on sale of assets, net Loss on debt extinguishment Other Income Net Income 1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Less Comprehensive Income Attributable to Non-Controlling Interest transactions and dispositions of the assets of our Company; 2) 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 3) 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 (2013) issued by the Committee of Sponsoring Organizations of the Treadway 34 Net Income Per Share Attributable to Agree Realty Corporation Other Comprehensive Income Total Comprehensive Income Other Comprehensive Income (Loss) - Gain (Loss) on Interest Rate Comprehensive Income Attributable to Agree Realty Corporation Weighted Average Number of Common Shares Outstanding - Basic Diluted Net income Swaps Basic: Diluted: Weighted Average Number of Common Shares Outstanding - See accompanying notes to consolidated financial statements. $ $ $ $ F-7 244 10,752 485 116,555 8,204 3,610 653 9,949 31,752 54,168 62,387 (18,137) 14,193 - 347 58,790 678 2.09 2.08 58,790 1,935 60,725 702 84,031 197 7,267 32 91,527 5,459 2,484 653 8,015 23,407 40,018 51,509 (15,343) 9,964 (333) - 45,797 679 1.97 1.97 45,797 2,618 48,415 703 $ $ $ $ $ $ 64,278 180 5,277 231 69,966 4,005 1,768 606 6,988 16,486 29,853 40,113 (12,305) 12,135 (181) - 39,762 744 2.17 2.16 39,762 (1,093) 38,669 724 $ 60,023 $ 47,712 $ 37,945 27,625,102 22,868,736 18,003,122 27,700,347 22,959,799 18,065,415 Less Net Income Attributable to Non-Controlling Interest Net Income Attributable to Agree Realty Corporation 58,112 $ 45,118 $ 39,018 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Cyan AGREE REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per-share data) December 31, December 31, 2017 2016 $ 88,270 $ 69,067 LIABILITIES Mortgage Notes Payable, net Unsecured Term Loans, net Senior Unsecured Notes, net Unsecured Revolving Credit Facility Dividends and Distributions Payable Deferred Revenue Accrued Interest Payable Accounts Payable and Accrued Expenses Capital expenditures Operating Lease intangibles, net of accumulated amortization of $11,357 and $7,079 at December 31, 2017 and December 31, 2016, respectively Interest Rate Swaps Deferred Income Taxes Tenant Deposits Total Liabilities EQUITY Common stock, $.0001 par value, 45,000,000 shares authorized, 31,004,900 and 26,164,977 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively Preferred Stock, $.0001 par value per share, 4,000,000 shares authorized Series A junior participating preferred stock, $.0001 par value, 200,000 authorized, no shares issued and outstanding Additional paid-in-capital Dividends in excess of net income Accumulated other comprehensive income (loss) Total Equity - Agree Realty Corporation Non-controlling interest Total Equity 158,171 259,122 14,000 16,303 1,837 3,412 354 10,811 30,350 242 475 97 3 - 936,046 (28,763) 1,375 908,661 2,529 911,190 158,679 159,176 14,000 13,124 1,823 2,210 677 4,866 30,047 1,994 705 94 3 - 712,069 (28,558) (536) 682,978 2,532 685,510 583,444 456,462 Total Liabilities and Equity $ 1,494,634 $ 1,141,972 See accompanying notes to consolidated financial statements. F-6 Commission. Based on our assessment and those criteria, our management believes that we maintained effective internal control over financial reporting as of December 31, 2017. 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 Annual Report on Form 10-K. Item 9B: Other Information None. PART III Item 10: Directors, Executive Officers and Corporate Governance Incorporated herein by reference to our definitive proxy statement with respect to our 2018 Annual Meeting of Shareholders. Item 11: Executive Compensation Incorporated herein by reference to our definitive proxy statement with respect to our 2018 Annual Meeting of Shareholders. 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, 2017. Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted Average Exercise Price of Outstanding Options, Warrant and Rights (b) - - - Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) - - - 480,299 (1) - 480,299 Plan Category Equity Compensation Plans Approved by Security Holders Equity Compensation Plans Not Approved by Security Holders Total (1) Relates to various stock-based awards available for issuance under our 2014 Omnibus 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, including our Security Ownership of Certain Beneficial Owners and Management table, is incorporated herein by reference to our definitive proxy statement with respect to our 2018 Annual Meeting of Shareholders. Item 13: Certain Relationships, Related Transactions and Director Independence Incorporated herein by reference to our definitive proxy statement with respect to our 2018 Annual Meeting of Shareholders. 35 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 44 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 4 44 ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Cyan Item 14: Principal Accounting Fees and Services Incorporated herein by reference to our definitive proxy statement with respect to our 2018 Annual Meeting of Shareholders. AGREE REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per-share data) Real Estate Investments ASSETS Land Buildings Less accumulated depreciation Property under development Net Real Estate Investments Real Estate Held For Sale, net Cash and Cash Equivalents Cash Held in Escrows Accounts Receivable - Tenants, net of allowance of $296 and $50 for possible losses at December 31, 2017 and December 31, 2016, respectively Unamortized Deferred Expenses Credit facility finance costs, net of accumulated amortization of $433 and $1,262 at December 31, 2017 and December 31, 2016, respectively Leasing costs, net of accumulated amortization of $814 and $677 at December 31, 2017 and December 31, 2016, respectively Lease intangibles, net of accumulated amortization of $41,390 and $25,666 at December 31, 2017 and December 31, 2016, respectively Interest Rate Swaps Other Assets, net Total Assets See accompanying notes to consolidated financial statements. December 31, December 31, 2017 2016 $ 405,457 $ 309,687 868,396 (85,239) 1,188,614 25,402 1,214,016 2,420 50,807 7,975 703,506 (69,696) 943,497 6,764 950,261 - 33,395 - 15,477 11,535 1,174 1,552 1,583 1,227 195,158 139,871 1,592 4,432 1,409 2,722 $ 1,494,634 $ 1,141,972 36 F-5  ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Cyan ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 4 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Agree Realty Corporation Opinion(cid:2)on(cid:2)the(cid:2)financial(cid:2)statements(cid:2) We have audited the accompanying consolidated balance sheets of Agree Realty Corporation (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 22, 2018 expressed an unqualified opinion. Basis(cid:2)for(cid:2)opinion(cid:2)(cid:2) These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2013. Southfield, Michigan February 22, 2018 PART IV ITEM 15: Exhibits and Financial Statement Schedules 15(a)(1). The following documents are filed as a part of this Annual Report on Form 10-K: (cid:131) Reports of Independent Registered Public Accounting Firms (cid:131) Consolidated Balance Sheets as of December 31, 2017 and 2016 (cid:131) Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015 (cid:131) Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015 (cid:131) Consolidated Statements of Cash Flow for the Years Ended December 31, 2017, 2016 and 2015 (cid:131) Notes to the Consolidated Financial Statements 15(a)(2). The following is a list of the financial statement schedules required by Item 8: Schedule III – Real Estate and Accumulated Depreciation 15(a)(3). Exhibits Exhibit No. Description 3.1 3.2 3.3 3.4 4.1 Articles of Incorporation of the Company, including all amendments and articles supplementary thereto (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (for the quarter ended June 30, 2013). Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on May 9, 2013). Amendment to the Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 6, 2015). Amendment to Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 3, 2016). Rights Agreement, dated as of December 7, 1998, by and between the Company 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 filed on November 13, 2009). 4.2 Second Amendment to Rights Agreement, dated as of December 8, 2008, by and between the Company and Computershare Trust Company, N.A., f/k/a EquiServe Trust Company, N.A., as successor rights agent to BankBoston, N.A. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 9, 2008). 4.3 4.4 4.5 10.1 10.2 Third Amendment to Rights Agreement, by and between the Company and Computershare Trust Company, N.A., as Rights Agent, dated December 20, 2017 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 21, 2017). 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 Annual Report on Form 10-K 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 filed on August 24, 2009). Term Loan Agreement, dated July 1, 2016, among Agree Limited Partnership, Capital One, National Association, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016). Amended and Restated Revolving Credit and Term Loan Agreement, dated as of December 15, 2016, among Agree Limited Partnership, as the Borrower, the Company, as the parent, certain subsidiaries of the Borrower, as guarantors, PNC Bank, National Association and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016). F-4 37 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 44 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 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. February 22, 2018 Southfield, Michigan 10.3 First Amendment and Joinder to Term Loan Agreement, dated December 15, 2016, by and among Agree Limited Partnership, the Company, the other guarantors party thereto, the lenders party thereto and Capital One, National Association (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016). 10.4 Note Purchase Agreement, dated as of August 3, 2017, among Agree Limited Partnership, the Company and the purchasers named therein (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017). 10.5 Uncommitted Master Note Facility, dated as of August 3, 2017, among Agree Limited Partnership, the Company and Teachers Insurance and Annuity Associate of America (“TIAA”) and each TIAA Affiliate (as defined therein) (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017). 10.6 Uncommitted Master Note Facility, dated as of August 3, 2017, among Agree Limited Partnership, the Company and Teachers Insurance and AIG Asset Management (U.S.), LLC (“AIG”) and each AIG Affiliate (as defined therein) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017). 10.7 10.8 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 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012). Second Amendment to First Amended and Restated Agreement of Limited Partnership of Agree Limited Partnership, dated as of March 20, 2013, by and among the Company, Agree Limited Partnership and Richard Agree (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013). 10.9+ Agree Realty Corporation Profit Sharing Plan (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996). 10.10+ Amended Employment Agreement, dated July 1, 2014, by and between the Company and Richard Agree (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014). 10.11+ Amended Employment Agreement, dated July 1, 2014, by and between the Company and Joey Agree (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014). 10.12+ 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 Current Report on Form 8-K filed on April 6, 2010). 10.13+ Employment Agreement, dated October 20, 2017, between Agree Realty Corporation and Clayton R. Thelen (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1, 2017). 10.14*Summary of Director Compensation. 10.15+ Agree Realty Corporation 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K (No. 001-12928) for the year ended December 31, 2014). 10.16+Form of Restricted Stock Agreement under the Agree Realty Corporation 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (No. 001-12928) for the quarter ended September 30, 2014). 10.17*+Form of Performance Share Award Agreement pursuant to the Agree Realty Corporation 2014 Omnibus Incentive Plan. 10.18 Agree Realty Corporation 2017 Executive Incentive Plan, dated February 16, 2017 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016). 10.19 Note Purchase Agreement dated as of May 28, 2015 by and among Agree Limited Partnership, the Company and the purchasers thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 1, 2015). 38 F-3  ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Cyan ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 10.20 Note Purchase Agreement, dated as of July 28, 2016, by and among Agree Limited Partnership, the Company and the purchasers thereto (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10- Q for the quarter ended September 30, 2016). 12.1* Statement of computation of ratios of earnings to combined fixed charges and preferred stock dividends. 21* Subsidiaries of Agree Realty Corporation. 23.1* Consent of Grant Thornton LLP. 24* Power of Attorney (included on the signature page of this Annual Report on Form 10-K). 31.1* Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Joel N. Agree, Chief Executive Officer. 31.2* Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Clayton Thelen, Chief Financial Officer. 32.1* Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Joel N. Agree, Chief Executive Officer. 32.2* Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Clayton Thelen, Chief Financial Officer. 99.1* Material Federal Income Tax Considerations. 101* The following materials from Agree Realty Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statement of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these consolidated financial statements, tagged as blocks of text. * + Filed herewith. Management contract or compensatory plan or arrangement. Pursuant to Item 601(b)(4)(iii)(A) 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, 2017. 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 Annual Report on Form 10-K. 15(c) The financial statement schedule listed at Item 15(a)(2) is hereby filed with this Annual Report on Form 10- K. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Agree Realty Corporation OPINION(cid:2)ON(cid:2)INTERNAL(cid:2)CONTROL(cid:2)OVER(cid:2)FINANCIAL(cid:2)REPORTING(cid:2) We have audited the internal control over financial reporting of Agree Realty Corporation (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal 4 Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017, and our report dated February 22, 2018 expressed an unqualified opinion on those financial statements. BASIS(cid:2)FOR(cid:2)OPINION(cid:2) The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. DEFINITION(cid:2)AND(cid:2)LIMITATIONS(cid:2)OF(cid:2)INTERNAL(cid:2)CONTROL(cid:2)OVER(cid:2)FINANCIAL(cid:2)REPORTING(cid:2) 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 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 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 F-2 39 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 [This page intentionally left blank.] Reports of Independent Registered Public Accounting Firm Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations and Comprehensive Income Consolidated Statements of Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Schedule III - Real Estate and Accumulated Depreciation Page F-2 F-5 F-7 F-8 F-9 F-10 F-30 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 [This page intentionally left blank.] Reports of Independent Registered Public Accounting Firm Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations and Comprehensive Income Consolidated Statements of Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Schedule III - Real Estate and Accumulated Depreciation Page F-2 F-5 F-7 F-8 F-9 F-10 F-30  ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Cyan ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 10.20 Note Purchase Agreement, dated as of July 28, 2016, by and among Agree Limited Partnership, the Company and the purchasers thereto (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10- Q for the quarter ended September 30, 2016). 12.1* Statement of computation of ratios of earnings to combined fixed charges and preferred stock dividends. 21* Subsidiaries of Agree Realty Corporation. 23.1* Consent of Grant Thornton LLP. 24* Power of Attorney (included on the signature page of this Annual Report on Form 10-K). 31.1* Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Joel N. Agree, Chief Executive Officer. 31.2* Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Clayton Thelen, Chief Financial Officer. 32.1* Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Joel N. Agree, Chief Executive Officer. 32.2* Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Clayton Thelen, Chief Financial Officer. 99.1* Material Federal Income Tax Considerations. 101* The following materials from Agree Realty Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statement of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these consolidated financial statements, tagged as blocks of text. * + Filed herewith. Management contract or compensatory plan or arrangement. Pursuant to Item 601(b)(4)(iii)(A) 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, 2017. 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 Annual Report on Form 10-K. 15(c) The financial statement schedule listed at Item 15(a)(2) is hereby filed with this Annual Report on Form 10- K. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Agree Realty Corporation OPINION(cid:2)ON(cid:2)INTERNAL(cid:2)CONTROL(cid:2)OVER(cid:2)FINANCIAL(cid:2)REPORTING(cid:2) We have audited the internal control over financial reporting of Agree Realty Corporation (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. 4 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017, and our report dated February 22, 2018 expressed an unqualified opinion on those financial statements. BASIS(cid:2)FOR(cid:2)OPINION(cid:2) The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. DEFINITION(cid:2)AND(cid:2)LIMITATIONS(cid:2)OF(cid:2)INTERNAL(cid:2)CONTROL(cid:2)OVER(cid:2)FINANCIAL(cid:2)REPORTING(cid:2) 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 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 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 F-2 39 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 44 10.3 First Amendment and Joinder to Term Loan Agreement, dated December 15, 2016, by and among Agree Limited Partnership, the Company, the other guarantors party thereto, the lenders party thereto and Capital One, National Association (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016). 10.4 Note Purchase Agreement, dated as of August 3, 2017, among Agree Limited Partnership, the Company and the purchasers named therein (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017). 10.5 Uncommitted Master Note Facility, dated as of August 3, 2017, among Agree Limited Partnership, the Company and Teachers Insurance and Annuity Associate of America (“TIAA”) and each TIAA Affiliate (as defined therein) (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended 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 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. 10.6 Uncommitted Master Note Facility, dated as of August 3, 2017, among Agree Limited Partnership, the Company and Teachers Insurance and AIG Asset Management (U.S.), LLC (“AIG”) and each AIG Affiliate (as defined therein) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 22, 2018 September 30, 2017). September 30, 2017). Southfield, Michigan 10.7 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 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012). 10.8 Second Amendment to First Amended and Restated Agreement of Limited Partnership of Agree Limited Partnership, dated as of March 20, 2013, by and among the Company, Agree Limited Partnership and Richard Agree (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013). 10.9+ Agree Realty Corporation Profit Sharing Plan (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996). 10.10+ Amended Employment Agreement, dated July 1, 2014, by and between the Company and Richard Agree (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014). 10.11+ Amended Employment Agreement, dated July 1, 2014, by and between the Company and Joey Agree (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 10.12+ 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 Current Report on Form 8-K filed on April 6, 2010). 10.13+ Employment Agreement, dated October 20, 2017, between Agree Realty Corporation and Clayton R. Thelen (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 1, 10.14*Summary of Director Compensation. 10.15+ Agree Realty Corporation 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K (No. 001-12928) for the year ended December 31, 2014). 10.16+Form of Restricted Stock Agreement under the Agree Realty Corporation 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (No. 001-12928) for the quarter ended September 30, 2014). 10.17*+Form of Performance Share Award Agreement pursuant to the Agree Realty Corporation 2014 Omnibus Incentive 10.18 Agree Realty Corporation 2017 Executive Incentive Plan, dated February 16, 2017 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016). 10.19 Note Purchase Agreement dated as of May 28, 2015 by and among Agree Limited Partnership, the Company and the purchasers thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 1, 2015). 2014). 2017). Plan. 38 F-3  ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Cyan ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 4 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Agree Realty Corporation Opinion(cid:2)on(cid:2)the(cid:2)financial(cid:2)statements(cid:2) We have audited the accompanying consolidated balance sheets of Agree Realty Corporation (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 22, 2018 expressed an unqualified opinion. Basis(cid:2)for(cid:2)opinion(cid:2)(cid:2) These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2013. Southfield, Michigan February 22, 2018 F-4 37 PART IV ITEM 15: Exhibits and Financial Statement Schedules 15(a)(1). The following documents are filed as a part of this Annual Report on Form 10-K: (cid:131) Reports of Independent Registered Public Accounting Firms (cid:131) Consolidated Balance Sheets as of December 31, 2017 and 2016 (cid:131) Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015 (cid:131) Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2017, (cid:131) Consolidated Statements of Cash Flow for the Years Ended December 31, 2017, 2016 and 2016 and 2015 2015 (cid:131) Notes to the Consolidated Financial Statements 15(a)(2). The following is a list of the financial statement schedules required by Item 8: Schedule III – Real Estate and Accumulated Depreciation 15(a)(3). Exhibits Exhibit No. Description June 30, 2013). 3.1 Articles of Incorporation of the Company, including all amendments and articles supplementary thereto (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q (for the quarter ended 3.2 Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on May 9, 2013). 3.3 Amendment to the Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 6, 2015). 3.4 Amendment to Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 3, 2016). 4.1 Rights Agreement, dated as of December 7, 1998, by and between the Company 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 filed on November 13, 2009). 4.2 Second Amendment to Rights Agreement, dated as of December 8, 2008, by and between the Company and Computershare Trust Company, N.A., f/k/a EquiServe Trust Company, N.A., as successor rights agent to BankBoston, N.A. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 9, 2008). 4.3 Third Amendment to Rights Agreement, by and between the Company and Computershare Trust Company, N.A., as Rights Agent, dated December 20, 2017 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 21, 2017). 4.4 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 Annual Report on Form 10-K for the year ended December 31, 1994). 4.5 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 filed on August 24, 2009). 10.1 Term Loan Agreement, dated July 1, 2016, among Agree Limited Partnership, Capital One, National Association, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016). 10.2 Amended and Restated Revolving Credit and Term Loan Agreement, dated as of December 15, 2016, among Agree Limited Partnership, as the Borrower, the Company, as the parent, certain subsidiaries of the Borrower, as guarantors, PNC Bank, National Association and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016). ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 4 44 ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Cyan Item 14: Principal Accounting Fees and Services Incorporated herein by reference to our definitive proxy statement with respect to our 2018 Annual Meeting of Shareholders. AGREE REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per-share data) ASSETS Real Estate Investments Land Buildings Less accumulated depreciation Property under development Net Real Estate Investments Real Estate Held For Sale, net Cash and Cash Equivalents Cash Held in Escrows Accounts Receivable - Tenants, net of allowance of $296 and $50 for possible losses at December 31, 2017 and December 31, 2016, respectively Unamortized Deferred Expenses Credit facility finance costs, net of accumulated amortization of $433 and $1,262 at December 31, 2017 and December 31, 2016, respectively Leasing costs, net of accumulated amortization of $814 and $677 at December 31, 2017 and December 31, 2016, respectively Lease intangibles, net of accumulated amortization of $41,390 and $25,666 at December 31, 2017 and December 31, 2016, respectively Interest Rate Swaps Other Assets, net Total Assets See accompanying notes to consolidated financial statements. December 31, 2017 December 31, 2016 $ 405,457 868,396 (85,239) 1,188,614 25,402 1,214,016 $ 309,687 703,506 (69,696) 943,497 6,764 950,261 2,420 50,807 7,975 - 33,395 - 15,477 11,535 1,174 1,552 1,583 1,227 195,158 139,871 1,592 4,432 1,409 2,722 $ 1,494,634 $ 1,141,972 36 F-5 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 44 Commission. Based on our assessment and those criteria, our management believes that we maintained effective internal control over financial reporting as of December 31, 2017. 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 Annual Report on Form 10-K. Item 9B: Other Information None. PART III Shareholders. Shareholders. Item 10: Directors, Executive Officers and Corporate Governance Incorporated herein by reference to our definitive proxy statement with respect to our 2018 Annual Meeting of Item 11: Executive Compensation Incorporated herein by reference to our definitive proxy statement with respect to our 2018 Annual Meeting of 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, 2017. Number of Securities to be Issued Upon Exercise of Outstanding Weighted Average Exercise Price of Options, Warrants and Outstanding Options, Securities Reflected in Rights (a) Warrant and Rights (b) Column (a)) (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding - - - 480,299 (1) - 480,299 Plan Category Equity Compensation Plans Approved by Security Holders Equity Compensation Plans Not Approved by Security Holders Total (1) Relates to various stock-based awards available for issuance under our 2014 Omnibus 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, including our Security Ownership of Certain Beneficial Owners and Management table, is incorporated herein by reference to our definitive proxy statement with respect to our 2018 Annual Meeting of Item 13: Certain Relationships, Related Transactions and Director Independence Incorporated herein by reference to our definitive proxy statement with respect to our 2018 Annual Meeting of Shareholders. Shareholders. - - - 35 AGREE REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per-share data) December 31, 2017 December 31, 2016 $ 88,270 $ 69,067 LIABILITIES Mortgage Notes Payable, net Unsecured Term Loans, net Senior Unsecured Notes, net Unsecured Revolving Credit Facility Dividends and Distributions Payable Deferred Revenue Accrued Interest Payable Accounts Payable and Accrued Expenses Capital expenditures Operating Lease intangibles, net of accumulated amortization of $11,357 and $7,079 at December 31, 2017 and December 31, 2016, respectively Interest Rate Swaps Deferred Income Taxes Tenant Deposits Total Liabilities EQUITY Common stock, $.0001 par value, 45,000,000 shares authorized, 31,004,900 and 26,164,977 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively Preferred Stock, $.0001 par value per share, 4,000,000 shares authorized Series A junior participating preferred stock, $.0001 par value, 200,000 authorized, no shares issued and outstanding Additional paid-in-capital Dividends in excess of net income Accumulated other comprehensive income (loss) Total Equity - Agree Realty Corporation Non-controlling interest Total Equity 158,171 259,122 14,000 16,303 1,837 3,412 354 10,811 30,350 242 475 97 158,679 159,176 14,000 13,124 1,823 2,210 677 4,866 30,047 1,994 705 94 583,444 456,462 3 3 - 936,046 (28,763) 1,375 908,661 2,529 911,190 - 712,069 (28,558) (536) 682,978 2,532 685,510 Total Liabilities and Equity $ 1,494,634 $ 1,141,972 See accompanying notes to consolidated financial statements. F-6 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 4 In September 2016, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $40.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.40%. This swap effectively converted $40.0 million of variable-rate borrowings to fixed-rate borrowings from August 1, 2016 to July 1, 2023. As of December 31, 2017, this interest rate swap was valued as an asset of approximately $1.5 million. 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, 2017. As of December 31, 2017, a 100 basis point increase in interest rates on the portion of our debt bearing interest at variable rates would have resulted in an increase in interest expense of approximately $0.1 million. Item 8: Financial Statements and Supplementary Data The financial statements and supplementary data are listed in the Index to the Financial Statements and Financial Statement Schedules appearing on Page F-1 of this Annual Report on Form 10-K and are included in this Annual Report on Form 10-K following page F-1. There are no disagreements with our independent registered public accounting firm on accounting matters or financial disclosure. 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 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 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 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: transactions and dispositions of the assets of our Company; 2) 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 3) 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 (2013) issued by the Committee of Sponsoring Organizations of the Treadway ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Cyan AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands, except share and per-share data) For the Year Ended December 31, 2017 2016 2015 Item 9: Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Income from Operations Revenues Minimum rents Percentage rents Operating cost reimbursement Other Total Revenues Operating Expenses Real estate taxes Property operating expenses Land lease expense General and administrative Depreciation and amortization Total Operating Expenses Other (Expense) Income Interest expense, net Gain (loss) on sale of assets, net Loss on debt extinguishment Other Income Net Income Less Net Income Attributable to Non-Controlling Interest Net Income Attributable to Agree Realty Corporation Net Income Per Share Attributable to Agree Realty Corporation Basic Diluted Other Comprehensive Income Net income Other Comprehensive Income (Loss) - Gain (Loss) on Interest Rate Swaps Total Comprehensive Income $ $ $ $ 1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Less Comprehensive Income Attributable to Non-Controlling Interest $ $ 105,074 244 10,752 485 116,555 8,204 3,610 653 9,949 31,752 54,168 62,387 (18,137) 14,193 - 347 58,790 678 $ 84,031 197 7,267 32 91,527 5,459 2,484 653 8,015 23,407 40,018 51,509 (15,343) 9,964 (333) - 45,797 679 64,278 180 5,277 231 69,966 4,005 1,768 606 6,988 16,486 29,853 40,113 (12,305) 12,135 (181) - 39,762 744 58,112 $ 45,118 $ 39,018 $ $ $ 2.09 2.08 58,790 1,935 60,725 702 $ $ $ 1.97 1.97 45,797 2,618 48,415 703 2.17 2.16 39,762 (1,093) 38,669 724 Comprehensive Income Attributable to Agree Realty Corporation $ 60,023 $ 47,712 $ 37,945 Weighted Average Number of Common Shares Outstanding - Basic: 27,625,102 22,868,736 18,003,122 Weighted Average Number of Common Shares Outstanding - Diluted: See accompanying notes to consolidated financial statements. 27,700,347 22,959,799 18,065,415 34 F-7 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Cyan AGREE REALTY CORPORATION CONSOLIDATED STATEMENT OF EQUITY (In thousands, except share and per-share data) Accumulated Unsecured Revolving Credit Facility (1) - $ - $ - $ 14,000 $ - $ - $ 14,000 Balance, December 31, 2014 Issuance of common stock, net of issuance costs Issuance of restricted stock under the Omnibus Incentive Plan Forfeiture of restricted stock Vesting of restricted stock Dividends and distributions declared for the period Other comprehensive income (loss) - change in fair value of interest rate swaps Net income Balance, December 31, 2015 Issuance of common stock, net of issuance costs Repurchase of common shares Issuance of restricted stock under the Omnibus Incentive Plan Forfeiture of restricted stock Vesting of restricted stock Dividends and distributions declared for the period Other comprehensive income (loss) - change in fair value of interest rate swaps Net income Balance, December 31, 2016 Issuance of common stock, net of issuance costs Repurchase of common shares Issuance of restricted stock under the Omnibus Incentive Plan Forfeiture of restricted stock Vesting of restricted stock Dividends and distributions declared for the period Other comprehensive income (loss) - change in fair value of interest rate swaps Net income Balance, December 31, 2017 Common Stock Shares Amount 17,539,946 3,043,812 85,597 (32,054) - - - - - 20,637,301 5,461,459 (20,569) 93,363 (6,577) - - - - 26,164,977 4,786,604 (23,925) 88,466 (11,222) - - - - 31,004,900 $ $ $ $ - - - - - - - 1 1 2 1 - - - - - - - 3 - - - - - - - - 3 See accompanying notes to consolidated financial statements. Additional Paid-In Capital 388,263 $ 92,259 - - 1,992 - - - - $ 482,514 228,010 (712) - - 2,257 - $ - - 712,069 222,695 (1,111) - - 2,393 - (32,584) - - - - (34,696) - - 39,018 (28,262) - - - - - (45,414) $ - 45,118 (28,558) - - - - - (58,317) - - 936,046 $ - 58,112 (28,763) $ $ $ $ Dividends in excess of net income $ Other Comprehensive Income (Loss) $ Non-Controlling Interest Total Equity $ $ $ (2,060) - - - - - - (1,070) - (3,130) - - - - - - 2,594 - (536) - - - - - - 1,911 - 1,375 $ $ $ $ 2,415 - - - - (640) - (23) 744 2,496 - - - - - (667) 24 679 2,532 - - - - - (705) 24 678 2,529 356,035 92,260 - - 1,992 (35,336) - (1,093) 39,762 453,620 228,011 (712) - - 2,257 (46,081) $ 2,618 45,797 685,510 222,695 (1,111) - - 2,393 (59,022) 1,935 58,790 911,190 $ 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 ($ in thousands) Mortgage Notes Payable Average Interest Rate Average Interest Rate Unsecured Term Loans Average Interest Rate Senior Unsecured Notes Average Interest Rate 2018 2019 2020 2021 2022 Thereafter Total $ 27,576 $ 24,251 $ 3,866 $ 998 $ 1,060 $ 31,344 $ 89,095 2.87% 3.69% 6.21% 6.02% 6.02% 4.09% $ $ $ 2.63% 761 $ 18,543 $ - $ - $ - $ 140,000 $ 159,304 3.62% 3.62% - $ - $ - $ - $ - $ 260,000 $ 260,000 3.57% 4.25% (1) The balloon payment balance includes the balance outstanding under the Credit Facility as of December 31, 2017. The Credit Facility matures in January 2021, with options to extend the maturity for one year at the Company’s election, subject to certain conditions. The fair value is estimated at $89.8 million and $426.7 million for mortgage notes payable and unsecured term loans and notes, respectively, as of December 31, 2017. The table above incorporates those exposures that exist as of December 31, 2017; 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 seek to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs by closely monitoring our variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous. From time to time, we may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements are intended to lessen the impact of rising interest rates, they also expose us to the risks that the other parties to the agreements will not perform, we could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly-effective cash flow hedges under GAAP guidance. In April 2012, the Company entered into an amortizing forward-starting interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $22.3 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.92%. The notional amount as of December 31, 2017 was $19.3 million. This swap effectively converted $22.3 million of variable-rate borrowings to fixed-rate borrowings from July 1, 2013 to May 1, 2019. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.0 million. In December 2012, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $25.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 0.89%. This swap effectively converted $25.0 million of variable-rate borrowings to fixed-rate borrowings from December 6, 2012 to April 4, 2018. As of December 31, 2017, this interest rate swap was valued as an asset of approximately $0.0 million. In September 2013, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.20%. This swap effectively converted $35.0 million of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.2 million. In July 2014, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.09%. This swap effectively converted $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.1 million. F-8 33 4 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Company’s computation of AFFO may differ from the methodology for calculating AFFO used by other equity REITs, and therefore may not be comparable to such other REITs. Note that, during the year ended December 31, 2015, the Company adjusted its calculation of AFFO to exclude non-recurring capitalized building improvements and to include non-real estate related depreciation and amortization. Management believes that these changes provide a more useful measure of operating performance in the context of AFFO. The following table provides a reconciliation of net income to FFO for the years ended December 31, 2017, 2016 and 2015: Net income Depreciation of real estate assets Amortization of leasing costs Amortization of lease intangibles Gain on sale of assets Funds from Operations Reconciliation from Net Income to Funds from Operations December 31, 2017 December 31, 2016 December 31, 2015 Year Ended $ 58,790 $ 45,797 $ 39,762 19,507 163 12,004 (14,193) 15,200 125 8,010 (9,964) 11,466 98 4,859 (12,135) $ 76,271 $ 59,168 $ 44,050 Funds from Operations Per Share - Diluted $ 2.72 $ 2.54 $ 2.39 The following table provides a reconciliation of net income to AFFO for the years ended December 31, 2017, 2016 27,972,721 28,047,966 23,216,355 23,307,418 18,350,741 18,413,034 Weighted average shares and OP units outstanding Basic Diluted and 2015: Reconciliation from Net Income to Adjusted Funds from Operations December 31, 2017 December 31, 2016 December 31, 2015 $ 58,790 $ 45,797 $ 39,762 $ 76,271 $ 59,168 $ 44,050 Year Ended 13,371 (3,582) (541) - 2,441 516 72 333 17,481 (3,548) - (230) 2,589 574 78 - 4,288 (2,450) (463) - 1,992 494 62 180 Adjusted Funds from Operations Per Share - Diluted $ 2.70 $ 2.51 $ 2.38 $ 75,734 $ 58,407 $ 43,865 Net income Cumulative adjustments to calculate FFO Funds from Operations Straight-line accrued rent Deferred revenue recognition Deferred tax expense (benefit) Stock based compensation expense Amortization of financing costs Non-real estate depreciation Loss on debt extinguishment Adjusted Funds from Operations Additional supplemental disclosure Scheduled principal repayments Capitalized interest Capitalized building improvements $ 3,151 $ 570 $ 1,230 $ 2,954 $ 210 $ 541 $ 2,772 $ 39 $ 310 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, assuming no mortgage defaults. AGREE REALTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) 2017 For the Year Ended December 31, 2016 2015 $ 58,790 $ 45,797 $ 39,762 19,586 12,166 979 2,393 - (14,193) (4,216) 444 5,265 14 1,202 (230) 3 82,203 15,274 8,133 720 2,257 333 (9,964) (4,117) (109) 1,984 115 1,247 - 65 61,735 11,530 4,956 689 1,992 181 (12,135) (2,911) (197) 1,043 (463) 241 - (8) 44,680 (319,572) (297,868) (223,871) (43,302) (568) (7,975) 44,343 (327,074) 222,695 (1,111) 203,000 (203,000) (2,412) - (739) 100,000 (55,146) (695) - (309) 262,283 17,412 33,395 50,807 17,331 257 4,298 16,303 21,500 $ $ $ $ $ $ (27,919) (686) - 28,919 (297,554) 228,011 (712) 252,000 (256,000) (31,578) 60,283 (239) 60,000 (42,058) (657) - (2,548) 266,502 30,683 2,712 33,395 13,822 153 3,517 13,124 - $ $ $ $ $ $ (6,970) (66) - 28,132 (202,775) 92,260 - 161,000 (158,000) (5,178) - - 100,000 (32,992) (636) (150) (896) 155,408 (2,687) 5,399 2,712 11,548 155 2,864 9,758 - Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization Amortization from financing and credit facility costs Stock-based compensation Write-off of deferred costs (Gain) loss on sale of assets (Increase) decrease in accounts receivable (Increase) decrease in other assets Increase (decrease) in accounts payable Increase (decrease) in deferred revenue Increase (decrease) in accrued interest Increase (decrease) in deferred taxes Increase (decrease) in tenant deposits Net Cash Provided by Operating Activities Cash Flows from Investing Activities Acquisition of real estate investments and other assets Development of real estate investments and other assets (including capitalized interest of $570 in 2017, $210 in 2016, and $39 in 2015) Payment of leasing costs Cash held in escrows from sale of assets Net proceeds from sale of assets Net Cash Used In Investing Activities Cash Flows from Financing Activities Proceeds from common stock offerings, net Repurchase of common shares Unsecured revolving credit facility borrowings Unsecured revolving credit facility repayments Payments of mortgage notes payable Unsecured term loan proceeds Payments of unsecured term loans Senior unsecured notes proceeds Dividends paid Distributions to Non-Controlling Interest Debt extinguishment costs Payments for financing costs Net Cash Provided by Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, beginning of period Cash and Cash Equivalents, end of period Supplemental Disclosure of Cash Flow Information Cash paid for interest (net of amounts capitalized) Cash paid (refunded) for income tax Supplemental Disclosure of Non-Cash Investing and Financing Activities Shares issued under equity incentive plans (in dollars) Dividends and limited partners' distributions declared and unpaid Real Estate acquisitions financed with debt assumption $ $ $ $ $ $ See accompanying notes to consolidated financial statements. 32 F-9 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT Agree Realty Corporation Note 1 – Organization Notes to Consolidated Financial Statements December 31, 2017 Agree Realty Corporation (the “Company”), a Maryland corporation, is a fully integrated real estate investment trust (“REIT”) primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. The Company was founded in 1971 by its current Executive Chairman, Richard Agree, and our common stock was listed on the New York Stock Exchange (“NYSE”) in 1994. Our assets are held by, and all of our operations are conducted through, directly or indirectly, Agree Limited Partnership (the “Operating Partnership”), of which Agree Realty Corporation is the sole general partner and in which it held a 98.8% interest as of December 31, 2017. Under the partnership agreement of the Operating Partnership, Agree Realty Corporation, as the sole general partner, has exclusive responsibility and discretion in the management and control of the Operating Partnership. The terms “Agree Realty,” the "Company," “Management,” "we,” “our” or "us" refer to Agree Realty Corporation and all of its consolidated subsidiaries, including the Operating Partnership. Note 2 – Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of Agree Realty Corporation include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries. The Company, as the sole general partner, held 98.8% and 98.7% of the Operating Partnership as of December 31, 2017 and 2016, respectively. All material intercompany accounts and transactions are eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) 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. Reclassifications Certain reclassifications of prior period amounts have been made in the consolidated financial statements and footnotes in order to conform to the current presentation. Prepaid rents are presented on the Balance Sheet as Deferred Revenue; in previously filed reports prepaid rents were presented in Accounts Payable - Operating. The classification of below-market lease intangibles are presented net of accumulated amortization as a Liability; in previously filed reports below-market lease intangibles were presented in Unamortized Deferred Expenses: Lease Intangibles, net with in-place and above-market lease intangibles. As of December 31, 2017, all fully amortized deferred credit facility financing costs attributable to the credit facility were written off. Segment Reporting The Company is primarily in the business of acquiring, developing and managing retail real estate which is considered to be one reporting segment. The Company has no other reportable segments. Real Estate Investments The Company records the acquisition of real estate at cost, including acquisition and closing costs. For properties developed by the Company, all direct and indirect costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed. Properties classified as “held for sale” are recorded at the lower of their carrying value or their fair value, less anticipated selling costs. Assets are generally classified as held for sale once management has actively engaged in marketing the asset and has received a firm purchase commitment that is expected to close within one year. Accounting for Acquisitions of Real Estate The acquisition of property for investment purposes is typically accounted for as an asset acquisition. The Company allocates the purchase price to land, buildings and identified intangible assets and liabilities, based in each case on their relative estimated fair values and without giving rise to goodwill. Intangible assets and liabilities F-10 We have entered into mortgage loans which are secured by multiple properties and contain cross-default and cross- collateralization provisions. Cross-collateralization provisions allow a lender to foreclose on multiple properties in the event that we default under the loan. Cross-default provisions allow a lender to foreclose on the related property in the event a default is declared under another loan. Contractual Obligations The following table summarizes our contractual obligations by due date as of December 31, 2017: Mortgage Notes Payable Revolving Credit Facility Unsecured Term Loans Senior Unsecured Notes Land Lease Obligations Total Estimated Interest Payments on Outstanding Debt Total 2018 2019-2020 2021-2022 $ 27,576 $ 28,118 $ Thereafter $ 31,343 $ $ 89,095 14,000 159,304 260,000 10,342 155,978 688,719 761 - - 641 20,270 49,248 - - 18,543 1,265 37,510 85,436 2,058 14,000 - - 1,093 35,449 52,600 - 140,000 260,000 7,343 62,749 501,435 $ $ $ $ Estimated interest payments are based on (i) the stated rates for mortgage notes payable, including the effect of interest rate swaps and (ii) the stated rates for unsecured term loans, including the effect of interest rate swaps and assuming the interest rate in effect for the most recent quarter remains in effect through the respective maturity dates. Dividends Inflation During the quarter ended December 31, 2017, we declared a quarterly dividend of $0.520 per share. The cash dividend was paid on January 3, 2018 to holders of record on December 20, 2017. Our leases typically contain provisions to mitigate the adverse impact of inflation on our results of operations. Tenant leases generally provide for limited increases in rent as a result of fixed increases or increases in the consumer price index. Certain of our leases contain clauses enabling us to receive percentage rents based on tenants’ gross sales, which generally increase as prices rise. During times when inflation is greater than increases in rent, rent increases will not keep up with the rate of inflation. Substantially all of properties are leased to tenants under long-term, net leases which require the tenant to pay certain operating expenses for a property, thereby reducing our exposure to operating cost increases resulting from inflation. Inflation may have an adverse impact on our tenants. Funds from Operations Funds from Operations (“FFO”) is defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) to mean net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization and any impairment charges on a depreciable real estate asset, and after adjustments for unconsolidated partnerships and joint ventures. Management uses FFO as a supplemental measure to conduct and evaluate the Company’s business because there are certain limitations associated with using GAAP net income by itself as the primary measure of the Company’s 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 an alternative to net income as the primary indicator of the Company’s operating performance, or an alternative to cash flow as a measure of liquidity. Further, while the Company adheres to the NAREIT definition of FFO, its presentation of FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that all REITs may not use the same definition. Adjusted Funds from Operations (“AFFO”) is a non-GAAP financial measure of operating performance used by many companies in the REIT industry. AFFO further adjusts FFO for certain non-cash items that reduce or increase net income in accordance with GAAP. Management considers AFFO a useful supplemental measure of the Company’s performance, however, AFFO should not be considered an alternative to net income as an indication of the Company’s performance, or to cash flow as a measure of liquidity or ability to make distributions. The 31 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Cyan ] 32 Page 4 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] 4 44 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 to $500.0 million, subject to lender approval. Borrowings under the revolving credit facility bear interest at LIBOR plus 130 to 195 basis points, depending on our leverage ratio. Additionally, we are required to pay an unused commitment fee at an annual rate of 15 or 25 basis points on the unused portion of the revolving credit facility, depending on the amount of borrowings outstanding. The credit agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio and a maximum percentage of secured debt to total asset value. Unsecured Term Loan Facilities In July 2016, the Company entered into a $40.0 million unsecured term loan facility that matures in July 2023 (the “2023 Term Loan”). Borrowings under the 2023 Term Loan are priced at LIBOR plus 165 to 225 basis points, depending on the Company’s leverage. The Company entered into an interest rate swap to fix LIBOR at 1.40% until maturity. As of December 31, 2017, $40.0 million was outstanding under the 2023 Term Loan, which was subject to an all-in interest rate of 3.05%. In August 2016, the Company entered into a $20.3 million unsecured amortizing term loan that matures in May 2019 (the “2019 Term Loan”). Borrowings under the 2019 Term Loan are priced at LIBOR plus 170 basis points. In order to fix LIBOR on the 2019 Term Loan at 1.92% until maturity, the Company had an interest rate swap agreement in place, which was assigned by the lender under the previously secured facility to the 2019 Term Loan lender. As of December 31, 2017, $19.3 million was outstanding under the 2019 Term Loan bearing an all-in interest rate of 3.62%. The amended and restated credit agreement, described above, extended the maturity dates of the $65.0 million unsecured term loan facility and $35.0 million unsecured term loan facility (together, the “2024 Term Loan Facilities”) to January 2024. In connection with entering into the amended and restated credit agreement, the prior notes evidencing the existing $65.0 million unsecured term loan facility and $35.0 million unsecured term loan facility were canceled and new notes evidencing the 2024 Term Loan Facilities were executed. Borrowings under the unsecured 2024 Term Loan Facilities bear interest at a variable LIBOR plus 165 to 235 basis points, depending on the Company's leverage ratio. The Company utilized existing interest rate swaps to effectively fix the LIBOR rate (refer to Note 8 – Derivative Instruments and Hedging Activity). Senior Unsecured Notes In May 2015, the Company completed a private placement of $100.0 million principal amount of senior unsecured notes. The senior unsecured notes were sold in two series; $50.0 million of 4.16% notes due in May 2025 and $50.0 million of 4.26% notes due in May 2027. The weighted average term of the senior unsecured notes is 11 years and the weighted average interest rate is 4.21%. In July 2016, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $60.0 million aggregate principal amount of our 4.42% senior unsecured notes due July 28, 2028. The senior unsecured notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act. In August 2017, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $100.0 million aggregate principal amount of our 4.19% senior unsecured notes due September 2029. The senior unsecured notes are guaranteed by the Company. The closing of the private placement was consummated in September 2017, and, on that date, the Operating Partnership issued the senior unsecured notes. The senior unsecured notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act. Mortgage Notes Payable As of December 31, 2017, we had total gross mortgage indebtedness of $89.1 million, with a weighted average term to maturity of 3.0 years. Including our mortgages that have been swapped to a fixed interest rate, our weighted average interest rate on mortgage debt was 3.74%. In December 2017, the Company assumed an interest only mortgage note for $21.5 million with PNC Bank, National Association. The mortgage note is due October 2019, secured by a multi-tenant property and has a fixed interest rate of 3.32%. 30 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 represent the value of in-place leases and above- or below-market leases. In making estimates of fair values, the Company may use a number of sources, including data provided by independent third parties, as well as information obtained by the Company as a result of its due diligence, including expected future cash flows of the property and various characteristics of the markets where the property is located. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, in-place lease intangibles are valued based on the Company’s estimates of costs related to tenant acquisition and the carrying costs that would be incurred during the time it would take to locate a tenant if the property were vacant, considering current market conditions and costs to execute similar leases at the time of the acquisition. Above- and below- market lease intangibles are recorded based on the present value of the difference between the contractual amounts to be paid pursuant to the leases at the time of acquisition and the Company’s estimate of current market lease rates for the property. The capitalized above- and below-market lease intangibles are amortized over the non-cancelable term of the lease unless the Company believes it is reasonably certain that the tenant will renew the lease for an option term whereby the Company amortizes the value attributable to the renewal over the renewal period. The fair value of identified intangible assets and liabilities acquired is amortized to depreciation and amortization over the remaining term of the related leases. Depreciation The Company’s real estate portfolio is depreciated using the straight-line method over the estimated remaining useful life of the properties, which are generally 40 years for buildings and 10 to 20 years for improvements. Properties classified as “held for sale” and properties under development are not depreciated. Impairments The Company reviews its real estate investments periodically for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Events or circumstances that may occur include, but are not limited to, significant changes in real estate market conditions or our ability to re-lease or sell properties that are 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. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows and an impairment charge is recorded in the amount by which the carrying value of the asset exceeds its estimated 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. Cash and cash equivalents consist of cash and money market accounts. 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. We had $57.5 million and $32.4 million in cash and cash held in escrow as of December 31, 2017 and December 31, 2016, respectively, in excess of the FDIC insured limit. Accounts Receivable – Tenants The Company reviews its rent receivables for collectability on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area where the property is located. In the event that the collectability of a receivable with respect to any tenant is in doubt, a provision for uncollectible amounts will be established or a direct write-off of the specific rent receivable will be made. For accrued rental revenues related to the straight-line method of reporting rental revenue, the Company performs a periodic review of receivable balances to assess the risk of uncollectible amounts and establish appropriate provisions. The Company’s leases provide for reimbursement from tenants for common area maintenance (“CAM”), insurance, real estate taxes and other operating expenses ("Operating Cost Reimbursement Revenue"). A portion of our Operating Cost Reimbursement Revenue is estimated each period and is recognized as revenue in the period the recoverable costs are incurred and accrued. Receivables from Operating Cost Reimbursement Revenue are included in our Accounts Receivable - Tenants line item in our consolidated balance sheets. The balance of unbilled Operating Cost Reimbursement Receivable at December 31, 2017 and December 31, 2016 was $1.4 million and $1.1 million, respectively. F-11 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT As of December 31, 2017, our total market capitalization was approximately $2.1 billion. Market capitalization consisted of $1.6 billion of shares of our common stock (based on the December 29, 2017 closing price of our common stock on the NYSE of $51.44 per share and assuming the conversion of OP Units) and $522.4 million of total debt including (i) $14.0 million of borrowings under our revolving credit facility; (ii) $159.3 million of unsecured term loans; (iii) $260.0 million of senior unsecured notes; and (iv) $89.1 million of mortgage notes payable. Our ratio of total debt to total market capitalization was 24.5% at December 31, 2017. At December 31, 2017, the non-controlling interest in our Operating Partnership consisted of a 1.2% ownership interest in the Operating Partnership held by third parties. The OP Units may, under certain circumstances, be exchanged for our shares of common stock on a one-for-one basis. We, as sole general partner of the Operating Partnership, have the option to settle exchanged OP Units held by others for cash based on the current trading price of our shares. Assuming the exchange of all OP Units, there would have been 31,352,519 shares of common stock outstanding at December 31, 2017. Debt December 31, 2016 (in thousands): The below table summarizes the Company’s outstanding debt for the periods ended December 31, 2017 and Senior Unsecured Revolving Credit Facility Maturity December 31, 2017 December 31, 2016 Principal Amount Outstanding Interest Rate 2.87% January 2021 $ 14,000 $ 14,000 $ 14,000 $ 14,000 Credit Facility (1) Total Credit Facility Unsecured Term Loans (2) 2019 Term Loan 2023 Term Loan 2024 Term Loan Facility 2024 Term Loan Facility Total Unsecured Term Loans Senior Unsecured Notes (2) 2025 Senior Unsecured Notes 2027 Senior Unsecured Notes 2028 Senior Unsecured Notes 2029 Senior Unsecured Notes Total Senior Unsecured Notes Mortgage Notes Payable (2) Secured Term Loan Single Asset Mortgage Loan Portfolio Mortgage Loan Single Asset Mortgage Loan CMBS Portfolio Loan Single Asset Mortgage Loan Portfolio Credit Tenant Lease 3.62% 3.05% 3.74% 3.85% May 2019 July 2023 January 2024 January 2024 4.16% 4.26% 4.42% 4.19% 2.49% 3.32% 6.90% 6.24% 3.60% 5.01% 6.27% May 2025 May 2027 July 2028 September 2029 April 2018 October 2019 January 2020 February 2020 January 2023 September 2023 July 2026 $ 19,304 $ 20,044 $ 159,304 $ 160,044 $ 50,000 $ 50,000 $ 260,000 $ 160,000 $ 25,000 $ 25,000 40,000 65,000 35,000 50,000 60,000 100,000 21,500 3,573 2,963 23,640 5,131 7,288 40,000 65,000 35,000 50,000 60,000 - - 5,114 3,049 23,640 5,294 7,910 4 44 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 Capitalization In addition, many of the Company’s leases contain rent escalations for which we recognize revenue on a straight- line basis over the non-cancelable lease term. This method results in rental revenue in the early years of a lease being higher than actual cash received, creating a straight-line rent receivable asset which is included in the Accounts Receivable - Tenants line item in our consolidated balance sheet. The balance of straight-line rent receivables at December 31, 2017 and December 31, 2016 was $12.9 million and $9.6 million, respectively. To the extent any of the tenants under these leases become unable to pay their contractual cash rents, the Company may be required to write down the straight-line rent receivable from those tenants, which would reduce operating income. Sales Tax The Company collects various taxes from tenants and remits these amounts, on a net basis, to the applicable taxing authorities. Unamortized Deferred Expenses Deferred expenses include debt financing costs related to the line of credit, leasing costs and lease intangibles. The expenses are amortized as follows: (i) debt financing costs related to the line of credit on a straight-line basis to interest expense over the term of the related loan, which approximates the effective interest method; (ii) leasing costs on a straight-line basis to depreciation and amortization over the term of the related lease entered into; and (iii) lease intangibles on a straight-line basis to depreciation and amortization over the remaining term of the related lease acquired. The following schedule summarizes the Company’s amortization of deferred expenses for the years ended December 31, 2017, 2016 and 2015, respectively (in thousands): For the Year Ended December 31, 2016 2017 2015 Credit Facility Financing Costs Leasing Costs Lease Intangibles (Asset) Lease Intangibles (Liability) Total $ $ $ 405 161 16,060 (4,275) 12,351 228 124 11,093 (3,083) 8,362 225 97 6,598 (1,739) 5,181 $ $ $ The following schedule represents estimated future amortization of deferred expenses as of December 31, 2017 (in thousands): Year Ending December 31, Credit Facility Financing Costs Leasing Costs Lease Intangibles (Asset) Lease Intangibles (Liability) Total 2018 2019 2020 2021 2022 Thereafter Total $ $ $ $ 394 179 20,151 (4,403) 16,321 380 221 19,383 (4,329) 15,655 379 210 18,917 (4,229) 15,277 $ $ $ $ 21 195 18,241 (3,944) 14,513 $ - 208 17,161 (3,044) 14,325 $ - $ 570 101,305 (10,401) 91,474 $ $ 1,174 1,583 195,158 (30,350) 167,565 $ Revenue Recognition The Company leases real estate to its tenants under long-term net leases which we account for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight- line basis over the lease term. Rental increases based upon changes in the consumer price indexes, or other variable factors, are recognized only after changes in such factors have occurred and are then applied according to the lease agreements. Certain leases also provide for additional rent based on tenants’ sales volumes. These rents are recognized when determinable after the tenant exceeds a sales breakpoint. Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses are generally included in operating costs reimbursement in the period when such expenses are recorded. Earnings per Share Earnings per share have been computed by dividing the net income (less income attributable to unvested restricted stock), by the weighted average number of common shares outstanding (less unvested restricted stock). Diluted F-12 Total Mortgage Notes Payable $ 89,095 $ 70,007 Total Principal Amount Outstanding $ 522,399 $ 404,051 (1) The annual interest rate of the Credit Facility assumes one month LIBOR as of December 31, 2017 of 1.57%. (2) Interest rate includes the effects of variable interest rates that have been swapped to fixed interest rates. Senior Unsecured Revolving Credit Facility In December 2016, the Company amended and restated the credit agreement that governs our senior unsecured revolving credit facility and unsecured term loan facility to increase the aggregate borrowing capacity to $350.0 million. The agreement provides for a $250.0 million unsecured revolving credit facility, a $65.0 million unsecured term loan facility and a $35.0 million unsecured term loan facility. The unsecured revolving credit facility matures in January 2021 with options to extend the maturity date to January 2022. The unsecured term loan facilities mature in January 2024. We have the ability to increase the aggregate borrowing capacity under the credit agreement up 29 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Cyan ] 32 Page 4 44 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] Property operating expenses increased $0.7 million, or 40%, to $2.5 million in 2016, compared to $1.8 million in 2015. The increase was primarily due to the ownership of additional properties in 2016 compared to 2015 which contributed to higher property maintenance, utilities and insurance expenses. Our tenants subsequently reimbursed us for the majority of these expenses. Land lease payments increased $0.1 million, or 8%, to $0.7 million in 2016, compared to $0.6 million in 2015. General and administrative expenses increased $1.0 million, or 15%, to $8.0 million in 2016, compared to $7.0 million in 2015. The increase was primarily the result of increased employee headcount and associated professional costs. General and administrative expenses as a percentage of total revenue decreased to 8.8% for 2016 from Depreciation and amortization increased $6.9 million, or 42%, to $23.4 million in 2016, compared to $16.5 million 10.0% in 2015. in 2015. We recorded no impairment charges during 2016 or 2015. Interest expense increased $3.0 million, or 25%, to $15.3 million in 2016, from $12.3 million in 2015. The increase in interest expense was primarily a result of an additional borrowing and debt issuance in 2016, including the $40.0 million unsecured term loan facility we entered into in July 2016 and $60.0 million senior unsecured notes issued in July 2016, which were offset by the repayment of the $8.6 million portfolio mortgage loan in March 2016. During 2016, the Company sold real estate properties for net proceeds of $28.9 million and a recorded net gain of $10.0 million (net of any expected losses on real estate held for sale). We had no income from discontinued operations in 2016 or 2015. Net Income increased $6.0 million, or 15%, to $45.8 million in 2016, from $39.8 million in 2015 for the reasons set forth above. Liquidity and Capital Resources Our principal demands for funds include payment of operating expenses, payment of principal and interest on our outstanding indebtedness, distributions to our shareholders and future property acquisitions and development. We expect to meet our short-term liquidity requirements through cash provided from operations and borrowings under our revolving credit facility. As of December 31, 2017, available cash and cash equivalents was $50.8 million. As of December 31, 2017 we had $14.0 million outstanding on our revolving credit facility and $236.0 million was available for future borrowings, subject to our compliance with covenants. We anticipate funding our long-term capital needs through cash provided from operations, borrowings under our revolving credit facility, the issuance of debt and common or preferred equity or other instruments convertible into or exchangeable for common or preferred equity. In August 2017, the Company entered into an uncommitted and unsecured $100 million private placement shelf agreement (the “AIG Shelf Agreement”) with AIG Asset Management (U.S.), LLC (“AIG”) and each AIG Affiliate named therein. The AIG Shelf Agreement allows us to issue senior unsecured notes to AIG at terms to be agreed upon at the time of any issuance during a three year issuance period ending in August 2020. As of December 31, 2017, no notes had been issued under the AIG Shelf Agreement. In August 2017, the Company entered into an uncommitted and unsecured $100 million private placement shelf agreement (the “TIAA Shelf Agreement”) with Teachers Insurance and Annuity Association of America (“TIAA”) and each TIAA Affiliate named therein. The TIAA Shelf Agreement allows us to issue senior unsecured notes to TIAA at terms to be agreed upon at the time of any issuance during a three year issuance period ending in August 2020. As of December 31, 2017, no notes had been issued under the TIAA Shelf Agreement. We continually evaluate alternative financing and believe that we can obtain financing on reasonable terms. However, there can be no assurance that additional financing or capital will be available, or that the terms will be acceptable or advantageous to us. 28 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 earnings per share is computed by dividing net income (less income attributable to unvested restricted stock), by the weighted average common and potentially 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: 2017 Year Ended December 31, 2016 2015 Weighted average number of common shares outstanding Less: Unvested restricted stock 27,852,231 (227,129) 23,096,267 (227,531) 18,215,628 (212,506) Weighted average number of common shares outstanding used in basic earnings per share 27,625,102 22,868,736 18,003,122 Weighted average number of common shares outstanding used in basic earnings per share Effect of dilutive securities: restricted stock Weighted average number of common shares outstanding used in diluted earnings per share 27,625,102 75,245 22,868,736 91,063 18,003,122 62,293 27,700,347 22,959,799 18,065,415 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% 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, 2017, 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 7). All provisions for federal income taxes in the accompanying consolidated financial statements are attributable to the Company’s TRS. Fair Values of Financial Instruments The Company’s estimates of fair value of financial and non-financial assets and liabilities are based on the framework established in the fair value accounting guidance. The framework specifies a hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures. The guidance describes a fair value hierarchy based upon three levels of inputs that may be used to measure fair value, two of which are considered observable and one that is considered unobservable. The following describes the three levels: Level 1 – Valuation is based upon quoted prices in active markets for identical assets or liabilities. Level 2 – Valuation is based upon inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include option pricing models, discounted cash flow models and similar techniques. Recent Accounting Pronouncements In August 2017, the Financial Accounting Standards Board (”FASB”) issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). The F-13 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side D Cyan ] 32 Page 4 44 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 objective of ASU 2017-12 is to expand hedge accounting for both financial (interest rate) and commodity risks, and create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. ASU 2017-12 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company is in the process of determining the impact that the implementation of ASU 2017-12 will have on the Company’s financial statements. In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). The objective of ASU 2017-09 is to provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. ASU 2017-09 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company has evaluated the impact that ASU 2017-09 will have on the Company’s financial statements, and concluded the implementation of ASU 2017-09 has no material impact on the financial statements. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations: Clarifying the Definition of a Business” (“ASU 2017-01”). The objective of ASU 2017-01 is to clarify the definition of a business by adding guidance on how entities should evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company has early adopted and the guidance has no material impact on the financial statements. In February 2016, the FASB issued ASU No. 2016-02 “Leases” (“ASU 2016-02”). The new standard creates Topic 842, Leases, in FASB Accounting Standards Codification (FASB ASC) and supersedes FASB ASC 840, Leases. ASU 2016-02 requires a lessee to recognize the assets and liabilities that arise from leases (operating and finance). However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election to not recognize lease assets and lease liabilities. The main difference between the existing guidance on accounting for leases and the new standard is that operating leases will now be recorded in the statement of financial position as assets and liabilities. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. ASU 2016-02 is expected to impact the Company’s consolidated financial statements as the Company has certain operating land lease arrangements for which it is the lessee. GAAP requires only capital (finance) leases to be recognized in the statement of financial position, and amounts related to operating leases largely are reflected in the financial statements as rent expense on the income statement and in disclosures to the financial statements. ASU 2016-02 is effective for annual reporting periods (including interim periods within those annual periods) beginning after December 15, 2018. Early adoption is permitted. The Company has engaged a professional services firm to assist in the implementation of ASU 2016-02. The Company anticipates that its retail leases where it is the lessor will continue to be accounted for as operating leases under the new standard. Therefore, the Company does not currently anticipate significant changes in the accounting for its lease revenues. The Company is also the lessee under various land lease arrangements and it will be required to recognize right of use assets and related lease liabilities on its consolidated balance sheets upon adoption. The Company will continue to evaluate the impact of adopting the new leases standard on its consolidated statements of income and comprehensive income and consolidated balance sheets. In May 2014, with subsequent updates issued in August 2015 and March, April and May 2016, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The update’s core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Companies are to use a five-step contract review model to ensure revenue is recognized, measured and disclosed in accordance with this principle. Those steps are (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to each performance obligation in the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation. F-14 Real estate taxes increased $2.7 million, or 50%, to $8.2 million in 2017, compared to $5.5 million in 2016. The increase was due to the ownership of additional properties in 2017 compared to 2016 for which we remit real estate taxes and are subsequently reimbursed by tenants. Property operating expenses increased $1.1 million, or 45%, to $3.6 million in 2017, compared to $2.5 million in 2016. The increase was primarily due to the ownership of additional properties in 2017 compared to 2016 which contributed to higher property maintenance, utilities and insurance expenses. Our tenants subsequently reimbursed us for the majority of these expenses. Land lease payments remained consistent with prior periods. The years ended December 31, 2017 and 2016 totaled approximately $0.7 million. General and administrative expenses increased $1.9 million, or 36%, to $9.9 million in 2017, compared to $8.0 million in 2016. The increase was primarily the result of increased employee headcount and associated professional costs and was partially offset by a one-time credit of $0.2 million to reflect a reduction in the company’s deferred tax liability due to new tax legislation. General and administrative expenses as a percentage of total revenue decreased to 8.5% for 2017 from 8.8% in 2016. Depreciation and amortization increased $8.4 million, or 35%, to $31.8 million in 2017, compared to $23.4 million in 2016. The increase was due to the ownership of additional properties in 2017 compared to 2016. We recorded no impairment charges during 2017 or 2016. Interest expense increased $2.8 million, or 18%, to $18.1 million in 2017, from $15.3 million in 2016. The increase in interest expense was primarily a result of higher levels of borrowings to finance the acquisition and development of additional properties. The Company also issued $100.0 million senior unsecured notes in September 2017. Higher interest expense was also attributable to the full year interest impact of debt issuances in 2016. During 2017, the Company sold real estate properties for net proceeds of $44.3 million and recorded a net gain of $14.2 million (net of any expected losses on real estate held for sale). We had no income from discontinued operations in 2017 or 2016. Net Income increased $13.0 million, or 29%, to $58.8 million in 2017, from $45.8 million in 2016 for the reasons set forth above. Comparison of Year Ended December 31, 2016 to Year Ended December 31, 2015 Minimum rental income increased $19.7 million, or 31%, to $84.0 million in 2016, compared to $64.3 million in 2015. Approximately $20.2 million of the increase is due to the acquisition of 82 properties in 2016 and the full year impact of 73 properties acquired in 2015. Approximately $1.2 million of the increase was attributable to nine development projects completed in 2016 and the full year impact of one development project completed in 2015, and approximately a $0.4 million increase due to other minimum rental income adjustments. These increases were partially offset by approximately a $2.1 million reduction in minimum rental income from properties sold during 2016 that were owned for all of part of 2015. Percentage rents remained consistent with prior periods. The years ended December 31, 2016 and 2015 totaled $0.2 million. Operating cost reimbursements increased $2.0 million, or 38%, to $7.3 million in 2016, compared to $5.3 million in 2015. Operating cost reimbursements increased due to higher levels of recoverable property operating expenses, including real estate taxes, acquisition, disposition, and development activity. The portfolio recovery rate remained consistent at 91% for both 2016 and 2015, respectively. Other income remained consistent with prior periods. Real estate taxes increased $1.5 million, or 36%, to $5.5 million in 2016, compared to $4.0 million in 2015. The increase was due to the ownership of additional properties in 2016 compared to 2015 for which we remit real estate taxes and are subsequently reimbursed by tenants. 27 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side C Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT 4 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 4 ] Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 The Company has identified four main revenue streams of which three of them originate from lease contracts and will be subject to Leases ASU 2016-02, Topic 842 effective for annual reporting periods (including interim periods) beginning after December 15, 2018. The revenue streams are: Revenue Recognition (ASU 2014-09, Topic 610-20): (cid:120) Gain (loss) on sale of real estate properties Leases (ASU 2016-02, Topic 842): (cid:120) Rental revenues (cid:120) Straight line rents (cid:120) Tenant recoveries As of January 1, 2018, the Company will be accounting for the sale of real estate properties under Subtopic 610- 20 which provides for revenue recognition based on transfer of ownership. All properties were non-financial real estate assets and thus not businesses which were sold to non-customers with no performance obligations. During the year ended December 31, 2017, the Company sold real estate properties for net proceeds of $44.3 million, and a recorded net gain of $14.2 million. Management has concluded that all of the Company’s material revenue streams falls outside of the scope of this guidance and currently recognizes revenue from its contracts with customers at a point in time and does not anticipate any changes. The Company intends to implement the standard under the modified retrospective method and does not anticipate any cumulative effect recognized in retained earnings at the date of adoption (January 1, 2018). Note 3 – Real Estate Investments Real Estate Portfolio As of December 31, 2017, the Company owned 436 properties, with a total gross leasable area of approximately 8.7 million square feet. Net Real Estate Investments totaled $1.2 billion as of December 31, 2017. As of December 31, 2016, the Company owned 366 properties, with a total gross leasable area of 7.0 million square feet. Net Real Estate Investments totaled $950.3 million as of December 31, 2016. Tenant Leases The properties that the Company owns are typically leased to tenants under long term operating leases. The leases are generally net leases which typically require the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. Certain of our properties are subject to leases under which we retain responsibility for specific costs and expenses of the property. The leases typically provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term. As of December 31, 2017, the future minimum lease payments to be received under the terms of all non- cancellable tenant leases is as follows (in thousands): For the Year Ending December 31, 2018 2019 2020 2021 2022 Thereafter Total $ 114,983 114,338 112,189 108,576 104,531 682,299 1,236,916 $ 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side B Cyan ] 32 Page F-15 Revenue Recognition We lease real estate to our tenants under long-term net leases which we account for as operating leases. Under this method, leases that have fixed and determinable rent increases are recognized on a straight-line basis over the lease term. Rental increases based upon changes in the consumer price indexes, or other variable factors, are recognized only after changes in such factors have occurred and are then applied according to the lease agreements. Certain leases also provide for additional rent based on tenants’ sales volumes. These rents are recognized when determinable by us after the tenant exceeds a sales breakpoint. Contractually obligated reimbursements from tenants for recoverable real estate taxes and operating expenses are generally included in operating costs reimbursement in the period when such expenses are recorded. Real Estate Investments We record the acquisition of real estate at cost, including acquisition and closing costs. For properties developed by us, all direct and indirect costs related to planning, development and construction, including interest, real estate taxes and other miscellaneous costs incurred during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed. Accounting for Acquisitions of Real Estate The acquisition of property for investment purposes is typically accounted for as an asset acquisition. We allocate the purchase price to land, building and identified intangible assets and liabilities, based in each case on their relative estimated fair values and without giving rise to goodwill. Intangible assets and liabilities represent the value of in-place leases and above- or below-market leases. In making estimates of fair values, we may use a number of sources, including data provided by independent third parties, as well as information obtained by the Company as a result our due diligence, including expected future cash flows of the property and various characteristics of the markets where the property is located. Our real estate portfolio is depreciated using the straight-line method over the estimated remaining useful life of the properties, which are generally 40 years for buildings and 10 to 20 years for improvements. Properties classified as “held for sale” and properties under development are not depreciated. Depreciation Impairments We review our real estate investments periodically for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Events or circumstances that may occur include, but are not limited to, significant changes in real estate market conditions or our ability to re-lease or sell properties that are 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. An asset is considered impaired if its carrying value exceeds its estimated undiscounted cash flows and an impairment charge is recorded in the amount by which the carrying value of the asset exceeds its estimated fair value. Results of Operations Comparison of Year Ended December 31, 2017 to Year Ended December 31, 2016 Minimum rental income increased $21.1 million, or 25%, to $105.1 million in 2017, compared to $84.0 million in 2016. Approximately $22.4 million of the increase was due to the acquisition of 79 properties in 2017 and the full year impact of 82 properties acquired in 2016. Approximately $2.2 million of the increase was attributable to four development projects completed in 2017 and the full year impact of nine development projects completed in 2016. These increases were partially offset by approximately a $2.1 million reduction in minimum rental income from properties sold during 2017 that were owned for all or part of 2016. Percentage rents remained consistent with prior periods. The years ended December 31, 2017 and 2016 totaled $0.2 million. Operating cost reimbursements increased $3.5 million, or 48%, to $10.8 million in 2017, compared to $7.3 million in 2016. Operating cost reimbursements increased primarily due to higher levels of recoverable property operating expenses, including real estate taxes, and increased property count. The portfolio recovery rate remained consistent at 91% in 2017 and 2016 due to the factors discussed above. Other income increased $0.5 million in 2017 compared to $0.0 million in 2016. 26 4 ] 4 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the current lease terms. In addition, this table does not include amounts for potential variable rent increases that are based on the Consumer Price Index (“CPI”) or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales. Of these future minimum rents, approximately 6.5% of the total is attributable to Walgreens as of December 31, 2017. The loss of this tenant or the inability of them to pay rent could have an adverse effect on the Company’s business. Deferred Revenue As of December 31, 2017, and December 31, 2016, there was $1.8 million and $1.8 million, respectively, in deferred revenues resulting from rents paid in advance. In July 2004, the Company’s tenant in a joint venture property located in Boynton Beach, FL repaid $4.0 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 company holding the property. Total assets of the property were approximately $4.0 million. The Company has treated the $4.0 million as deferred revenue and accordingly, will recognize rental income over the term of the related leases. The remaining deferred revenue for the Boynton Beach, FL property was fully recognized in 2016. Land Lease Obligations The Company is subject to land lease agreements for certain of its properties. Land lease expense was $0.7 million, $0.7 million, and $0.6 million for the years ending December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, future annual lease commitments under these agreements are as follows (in thousands): For the Year Ending December 31, 2018 2019 2020 2021 2022 Thereafter Total $ 641 634 632 588 505 7,342 10,342 $ Acquisitions During 2017, the Company purchased 79 retail net lease assets for approximately $338.0 million, including acquisition and closing costs. These properties are located in 27 states and 100% leased to 49 different tenants operating in 22 unique retail sectors for a weighted average lease term of approximately 11.1 years. None of the Company’s investments during 2017 caused any new or existing tenant to comprise 10% or more of the Company’s total assets or generate 10% or more of the Company’s total annualized base rent at December 31, 2017. The aggregate 2017 acquisitions were allocated approximately $94.1 million to land, $172.0 million to buildings and improvements, and $71.9 million to lease intangibles and other assets. The acquisitions were substantially all cash purchases and there was no contingent consideration associated with these acquisitions. In one acquisition, the Company assumed debt of $21.5 million. During 2016, the Company purchased 82 retail net lease assets for approximately $295.6 million, including acquisition and closing costs. These properties are located in 27 states and 100% leased to 49 different tenants operating in 22 unique retail sectors for a weighted average lease term of approximately 10.7 years. None of the Company’s investments during 2016 caused any new or existing tenant to comprise 10% or more of the Company’s total assets or generate 10% or more of the Company’s total annualized base rent at December 31, 2016. The aggregate 2016 acquisitions were allocated approximately $84.3 million to land, $170.0 million to buildings and improvements, and $41.3 million to lease intangibles and other assets. The acquisitions were substantially all cash purchases and there was no contingent consideration associated with these acquisitions. F-16 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 4 Side A Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT to impact the Company’s consolidated financial statements as the Company has certain operating land lease arrangements for which it is the lessee. GAAP requires only capital (finance) leases to be recognized in the statement of financial position, and amounts related to operating leases largely are reflected in the financial statements as rent expense on the income statement and in disclosures to the financial statements. ASU 2016-02 is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018. Early adoption is permitted. The Company has engaged a professional services firm to assist in the implementation of ASU 2016-02. The Company anticipates that its retail leases where it is the lessor will continue to be accounted for as operating leases under the new standard. Therefore, the Company does not currently anticipate significant changes in the accounting for its lease revenues. The Company is also the lessee under various land lease arrangements and it will be required to recognize right of use assets and related lease liabilities on its consolidated balance sheets upon adoption. The Company will continue to evaluate the impact of adopting the new leases standard on its consolidated statements of income and comprehensive income and consolidated balance sheets. In May 2014, with subsequent updates issued in August 2015 and March, April and May 2016, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The update’s core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Companies are to use a five-step contract review model to ensure revenue is recognized, measured and disclosed in accordance with this principle. Those steps include the following: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to each performance obligation in the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation. The Company has identified four main revenue streams of which three of them originate from lease contracts and will be subject to Leases ASU 2016-02, Topic 842 effective for annual reporting periods (including interim periods) beginning after December 15, 2018. The revenue streams are: Revenue Recognition (ASU 2014-09, Topic 610-20): (cid:120) Gain (loss) on sale of real estate properties Leases (ASU 2016-02, Topic 842): (cid:120) Rental revenues (cid:120) Straight line rents (cid:120) Tenant recoveries As of January 1, 2018, the Company will be accounting for the sale of real estate properties under Subtopic 610- 20which provides for revenue recognition based on transfer of ownership. All properties were non-financial real estate assets and thus not businesses which were sold to non-customers with no performance obligations. During the year ended December 31, 2017, the Company sold real estate properties for net proceeds of $44.3 million, and a recorded net gain of $14.2 million. Management has concluded that all of the Company’s material revenue streams falls outside of the scope of this guidance and currently recognizes revenue from its contracts with customers at a point in time and does not anticipate any changes. The Company intends to implement the standard under the modified retrospective method and does not anticipate recording any cumulative effect recognized in retained earnings as of the date of adoption (January 1, 2018). Critical Accounting Policies Our accounting policies are determined in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that are subjective in nature and, as a result, our actual results could differ materially from our estimates. Set forth below are the more critical accounting policies that require management judgment and estimates in the preparation of our consolidated financial statements. This summary should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 to our consolidated financial statements. 25 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] 3 Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements, and related notes thereto, included elsewhere in this Annual Report on Form 10-K and the “-Special Note Regarding Forward-Looking Statements” in “Item 1A – Risk Factors” above. Overview We are a fully integrated REIT primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. We were founded in 1971 by our current Executive Chairman, Richard Agree, and our common stock was listed on the NYSE in 1994. 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 98.8% interest as of December 31, 2017. As of December 31, 2017, our portfolio consisted of 436 properties located in 43 states and totaling approximately 8.7 million square feet of gross leasable area. As of December 31, 2017, our portfolio was approximately 99.7% leased and had a weighted average remaining lease term of approximately 10.2 years. Substantially all of our tenants are subject to net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. We elected to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 1994. We believe that we have been organized and have operated in a manner that has allowed us to qualify as a REIT for federal income tax purposes and we intend to continue operating in such a manner. Recent Accounting Pronouncements In August 2017, the Financial Accounting Standards Board (”FASB”) issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). The objective of ASU 2017-12 is to expand hedge accounting for both financial (interest rate) and commodity risks, and create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. ASU 2017-12 will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company is in the process of determining the impact that the implementation of ASU 2017-12 will have on the Company’s financial statements. In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). The objective of ASU 2017-09 is to provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. ASU 2017-09 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company has evaluated the impact that ASU 2017-09 will have on the Company’s financial statements, and concluded the implementation of ASU 2017-09 has no material impact on the financial statements. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations: Clarifying the Definition of a Business” (“ASU 2017-01”). The objective of ASU 2017-01 is to clarify the definition of a business by adding guidance on how entities should evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 will be effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods in the year of adoption. Early adoption is permitted for any interim or annual period. The Company has early adopted and the guidance has no material impact on the Company’s financial statements. In February 2016, the FASB issued ASU No. 2016-02 “Leases” (“ASU 2016-02”). The new standard creates Topic 842, Leases, in FASB Accounting Standards Codification (FASB ASC) and supersedes FASB ASC 840, Leases. ASU 2016-02 requires a lessee to recognize the assets and liabilities that arise from leases (operating and finance). However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The main difference between the existing guidance on accounting for leases and the new standard is that operating leases will now be recorded in the statement of financial position as assets and liabilities. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases and operating leases. ASU 2016-02 is expected 24 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 Developments During the fourth quarter of 2017, construction continued or commenced on seven development and Partner Capital Solutions (“PCS”) projects with anticipated total project costs of approximately $41.3 million. The projects consist of the Company’s first PCS project with Art Van Furniture in Canton, Michigan; four development projects with Mister Car Wash; one Burger King development in North Ridgeville, Ohio; and the Company’s third project with Camping World in Grand Rapids, Michigan. During the twelve months ended December 31, 2017, the Company had 11 development or PCS projects completed or under construction. Anticipated total costs for those projects are approximately $62.7 million and include the following completed or commenced projects: Location Tyler, TX Heber, UT Georgetown, KY Boynton Beach, FL Urbandale, IA Bernalillo, NM Canton, MI North Ridgeville, OH Grand Rapids, MI Orlando, FL Tavares, FL Lease Structure Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Build-to-Suit Lease Term 20 Years 20 Years 20 Years 15 Years 20 years 20 years 20 years 20 years 20 years 20 years 20 years Actual or Anticipated Rent Commencement Q1 2017 Q1 2017 Q2 2017 Q3 2017 Q1 2018 Q1 2018 Q1 2018 Q1 2018 Q2 2018 Q3 2018 Q3 2018 Status Completed Completed Completed Completed Under Construction Under Construction Under Construction Under Construction Under Construction Under Construction Under Construction Tenant Camping World Burger King(1) Camping World Orchard Supply Mister Car Wash Mister Car Wash Art Van Furniture Burger King(2) Camping World Mister Car Wash Mister Car Wash Notes: (cid:11)(cid:20)(cid:12)(cid:3)(cid:41)(cid:85)(cid:68)(cid:81)(cid:70)(cid:75)(cid:76)(cid:86)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:87)(cid:68)(cid:88)(cid:85)(cid:68)(cid:81)(cid:87)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:48)(cid:72)(cid:85)(cid:76)(cid:71)(cid:76)(cid:68)(cid:81)(cid:3)(cid:53)(cid:72)(cid:86)(cid:87)(cid:68)(cid:88)(cid:85)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:56)(cid:81)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:72)(cid:71)(cid:15)(cid:3)(cid:47)(cid:17)(cid:38)(cid:17)(cid:3)(cid:0) (2) Franchise restaurant operated by TOMS King, LLC. Dispositions During 2017, the Company sold real estate properties for net proceeds of $44.3 million and a recorded net gain of $14.2 million (net of any expected losses on real estate held for sale). During 2016, the Company sold real estate properties for net proceeds of $27.9 million and a recorded net gain of $10.0 million (net of any expected losses on real estate held for sale). During 2015, the Company sold real estate properties for net proceeds of $28.1 million and a recorded net gain of $12.1 million (net of any expected losses on real estate held for sale). Impairments As a result of our review of Real Estate Investments we did not recognize any real estate impairment charges for the years ended December 31, 2017, 2016 and 2015. Note 4 – Debt In April 2015, FASB issued ASU 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the gross carrying amount of that debt liability, consistent with debt discounts. We adopted ASU 2015-03, effective March 31, 2016, and applied the guidance retrospectively to our Mortgage Notes Payable, Unsecured Term Loans and Senior Unsecured Notes for all periods presented. Unamortized debt issuance costs of approximately $2.8 million and $3.1 million are included as an offset to the respective debt balances as of December 31, 2017 and 2016, respectively (previously included in Unamortized Deferred Expenses on our Consolidated Balance Sheets). As of December 31, 2017, we had total indebtedness of $522.4 million, including (i) $89.1 million of mortgage notes payable; (ii) $159.3 million of unsecured term loans; (iii) $260.0 million of senior unsecured notes; and (iv) $14.0 million of borrowings under our Credit Facility. F-17  ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Cyan ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 Mortgage Notes Payable As of December 31, 2017, the Company had total gross mortgage indebtedness of $89.1 million which was collateralized by related real estate and tenants’ leases with an aggregate net book value of $142.1 million. Including mortgages that have been swapped to a fixed interest rate, the weighted average interest rate on the Company’s mortgage notes payable was 3.74% as of December 31, 2017 and 3.97% as of December 31, 2016. In December 2017, the Company assumed an interest only mortgage note for $21.5 million with PNC Bank, National Association in connection with an acquisition. The mortgage note is due October 2019, secured by a multi-tenant property and has a fixed interest rate of 3.32%. 3 Mortgages payable consisted of the following: (not presented in thousands) Note payable in monthly installments of interest only at LIBOR plus 160 basis points, swapped to a fixed rate of 2.49% with a balloon payment due April 4, 2018 December 31, 2017 December 31, 2016 (in thousands) $ 25,000 $ 25,000 Note payable in monthly installments of interest only at 3.32% per annum, with a balloon payment due October 2019 21,500 - Note payable in monthly installments of $153,838, including interest at 6.90% per annum, with the final monthly payment due January 2020 Note payable in monthly installments of $23,004, including interest at 6.24% per annum, with a balloon payment of $2,781,819 due February 2020 Note payable in monthly installments of interest only at 3.60% per annum, with a balloon payment due January 1, 2023 Note payable in monthly installments of $35,673, including interest at 5.01% per annum, with a balloon payment of $4,034,627 due September 2023 Note payable in monthly installments of $91,675 including interest at 6.27% per annum, with a final monthly payment due July 2026 3,573 5,114 2,963 3,049 23,640 23,640 5,131 5,294 7,288 7,910 Total principal Unamortized debt issuance costs Total 89,095 (825) 88,270 $ 70,007 (940) 69,067 $ The mortgage loans encumbering our properties are generally non-recourse, subject to certain exceptions for which we would be liable for any resulting losses incurred by the lender. These exceptions vary from loan to loan, but generally include fraud or material misrepresentations, misstatements or omissions by the borrower, intentional F-18 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 the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on 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, 2013 through 2017 and operating data for each of the periods presented were derived from our audited financial statements. (in thousands, except per share information and number of properties) Year Ended December 31, 2017 2016 2015 2014 2013 Operating Data Total revenues Expenses Property costs (1) General and administrative Interest Depreciation and amortization Impairments Total Expenses Income From Operations Gain (loss) on extinguishment of debt Gain (loss) on sale of assets Income From Continuing Operations Gain on sale of asset from discontinued operations Income (loss) from discontinued operations Less net income attributable to non-controlling interest Net income Share Data Weighted average common shares - diluted Net income per share - diluted Cash dividends per share Balance Sheet Data Real Estate (before accumulated depreciation) Total Assets Total Debt, including accrued interest Other Data Number of Properties Gross Leasable Area (Sq. Ft.) Percentage Leased $ 116,902 $ 91,527 $ 69,966 $ 53,559 $ 43,518 12,467 9,949 18,137 31,752 72,305 44,597 14,193 58,790 - - - - 58,790 678 8,596 8,015 15,343 23,407 55,361 36,166 (333) 9,964 45,797 - - - 45,797 679 6,379 6,988 12,305 16,486 42,158 27,808 (181) 12,135 39,762 - - - 39,762 744 4,916 6,629 8,587 11,103 3,020 34,255 19,304 - (528) 18,776 123 14 18,913 425 3,656 5,952 6,475 8,489 24,572 18,946 - - - 18,946 946 298 20,190 515 27,700 $ 2.08 $ 2.03 $1,299,255 $1,497,041 $ 525,811 436 8,663 100% 22,960 $ 1.95 $ 1.92 $1,019,957 $1,141,972 $ 406,261 366 7,033 100% 18,065 $ 2.15 $ 1.85 $ 755,849 $ 807,042 $ 320,547 278 5,207 99% 14,967 $ 1.22 $ 1.74 $ 589,147 $ 606,415 $ 222,483 209 4,315 99% 13,158 $ 1.47 $ 1.64 $ 471,366 $ 471,327 $ 158,869 130 3,662 98% Net income attributable to Agree Realty Corporation $ 58,112 $ 45,118 $ 39,018 $ 18,488 $ 19,675 (1) Property costs include real estate taxes, insurance, maintenance and land lease expense. 23 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] 3 Item 4: Mine Safety Disclosures Not applicable. 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 NYSE under the symbol “ADC.” The following table sets forth the high and low closing prices of our common stock, as reported on the NYSE, 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, 2017 June 30, 2017 September 30, 2017 December 31, 2017 March 31, 2016 June 30, 2016 September 30, 2016 December 31, 2016 High $50.74 $51.10 $51.02 $52.69 $39.01 $48.24 $50.80 $49.25 Low $45.23 $44.83 $45.62 $47.12 $32.49 $38.26 $46.02 $42.44 Dividends per share declared $0.495 $0.505 $0.505 $0.520 $0.465 $0.480 $0.480 $0.495 As of February 20, 2018, the reported closing sale price per share of our common stock on the NYSE was $45.83. At February 20, 2018, there were 30,992,597 shares of our common stock issued and outstanding which were held by approximately 132 shareholders of record. The number of shareholders of record does not reflect persons or entities that held their shares in nominee or “street” name. In addition, at February 20, 2018 there were 347,619 outstanding OP Units 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 2017, we declared $2.025 per share of common stock in dividends. Of the $2.025, 85.1% represented ordinary income, and 14.9% represented return of capital, for tax purposes. For 2016, we declared $1.92 per share of common stock in dividends. Of the $1.92, 81.0% represented ordinary income, and 19.0% represented return of capital, for tax purposes. We intend to continue to declare quarterly dividends. However, our distributions are determined by our board of directors and will depend upon cash generated by operating activities, our financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Code and such other factors as the 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 shareholders, as well as meet certain other 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 shareholders of record on a specified date during such period and paid during January of the following year. Such distributions are treated for REIT tax purposes as paid by us and received by our shareholders 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. For information about our equity compensation plan, please see “Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K. Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 or grossly negligent conduct by the borrower that harms the property or results in a loss to the lender, filing of a bankruptcy petition by the borrower, either directly or indirectly, and certain environmental liabilities. At December 31, 2017, there were no mortgage loans with partial recourse to us. We have entered into mortgage loans which are secured by multiple properties and contain cross-default and cross-collateralization provisions. Cross-collateralization provisions allow a lender to foreclose on multiple properties in the event that we default under the loan. Cross-default provisions allow a lender to foreclose on the related property in the event a default is declared under another loan. The Company was in compliance with covenant terms for all mortgages payable at December 31, 2017. Senior Unsecured Notes The following table presents the Senior Unsecured Notes balance net of unamortized debt issuance costs as of December 31, 2017, and 2016 (in thousands): December 31, 2017 December 31, 2016 2025 Senior Unsecured Notes 2027 Senior Unsecured Notes 2028 Senior Unsecured Notes 2029 Senior Unsecured Notes Total Principal Unamortized debt issuance costs Total $ $ $ 50,000 50,000 60,000 100,000 260,000 (878) 259,122 $ 50,000 50,000 60,000 - 160,000 (824) 159,176 In May 2015, the Company completed a private placement of $100.0 million principal amount of senior unsecured notes. The senior unsecured notes were sold in two series; $50.0 million of 4.16% notes due May 2025 and $50.0 million of 4.26% notes due May 2027. The weighted average term of the senior unsecured notes is 11 years and the weighted average interest rate is 4.21%. In July 2016, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $60.0 million aggregate principal amount of our 4.42% senior unsecured notes due July 2028. The senior unsecured notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act. In August 2017, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $100.0 million aggregate principal amount of our 4.19% senior unsecured notes due September 2029. The senior unsecured notes are guaranteed by the Company. The closing of the private placement was consummated in September 2017; and, on that date, the Operating Partnership issued the senior unsecured notes. The senior unsecured notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act. Unsecured Term Loan Facilities The following table presents the Unsecured Term Loans balance net of unamortized debt issuance costs as of December 31, 2017 and 2016 (in thousands): 22 F-19  ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Cyan ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation 2019 Term Loan 2023 Term Loan 2024 Term Loans Total Principal Notes to Consolidated Financial Statements December 31, 2017 December 31, 2017 December 31, 2016 $ 19,304 40,000 100,000 159,304 $ 20,044 40,000 100,000 160,044 Unamortized debt issuance costs Total $ (1,133) 158,171 $ (1,365) 158,679 3 The amended and restated credit agreement, described below, extended the maturity dates of the $65.0 million unsecured term loan facility and $35.0 million unsecured term loan facility (together, the “2024 Term Loan Facilities”) to January 2024. In connection with entering into the amended and restated credit agreement, the prior notes evidencing the existing $65.0 million unsecured term loan facility and $35.0 million unsecured term loan facility were canceled and new notes evidencing the 2024 Term Loan Facilities were executed. Borrowings under the unsecured 2024 Term Loan Facilities bear interest at a variable LIBOR plus 165 to 235 basis points, depending on the Company's leverage ratio. The Company utilized existing interest rate swaps to effectively fix the LIBOR rate (refer to Note 8 – Derivative Instruments and Hedging Activity). In July 2016, the Company completed a $40.0 million unsecured term loan facility that matures July 2023 (the “2023 Term Loan”). Borrowings under the 2023 Term Loan are priced at LIBOR plus 165 to 225 basis points, depending on the Company’s leverage. The Company entered into an interest rate swap to fix LIBOR at 140 basis points until maturity. As of December 31, 2017, $40.0 million was outstanding under the 2023 Term Loan, which was subject to an all-in interest rate of 3.05%. In August 2016, the Company entered into a $20.3 million unsecured amortizing term loan that matures May 2019 (the “2019 Term Loan”). Borrowings under the 2019 Term Loan are priced at LIBOR plus 170 basis points. In order to fix LIBOR on the 2019 Term Loan at 1.92% until maturity, the Company had an interest rate swap agreement in place, which was assigned by the lender under the Mortgage Note to the 2019 Term Loan lender. As of December 31, 2017, $19.3 million was outstanding under the 2019 Term Loan bearing an all-in interest rate of 3.62%. Senior Unsecured Revolving Credit Facility In December 2016, the Company amended and restated the credit agreement that governs the Company's senior unsecured revolving credit facility and the Company's unsecured term loan facility to increase the aggregate borrowing capacity to $350.0 million. The agreement provides for a $250.0 million unsecured revolving credit facility, a $65.0 million unsecured term loan facility and a $35.0 million unsecured term loan facility (Referenced above as 2024 Term Loan Facilities). The unsecured revolving credit facility matures January 2021 with options to extend the maturity date to January 2022. The 2024 Term Loan Facilities mature January 2024. The Company has the ability to increase the aggregate borrowing capacity under the credit agreement up to $500.0 million, subject to lender approval. Borrowings under the revolving credit facility bear interest at LIBOR plus 130 to 195 basis points, depending on the Company’s leverage ratio. Additionally, the Company is required to pay an unused commitment fee at an annual rate of 15 or 25 basis points of the unused portion of the revolving credit facility, depending on the amount of borrowings outstanding. The credit agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a maximum percentage of secured debt to total asset value. As of December 31, 2017 and December 31, 2016, the Company had $14.0 million of outstanding borrowings under the revolving credit facility, respectively, bearing weighted average interest rates of approximately 2.6% and 1.9%, respectively. As of December 31, 2017, $236.0 million was available for borrowing under the revolving credit facility and the Company was in compliance with the credit agreement covenants. Concurrent with the amendment and restatement of the Company’s senior unsecured revolving credit facility, conforming changes were made to the 2023 Term Loan and 2019 Term Loan. The following table presents contractual lease expirations within the Company’s portfolio as of December 31, 2017, assuming that no tenants exercise renewal options: Lease Expirations ($ and GLA in thousands) Annualized Base Rent (1) Gross Leasable Area % of Total Square Feet % of Total Number of Leases Dollars $ 1,130 2,681 3,206 5,905 4,284 6,804 11,037 8,915 7,155 9,716 0.9% 2.2% 2.7% 5.0% 3.6% 5.7% 9.3% 7.5% 6.0% 8.2% 9 12 18 29 24 39 38 38 47 38 206 498 255 138 237 375 394 659 626 682 814 1,069 3,414 8,663 2.9% 1.6% 2.7% 4.3% 4.6% 7.6% 12.3% 7.2% 7.9% 9.4% 39.5% 100.0% Thereafter Total 58,376 $119,209 48.9% 100.0% Year 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Community Shopping Centers Our three community shopping centers range in size from 20,000 to 241,458 square feet of GLA. The location and primary occupancy information with respect to the community shopping centers as of December 31, 2017 are set forth below: ($ and GLA in thousands) Property Capital Plaza Location Renovated Area (Sq. Ft.) Base Rent (1) per Sq. Ft (2) December 31, 2017 Option Expiration) (3) Frankfort, KY 1978 / 2006 $634 $5.46 100% Kmart (2018 / 2053) Year Gross Completed / Leasable Annualized Annualized Base Rent Percent Leased at Anchor Tenants (Lease Expiration / Central Michigan Commons Mt. Pleasant, MI 1973 / 1997 $1,015 $4.63 91% Kmart (2018 / 2048) 116 241 20 377 Walgreens (2032 / 2052) JC Penney (2020 / 2035) Staples (2020 / 2030) 70% 93% West Frankfort Plaza West Frankfort, IL 1982 / N/A $91 $6.53 Totals $1,740 $4.62 (1) Represents annualized straight-line rent as of December 31, 2017. (2) Calculated as total annualized base rent divided by leased GLA. (3) Only the tenant has the option to extend a lease beyond the initial term. 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. F-20 21 ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 3 Tenant Sector Base Rent (1) Base Rent Annualized % of Ann. $14,394 10,112 12.1% ($ in thousands) Michigan Texas Florida Illinois Ohio Pennsylvania New Jersey Louisiana California Kentucky Missouri Mississippi Wisconsin Georgia Kansas Colorado Indiana Tennessee Alabama North Carolina South Carolina Virginia Minnesota Utah Oregon New York North Dakota Oklahoma Arizona New Mexico Iowa Delaware Arkansas Maine Connecticut West Virginia Nevada Washington Maryland South Dakota Montana New Hampshire Nebraska Total 8,839 8,190 6,816 4,646 4,352 3,853 3,697 3,640 3,387 3,283 3,258 3,204 2,979 2,591 2,571 2,366 2,149 2,087 2,031 1,990 1,794 1,709 1,569 1,551 1,455 1,320 1,276 1,098 1,045 1,010 991 792 585 529 487 413 388 326 249 107 80 8.5% 7.4% 6.9% 5.7% 3.9% 3.7% 3.2% 3.1% 3.1% 2.8% 2.8% 2.7% 2.7% 2.5% 2.2% 2.2% 2.0% 1.8% 1.7% 1.7% 1.7% 1.5% 1.4% 1.3% 1.3% 1.2% 1.1% 1.1% 0.9% 0.9% 0.8% 0.8% 0.7% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.2% 0.1% 0.1% $119,209 100% (1) Represents annualized straight-line rent as of December 31, 2017. ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Cyan Geographic Diversification The following table presents annualized base rents, by state, for our portfolio as of December 31, 2017: Agree Realty Corporation Debt Maturities Notes to Consolidated Financial Statements December 31, 2017 The following table presents scheduled principal payments related to our debt as of December 31, 2017 (in thousands): 2018 2019 2020 2021 (1) 2022 Thereafter Total Scheduled Principal Balloon Payment $ $ Total $ 3,336 2,751 1,092 998 1,060 3,687 12,924 25,000 40,044 2,775 14,000 - 427,656 509,475 28,336 42,795 3,867 14,998 1,060 431,343 522,399 $ $ $ (1) The balloon payment balance includes the balance outstanding under the Credit Facility as of December 31, 2017. The Credit Facility matures in January 2021, with options to extend the maturity for one year at the Company’s election, subject to certain conditions. Note 5 – Common Stock In April 2017, the Company entered into a new $200.0 million at-the-market equity program (“ATM program”) through which the Company may, from time to time, sell shares of common stock. The Company uses the proceeds generated from its ATM program for general corporate purposes, including funding our investment activity, the repayment or refinancing of outstanding indebtedness, working capital and other general purposes. During the year ended December 31, 2017, the Company issued 2,368,359 shares of common stock under its ATM program at an average price of $49.17, realizing gross proceeds of approximately $116.5 million. The Company had approximately $83.5 million remaining under the ATM program as of December 31, 2017. In May 2017, the Company filed an automatic shelf registration statement on Form S-3, registering an unspecified amount at an indeterminant aggregate initial offering price of common stock, preferred stock, depositary shares and warrants. The Company may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. In June 2017, the Company completed a follow-on underwritten offering of 2,415,000 shares of common stock. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $108.0 million, after deducting the underwriting discount. The proceeds from the offering were used to repay borrowings under our revolving credit facility to fund property acquisitions and for general corporate purposes. In October 2016, under a previously filed shelf registration, the Company completed a follow-on underwritten offering of 2,087,250 shares of common stock. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $95.0 million after deducting the underwriting discount. The proceeds from the offering were used to repay borrowings under our revolving credit facility to fund property acquisitions and for general corporate purposes. In May 2016, under a previously filed shelf registration, the Company completed a follow-on underwritten offering of 2,875,000 shares of common stock. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $109.6 million after deducting the underwriting discount. The proceeds from the offering were used to repay borrowings under our revolving credit facility to fund property acquisitions and for general corporate purposes. 20 F-21 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 24 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Cyan Agree Realty Corporation Note 6 – Dividends and Distribution Payable Notes to Consolidated Financial Statements December 31, 2017 The Company declared dividends of $2.025, $1.920 and $1.845 per share during the years ended December 31, 2017, 2016 and 2015; the dividends have been reflected for federal income tax purposes as follows: The following table presents annualized base rents for all sectors that generated 2.5% or greater of our total Tenant Sector Diversification annualized base rents as of December 31, 2017: For the Year Ended December 31, Ordinary Income Return of Capital $ 2017 1.695 0.330 $ 2016 1.557 0.363 $ 2015 1.519 0.326 Total $ 2.025 $ 1.920 $ 1.845 On December 5, 2017, the Company declared a dividend of $0.520 per share for the quarter ended December 31, 2017. The holders Operating Partnership Units were entitled to an equal distribution per Operating Partnership Unit held as of December 20, 2017. The dividends and distributions payable are recorded as liabilities in the Company's consolidated balance sheet at December 31, 2017. The dividend has been reflected as a reduction of stockholders' equity and the distribution has been reflected as a reduction of the limited partners' non-controlling interest. These amounts were paid on January 3, 2018. Note 7 – Income Taxes (not presented in thousands) The Company is subject to the provisions of Financial Accounting Standards Board Accounting Standard Codification 740-10 (“FASB ASC 740-10”) 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. The Company’s Federal income tax returns are open for examination by taxing authorities for all tax years after December 31, 2014. The Company has elected to record related interest and penalties, if any, as income tax expense on the consolidated statements of operations and comprehensive 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, 2017 and 2016, the Company had accrued a deferred income tax liability in the amount of $475,000 and $705,000, respectively. 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 was accrued within the TRS entities described above. During the years ended December 31, 2017 and 2016, the Company recognized total federal and state tax expense of approximately $227,000 and $157,000, respectively, which are included in general and administrative expenses in the consolidated statements of operations and comprehensive income. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect 2017, including but not limited to reducing the U.S. federal corporate rate from 35 percent to 21 percent. In connection with our initial analysis of the impact of the Tax Act, we have recorded a discrete net tax benefit related to one of the Company’s TRS entities reducing the deferred income tax liability by $230,000 in the period ending December 31, 2017. This is included in general and administrative expenses in the consolidated statements of operations and comprehensive income. Note 8 – Derivative Instruments and Hedging Activity The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risk, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and, to a limited extent, the use of derivative instruments. For additional information regarding the leveling of our derivatives, (refer to Note 10 – Fair Value Measurements.) F-22 Restaurants - Quick Service ($ in thousands) Tenant Sector Pharmacy Grocery Stores Health & Fitness Tire & Auto Service Off-Price Retail Home Improvement Convenience Stores General Merchandise Crafts and Novelties Auto Parts Specialty Retail Warehouse Clubs Farm and Rural Supply Sporting Goods Dollar Stores Home Furnishings Health Services Other(2) Total Annualized % of Ann. Base Rent (1) Base Rent $14,694 12.3% 9,136 6,938 6,534 6,405 6,120 5,551 5,298 4,643 4,539 4,370 4,261 3,749 3,361 3,171 3,145 3,120 3,066 7.7% 5.8% 5.5% 5.4% 5.1% 4.7% 4.4% 3.9% 3.8% 3.7% 3.6% 3.1% 2.8% 2.7% 2.6% 2.6% 2.6% 21,108 $119,209 17.7% 100.0% (1) Represents annualized straight-line rent as of December 31, 2017. (2) Includes sectors generating less than 2.5% of annualized base rent. 19 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] 3 3 ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Tenant Diversification The following table presents annualized base rents for all tenants that generated 1.5% or greater of our total annualized base rent as of December 31, 2017: ($ in thousands) Tenant / Concept Walgreens Walmart LA Fitness Lowe's TJX Companies CVS Wawa Mister Car Wash Smart & Final Dollar General PetSmart Tractor Supply Hobby Lobby Michaels Dave & Buster's Academy Sports Dollar Tree AutoZone Rite Aid Other(2) Total Annualized % of Ann. Base Rent (1) Base Rent $ 9,215 4,224 4,224 4,215 3,652 3,004 2,664 2,580 2,475 2,415 2,234 2,179 2,176 2,072 2,058 1,982 1,939 1,909 1,886 7.7% 3.5% 3.5% 3.5% 3.1% 2.5% 2.2% 2.2% 2.1% 2.0% 1.9% 1.8% 1.8% 1.7% 1.7% 1.7% 1.6% 1.6% 1.6% 62,106 $ 119,209 52.3% 100.0% (1) Represents annualized straight-line rent as of December 31, 2017. (2) Includes tenants generating less than 1.5% of annualized base rent. Significant Tenants Walgreens Co. (“Walgreens”) operates the second largest drugstore chain in the United States and trades, through its holding company Walgreens Boot Alliance, Inc.(“WBA”), on the Nasdaq stock exchange under the symbol “WBA.” For its fiscal year ended August 31, 2017, Walgreens reported total assets of approximately $66.0 billion, annual net sales of $118.2 billion, annual net income of $4.1 billion and shareholders’ equity of $28.3 billion. As of August 31, 2017, Walgreens operated 8,100 locations in 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. On June 28, 2017, WBA entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Rite Aid Corporation (“Rite Aid”), pursuant to which WBA agreed, subject to the terms and conditions thereof, to acquire 2,186 stores, three distribution centers and related inventory from Rite Aid. On September 19, 2017, WBA announced it had secured regulatory clearance for an amended and restated asset purchase agreement (the “Amended and Restated Asset Purchase Agreement”) to purchase 1,932 stores, three distribution centers and related inventory from Rite Aid for $4.4 billion in cash and other consideration. Ownership of stores is expected to be transferred in phases, with the goal being to complete the store transfers in spring 2018. These transfers remain subject to closing conditions as set forth in the Amended and Restated Asset Purchase Agreement. The information set forth above was derived from the Annual Report on Form 10-K filed by Walgreens and WBA with respect to WBA’s 2017 fiscal year. Additional information regarding Walgreens and Walgreens Boots Alliance, Inc. can be found in their 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. Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements and add stability to interest expense. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreement without exchange of the underlying notional amount. In April 2012, the Company entered into an amortizing forward-starting interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $22.3 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.92%. This swap effectively converted $22.3 million of variable-rate borrowings to fixed-rate borrowings from July 1, 2013 to May 1, 2019. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.0 million. In December 2012, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $25.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 0.89%. The notional amount as of December 31, 2017 is $19.3 million. This swap effectively converted $25.0 million of variable-rate borrowings to fixed-rate borrowings from December 6, 2012 to April 4, 2018. As of December 31, 2017, this interest rate swap was valued as an asset of approximately $0.0 million. In September 2013, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.20%. This swap effectively converted $35.0 million of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.2 million. In July 2014, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.09%. This swap effectively converted $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of December 31, 2017, this interest rate swap was valued as a liability of approximately $0.1 million. In September 2016, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $40.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.40%. This swap effectively converted $40.0 million of variable-rate borrowings to fixed-rate borrowings from August 1, 2016 to July 1, 2023. As of December 31, 2017, this interest rate swap was valued as an asset of approximately $1.5 million. Companies are required to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. The Company has designated these derivative instruments as cash flow hedges. As such, the effective portion of changes in the fair value of the derivatives designated, and that qualify as cash flow hedges, is recorded as a component of Other Comprehensive Income (Loss). The ineffective portion of the change in fair value of the derivative instrument is recognized directly in interest expense. For the years ended December 31, 2017 and 2016, the Company has not recorded any hedge ineffectiveness in earnings. Amounts in Accumulated Other Comprehensive Income (Loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $0.2 million will be reclassified as an increase to interest expense. The Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands, except number of instruments): 18 F-23 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Cyan ] 24 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 Interest Rate Derivatives Number of Instruments Notional December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 Interest Rate Swap 5 5 $ 184,304 $ 185,044 The table below presents the estimated fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance sheets (in thousands). Asset Derivatives December 31, 2017 Fair Value December 31, 2016 Fair Value Derivatives designated as cash flow hedges: Interest Rate Swaps $ 1,592 $ 1,409 Liability Derivatives December 31, 2017 Fair Value December 31, 2016 Fair Value Derivatives designated as cash flow hedges: Interest Rate Swaps $ 242 $ 1,994 The table below presents the effect of the Company’s derivative financial instruments in the consolidated statements of operations and other comprehensive loss for the years ended December 31, 2017 and 2016 (in thousands). Derivatives in Cash Flow Hedging Relationships Amount of Income/(Loss) Recognized in OCI on Derivative (Effective Portion) Location of Income/(Loss) Reclassifed from Accumulated OCI into Income (Effective Portion) Amount of Income/(Loss) Reclassified from Accumulated OCI into Expense (Effective Portion) Twelve months ended December 31 2017 2016 2017 2016 Interest rate swaps $ 1,935 $ 2,618 Interest Expense $ (1,495) $ (2,493) The Company does not use derivative instruments for trading or other speculative purposes and did not have any other derivative instruments or hedging activities as of December 31, 2017. Credit-risk-related Contingent Features The Company has agreements with two of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. As of December 31, 2017, the fair value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $0.2 million. As of December 31, 2017, the Company has not posted any collateral related to these net liability positions. If the Company had breached any of these provisions as of December 31, 2017, it could have been required to settle its obligations under the agreements at their termination value of $0.2 million. Although the derivative contracts are subject to master netting arrangements, which serve as credit mitigants to both us and our counterparties under certain situations, we do not net our derivative fair values or any existing rights or obligations to cash collateral on the consolidated balance sheets. F-24 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 There are no unresolved staff comments. Item 2: Properties As of December 31, 2017, our portfolio consisted of 436 properties located in 43 states and totaling approximately 8.7 million square feet of gross leasable area. Our portfolio included 433 net lease properties, which contributed approximately 98.5% of annualized base rent, and three community shopping centers, which generated the remaining 1.5% of annualized base rent. As of December 31, 2017, our portfolio was approximately 99.7% leased and had a weighted average remaining lease term of approximately 10.2 years. A significant majority of our properties are leased to national tenants and approximately 43.9% of our annualized base rent was derived from tenants, or parents thereof, with an investment grade credit rating. Substantially all of our tenants are subject to net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, our tenants are typically subject to future rent increases based on fixed amounts or increases in the consumer price index and many leases provide for additional rent calculated as a percentage of the tenants’ gross sales above a specified level. Property Type Summary The following table presents certain information about our properties as of December 31, 2017: Number of Annualized % of Ann. Properties Base Rent (1) Base Rent Grade Rated (2) Property Type Retail Net Lease Retail Net Lease (ground leases) Total Retail Net Lease Community Shopping Centers Total Portfolio 392 41 433 3 436 $108,066 9,403 $117,469 1,740 $119,209 90.6% 7.9% 98.5% 1.5% 100.0% % Investment Wtd. Avg. Remaining Lease Term 10.2 yrs 11.9 yrs 10.3 yrs 4.9 yrs 10.2 yrs 40.6% 84.8% 44.2% 28.3% 43.9% Annualized base rent is in thousands. (1) Represents annualized straight-line rent as of December 31, 2017. (2) Reflects tenants, or parent entities thereof, w ith investment grade credit ratings from Standard & Poors, Moody's, Fitch and/or NAIC. 17 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Cyan ] 24 Page 3 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] 3 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] Our ownership of and relationship with our TRSs 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 20% 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. Our TRSs will pay federal, state and local income tax on their taxable income, and their 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 20% limitation discussed above or to avoid application of the 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 remain qualified 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 Internal Revenue Service 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 TRSs, or through entities that are disregarded for federal income tax purposes as entities separate from our TRSs, 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 shareholders. Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations. The maximum federal income tax rate applicable to “qualified dividend income” payable by non-REIT corporations to certain non-corporate U.S. stockholders is generally 20% and a 3.8% Medicare tax may also apply. Dividends paid by REITs, however, generally are not eligible for the reduced rates applicable to qualified dividend income. Commencing with taxable years beginning on or after January 1, 2018 and continuing through 2025, H.R. 1 temporarily reduces the effective tax rate on ordinary REIT dividends (i.e., dividends other than capital gain dividends and dividends attributable to certain qualified dividend income received by us) for U.S. holders of our common stock that are individuals, estates or trusts by permitting such holders to claim a deduction in determining their taxable income equal to 20% of any such dividends they receive. Taking into account H.R. 1’s reduction in the maximum individual federal income tax rate from 39.6% to 37%, this results in a maximum effective rate of regular income tax on ordinary REIT dividends of 29.6% through 2025 (as compared to the 20% maximum federal income tax rate applicable to qualified dividend income received from a non-REIT corporation). The more favorable rates applicable to regular corporate distributions could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay distributions. This could materially and adversely affect the value of the stock of REITs, including our common stock. Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities. The REIT provisions of the 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 16 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 The table below presents a gross presentation of the effects of offsetting and a net presentation of the Company’s derivatives as of December 31, 2017 and December 31, 2016. The gross amounts of derivative assets or liabilities can be reconciled to the Tabular Disclosure of Fair Values of Derivative Instruments above, which also provides the location that derivative assets and liabilities are presented on the consolidated balance sheets (in thousands): Offsetting of Derivative Assets As of December 31, 2017 Gross Amounts Not Offset in the Statement of Financial Position Gross Amounts of Recognized Assets Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the statement of Financial Position Financial Instruments Cash Collateral Received Net Amount Derivatives $ 1,592 $ - $ 1,592 $ (42) $ - $ 1,550 Offsetting of Derivative Liabilities As of December 31, 2017 Gross Amounts Not Offset in the Statement of Financial Position Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities presented in the statement of Financial Position Financial Instruments Cash Collateral Received Net Amount Derivatives $ 242 $ - $ 242 $ (42) $ - $ 200 Offsetting of Derivative Assets As of December 31, 2016 Gross Amounts Not Offset in the Statement of Financial Position Gross Amounts of Recognized Assets Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the statement of Financial Position Financial Instruments Cash Collateral Received Net Amount Derivatives $ 1,409 $ - $ 1,409 $ (50) $ - $ 1,359 Offsetting of Derivative Liabilities As of December 31, 2016 Gross Amounts Not Offset in the Statement of Financial Position Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities presented in the statement of Financial Position Financial Instruments Cash Collateral Received Net Amount Derivatives $ 1,994 $ - $ 1,994 $ (50) $ - $ 1,944 Note 9 – Discontinued Operations There were no properties classified as discontinued operations for the years ended December 31, 2017, 2016 and 2015. F-25 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side D Cyan ] 24 Page 3 ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Note 10 – Fair Value Measurements Assets and Liabilities Measured at Fair Value Notes to Consolidated Financial Statements December 31, 2017 The Company accounts for fair values in accordance with FASB Accounting Standards Codification Topic 820 Fair Value Measurements and Disclosure (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. that fair value ASC 820 emphasizes is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls, is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Derivative Financial Instruments Currently, the Company uses interest rate swap agreements to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016 (in thousands): F-26 15 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side C Cyan ] 24 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT 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 affect the market price for our common stock. U.S. federal tax reform legislation could affect REITs generally, the geographic markets in which we operate, our stock and our results of operations, both positively and negatively in ways that are difficult to anticipate. Changes to the federal income tax laws are proposed regularly. Additionally, the REIT rules are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Department of the Treasury, which may result in revisions to regulations and interpretations in addition to statutory changes. If enacted, certain such changes could have an adverse impact on our business and financial results. In particular, H.R. 1, which generally takes effect for taxable years beginning on or after January 1, 2018 (subject to certain exceptions), makes many significant changes to the federal income tax laws that will profoundly impact the taxation of individuals, corporations (both regular C corporations as well as corporations that have elected to be taxed as REITs), and the taxation of taxpayers with overseas assets and operations. A number of changes that affect non- corporate taxpayers will expire at the end of 2025 unless Congress acts to extend them. These changes will impact us and our shareholders in various ways, some of which are adverse or potentially adverse compared to prior law. To date, the IRS has issued only limited guidance with respect to certain of the new provisions, and there are numerous interpretive issues that will require guidance. It is highly likely that technical corrections legislation will be needed to clarify certain aspects of the new law and give proper effect to Congressional intent. There can be no assurance, however, that technical clarifications or changes needed to prevent unintended or unforeseen tax consequences will be enacted by Congress in the near future. In addition, while certain elements of tax reform legislation would not impact us directly as a REIT, they could impact the geographic markets in which we operate, the tenants that populate our shopping centers and the customers who frequent our properties in ways, both positive and negative, that are difficult to anticipate. Other legislative proposals could be enacted in the future that could affect REITs and their shareholders. Prospective investors are urged to consult their tax advisors regarding the effect of H.R. 1 and any other potential tax law changes on an investment in 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 law that prevents 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 shareholders. Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments. In order to qualify as a REIT, at least 75% of the value of our assets must consist of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities, securities of TRSs and qualified real estate assets) cannot include more than 10% of the voting securities or 10% of the value of all securities, of any one issuer. In addition, in general, no more than 5% of the total value of our assets (other than government securities, securities of TRSs and qualified real estate assets) can consist of securities of any one issuer, and no more than 20% of the total value of our assets can be represented by one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. 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 that 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. 3 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 3 ] and this could materially and adversely affect our ability to raise capital through future offerings of equity or equity- related securities. In addition, we may issue preferred stock or other securities convertible into equity securities with a distribution preference or a liquidation preference that may limit our ability to make distributions on our common stock. 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. Agree Realty Corporation December 31, 2017 Total Fair Value Level 2 Notes to Consolidated Financial Statements December 31, 2017 Derivative assets - interest rate swaps $ 1,592 $ 1,592 Derivative liabilities - interest rate swaps $ 242 $ 242 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: December 31, 2016 Derivative assets - interest rate swaps Derivative liabilities - interest rate swaps $ $ 1,409 1,994 $ $ 1,409 1,994 (cid:120) Changes in interest rates; (cid:120) Our financial condition and operating performance and the performance of other similar companies; (cid:120) Actual or anticipated variations in our quarterly results of operations; (cid:120) The extent of investor interest in our company, real estate generally or commercial real estate specifically; (cid:120) 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; (cid:120) Changes in expectations of future financial performance or changes in estimates of securities analysts; (cid:120) Fluctuations in stock market prices and volumes; and (cid:120) Announcements by us or our competitors of acquisitions, investments or strategic alliances. An officer and director may have interests that conflict with the interests of shareholders. An officer and member of our board of directors owns OP units in the Operating Partnership. This individual may have personal interests that conflict with the interests of our shareholders with respect to business decisions affecting us and the Operating Partnership, such as interests in the timing and pricing of property sales or refinancings in order to obtain favorable tax treatment. Federal Income Tax Risks Complying with REIT requirements may cause us to forego otherwise attractive opportunities. To qualify as a REIT for federal income tax purposes we must continually satisfy numerous income, asset and other tests, thus having to forego 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 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. Additionally, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the approval of our stockholders. A REIT generally is not taxed at the corporate level on income it distributes to its shareholders, as long as it distributes annually at least 90% of its taxable income to its shareholders. 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: (cid:120) We would not be allowed a deduction for dividends paid to shareholders in computing our taxable income and would be subject to federal income tax at regular corporate rates. (cid:120) We could be subject to the federal alternative minimum tax and possibly increased state and local taxes. (cid:120) 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 failed to qualify. The carrying values of cash and cash equivalents, receivables and accounts payable and accrued liabilities are reasonable estimates of their fair values because of the short maturity of these financial instruments. The Company estimated the fair value of our debt based on our incremental borrowing rates for similar types of borrowing arrangements with the same remaining maturity and on the discounted estimated future cash payments to be made for other debt. The discount rate used to calculate the fair value of debt approximates current lending rates for loans and assumes the debt is outstanding through maturity. Since such amounts are estimates that are based on limited available market information for similar transactions, which is a Level 2 non-recurring measurement, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument. Fixed rate debt (including variable rate debt swapped to fixed, excluding the value of the derivatives) with carrying values of $505.6 million and $386.9 million as of December 31, 2017 and December 31, 2016, respectively, had fair values of approximately $516.5 million and $401.4 million, respectively. Variable rate debt’s fair value is estimated to be equal to the carrying values of $14.0 million as of December 31, 2017 and December 31, 2016. Note 11 – Equity Incentive Plan In 2005, the Company’s stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”), which replaced a stock incentive plan established in 1994. The 2005 Plan authorized the issuance of a maximum of 1,000,000 shares of common stock. In 2014, the Company’s stockholders approved the 2014 Omnibus Incentive Plan (the “2014 Plan”), which replaced the 2005 Equity Incentive Plan. The 2014 Plan authorizes the issuance of a maximum of 700,000 shares of common stock. No options were granted during 2017, 2016 or 2015. Restricted common stock has been granted to certain employees under the 2014 Plan. As of December 31, 2017, there was $6.7 million of unrecognized compensation costs related to the outstanding restricted stock, which is expected to be recognized over a weighted average period of 3.5 years. The Company used 0% for both the discount factor and forfeiture rate for determining the fair value of restricted stock. The holder of a restricted share award is generally entitled at all times on and after the date of issuance of the restricted shares to exercise the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends on the shares. The Company granted 88,466, 93,363 and 85,597 shares of restricted stock in 2017, 2016 and 2015, respectively to employees and Directors. The restricted shares vest over a five- year period based on continued service to the Company. Restricted share activity is summarized as follows (in thousands, except per share data): 14 F-27 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side B Cyan ] 24 Page 3 ] 3 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 Shares Outstanding Weighted Average Grant Date Fair Value Unvested restricted stock at December 31, 2014 239 $ 26.24 Restricted stock granted Restricted stock vested Restricted stock forfeited 86 (80) (32) $ $ $ 33.46 25.13 29.54 Unvested restricted stock at December 31, 2015 213 $ 29.07 Restricted stock granted Restricted stock vested Restricted stock forfeited 93 (72) (6) $ $ $ 37.67 27.07 35.58 Unvested restricted stock at December 31, 2016 228 $ 33.02 Restricted stock granted Restricted stock vested Restricted stock forfeited 88 (78) (11) $ $ $ 48.59 30.95 39.68 Unvested restricted stock at December 31, 2017 227 $ 39.47 The intrinsic value of stock options exercised was $1.1 million, $0.7 million and $0.0 million during the years ended December 31, 2017, 2016 and 2015, respectively. Note 12 – Profit-Sharing Plan 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 2017, 2016, or 2015. Note 13 – Quarterly Financial Data (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, 2016 through December 31, 2017. Certain amounts have been reclassified to conform to the current presentation of discontinued operations: F-28 transaction or change of control that might involve a premium price for our common stock or otherwise be viewed to be in the best interest of our shareholders. 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: (cid:120) “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 (cid:120) “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 shareholders 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 Maryland General Corporation Law, or 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 Richard Agree, Edward Rosenberg, any spouses or the foregoing, any brothers or sisters of the foregoing, any ancestors of the foregoing, any other lineal descendants of any of the foregoing, any estates of any of the foregoing, any trusts established for the benefit of any of the foregoing and any other entity controlled by any of the foregoing, 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 MGCL, permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to implement certain 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 the 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 viewed to be in the best interest of our shareholders. 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 could include classes or series of preferred stock, common stock and senior or subordinated notes. Our ability to raise additional capital may be restricted at a time when we would like or need, including as a result of market conditions. Future market dislocations could cause us to seek sources of potentially less attractive capital and impact our flexibility to react to changing economic and business conditions. All debt securities and other borrowings, as well as all classes or series of preferred stock, will be senior to our common stock in a liquidation of our company. Additional equity offerings could dilute our shareholders’ equity and reduce the market price of shares of our common stock. In addition, depending on the terms and pricing of an additional offering of our common stock and the value of our properties, our shareholders may experience dilution in both the book value and fair value of their shares. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after an offering or the perception that such sales could occur, 13 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 3 Side A Cyan ] 24 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 2 to reposition our portfolio promptly in response to changes in economic or other conditions. An increase in market interest rates may lead prospective purchasers of our common stock to expect a higher dividend yield, which could adversely affect the market price of our common stock. Decreases in interest rates may lead to additional competition for the acquisition of real estate due to a reduction in desirable alternative income-producing investments. Increased competition for the acquisition of real estate may lead to a decrease in the yields on real estate targeted for acquisition. In such circumstances, if we are not able to offset the decrease in yields by obtaining lower interest costs on our borrowings, our results of operations may be adversely affected. Our hedging strategies may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on your investment. We use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. These instruments involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes, that a court could rule that such agreements are not legally enforceable, and that we may have to post collateral to enter into hedging transactions, which we may lose it we are unable to honor our obligations. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the REIT income tests. In addition, the nature and timing of hedging transactions may influence the effectiveness of our hedging strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. Moreover, hedging strategies involve transaction and other costs. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses that may reduce the overall return on your investment. Risks Related to Our Corporate Structure Our charter, bylaws and Maryland law contain provisions that may delay, defer or prevent a change of control transaction. Our charter contains 9.8% ownership limits. 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 contains provisions that limit any person to actual or constructive ownership of no more than 9.8% (in value or in number of shares, whichever is more restrictive) of the outstanding shares of our common stock and no more than 9.8% (in value) of the aggregate of the outstanding shares of all classes and series of our stock. Our board of directors, in its sole discretion, may exempt, subject to the satisfaction of certain conditions, any person from the ownership limits. 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 limits may delay or impede, and we may use the ownership limits 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 shareholders. 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 the Company or make an acquisition more difficult, even when an acquisition may be viewed to be in the best interest of our shareholders. 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 the acquisition, after the person acquires more than 15% of our outstanding common stock, all other shareholders 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. On December 20, 2017, the Company entered into a third amendment to the plan to provide a limited exemption, which permitted an investor to become the beneficial owner of less than 20% of the common stock of the Company then outstanding rather than the 15% threshold otherwise applicable without becoming an Acquiring Person (as defined in the plan). 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 12 Agree Realty Corporation Notes to Consolidated Financial Statements December 31, 2017 2017 Three Months Ended March 31 June 30 September 30 December 31 $ 26,560 $ 28,080 $ 30,387 $ 33,375 $ 14,768 $ 15,067 $ 12,283 $ 16,672 Revenue Net Income Earnings per Share - diluted $ 0.55 $ 0.56 $ 0.42 $ 0.55 2016 Three Months Ended March 31 June 30 September 30 December 31 $ 20,224 $ 21,844 $ 24,161 $ 25,299 $ 7,586 $ 10,828 $ 14,476 $ 12,906 Revenue Net Income Earnings per Share - diluted $ 0.36 $ 0.48 $ 0.61 $ 0.50 Note 14 – Commitments and Contingencies In the ordinary course of business, we are party to various legal actions which we believe are routine in nature and incidental to the operation of our business. We believe that the outcome of the proceedings will not have a material adverse effect upon our consolidated financial position or results of operations Note 15 – Subsequent Events In February 2018, the Company granted shares of restricted stock to employees under the 2014 Plan. The fair value of these grants was approximately $3.9 million. The grants were a mix of Performance Shares and restricted shares that vest over a five-year period based on continued service to the Company. There were no other reportable subsequent events or transactions as of February 22, 2018. F-29  ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Cyan 0 3 - F (cid:120) limiting our flexibility in conducting our business, including our ability to finance or refinance our assets, contribute assets to joint ventures or sell assets as needed, which may place us at a disadvantage compared to competitors with less debt or debt with less restrictive terms. In addition, 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, (3) there is an increase in interest rates, (4) we default on our financial obligations and (5) debt service requirements increase. 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 consequential 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 on other properties resulting in multiple foreclosures. We generally intend to maintain a ratio of total indebtedness (including construction or acquisition financing) to total market capitalization of 65% or less. Nevertheless, we may operate with debt levels which are in excess of 65% of total market capitalization for extended periods of time. Our organizational 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 shareholders, 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 shareholders, 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 the financing agreements 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 financing agreements contain certain cross-default provisions which could be triggered in the event that we default on our other indebtedness. These cross-default provisions may require us to repay or restructure the revolving 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. Our unsecured revolving credit facility and certain term loan agreements contain various restrictive corporate covenants, including a maximum total leverage ratio, a maximum secured leverage ratio, a minimum fixed charge coverage ratio, a maximum recourse secured debt ratio, a minimum net worth requirement and a maximum payout ratio. In addition, our unsecured revolving credit facility and certain term loan agreements have unencumbered pool covenants, which include a minimum number of eligible unencumbered assets, a maximum unencumbered leverage ratio and a minimum unencumbered interest coverage ratio. These covenants may restrict our ability to pursue certain business initiatives or certain transactions that might otherwise be advantageous. Furthermore, failure to meet certain of these financial covenants could cause an event of default under and/or accelerate some or all of such indebtedness which could have a material adverse effect on us. Credit market developments may reduce availability under our revolving credit facility. 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 revolving credit facility, including but not limited to: extending credit up to the maximum amount permitted by such 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 revolving credit facility, it could be difficult to replace our revolving credit facility on similar terms. Any such failure by any of the lenders under the revolving credit facility may impact our ability to finance our operating or investing activities. An increase in market interest rates could raise our interest costs on existing and future debt or adversely affect our stock price, and a decrease in interest rates may lead to additional competition for the acquisition of real estate or adversely affect our results of operations. Our interest costs for any new debt and our current debt obligations may rise if interest rates increase. This increased cost could make the financing of any new acquisition more expensive as well as lower our current period earnings. Rising interest rates could limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing. In addition, an increase in interest rates could decrease the access third parties have to credit, thereby decreasing the amount they are willing to pay to lease our assets and limit our ability 11 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 7 1 0 2 , 1 3 r e b m e c e D 2 i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S n o i t a r o p r o C y t l a e R e e r g A DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 2 22 1 3 - F 7 1 0 2 , 1 3 r e b m e c e D i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S n o i t a r o p r o C y t l a e R e e r g A (cid:120) As owner, we may have to pay for property damage and for investigation and clean-up costs incurred in (cid:120) The law may impose clean-up responsibility and liability regardless of whether the owner or operator knew connection with the contamination; of or caused the contamination; (cid:120) 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; and (cid:120) 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. We own and may in the future acquire properties that will be operated as convenience stores with gas station facilities. The operation of convenience stores with gas station facilities at our properties will create additional environmental concerns. We require that the tenants who operate these facilities do so in material compliance with current laws and regulations. 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 are certain losses, including losses from environmental liabilities, 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. 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 shareholders 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 generally 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. Risks Related to Our Debt Financings Our level of indebtedness could materially and adversely affect our financial position, including reducing funds available for other business purposes and reducing our operational flexibility, and we may have future capital needs and may not be able to obtain additional financing on acceptable terms. At December 31, 2017, our ratio of total debt to total market capitalization (assuming conversion of OP Units into shares of common stock) was approximately 24.5%. Incurring substantial debt may adversely affect our business and operating results by: (cid:120) (cid:120) requiring us to use a substantial portion of our cash flow to pay interest and principal, which reduces the amount available for distributions, acquisitions and capital expenditures; (cid:120) making us more vulnerable to economic and industry downturns and reducing our flexibility to respond to changing business and economic conditions; requiring us to agree to less favorable terms, including higher interest rates, in order to incur additional debt, and otherwise limiting our ability to borrow for operations, working capital or to finance acquisitions in the future; or 10  ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Cyan parties) and affect the efficiency of our business operations. Any such incidents could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information and reduce the benefits of our technologies. General Real Estate Risk estate assets. Our performance and value are subject to general economic conditions and risks associated with our real 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: (cid:120) Changes in general or local economic conditions; (cid:120) The attractiveness of our properties to potential tenants; (cid:120) Changes in supply of or demand for similar or competing properties in an area; (cid:120) Bankruptcies, financial difficulties or lease defaults by our tenants; (cid:120) Changes in operating costs and expense and our ability to control rents; (cid:120) Our ability to lease properties at favorable rental rates; (cid:120) Our ability to sell a property when we desire to do so at a favorable price; (cid:120) Unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions; (cid:120) 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 (cid:120) Unanticipated expenditures to comply with the Americans with Disabilities Act and other similar regulations. 2 3 - F Economic and financial market conditions have and may continue to exacerbate 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 generally be sold quickly, and we cannot assure you that we could always obtain a favorable price. 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 shareholders 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. 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 shareholders. This potential liability results from the following: 9 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 7 1 0 2 , 1 3 r e b m e c e D 2 22 i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S n o i t a r o p r o C y t l a e R e e r g A ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 2 22 ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Cyan 7 1 0 2 , 1 3 r e b m e c e D 3 3 - F i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S n o i t a r o p r o C y t l a e R e e r g A materially adversely impacted by such market conditions. Also, our ability to access equity markets as a source of funds may be affected by our stock price as well as general market conditions. Loss of revenues from tenants would reduce the Company’s cash flow. Our tenants encounter significant macroeconomic, governmental and competitive forces. Adverse changes in consumer spending or consumer preferences for particular goods, services or store-based retailing could severely impact their ability to pay rent. Shifts from in-store to online shopping could increase due to changing consumer shopping patterns as well as the increase in consumer adoption and use of mobile electronic devices. This expansion of e-commerce could have an adverse impact on our tenant’s ongoing viability. The default, financial distress, bankruptcy or liquidation of one or more of our tenants could cause substantial vacancies in our property portfolio. Vacancies reduce our revenues, increase property expenses and could decrease the value of each vacant property. Upon the expiration of a lease, the tenant may choose not to renew the lease, and/or we may not be able to release the vacant property at a comparable lease rate or without incurring additional expenditures in connection with such renewal or re-leasing. The availability and timing of cash distributions is uncertain We expect to continue to pay quarterly distributions to our shareholders. 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 shareholders. We cannot assure our shareholders that sufficient funds will be available to pay distributions. The decision to declare and pay dividends on our common stock in the future, as well as the timing, amount, and composition of any such future dividends, will be at the sole discretion of our board of directors and will depend on our earnings, funds from operations, liquidity, financial condition, capital requirements, contractual prohibitions, or other limitations under our indebtedness, annual dividend requirements or the REIT provisions of the Internal Revenue Code of 1986, as amended (the “Code”), state law and such other factors as our board of directors deems relevant. Further, we may issue new shares of common stock as compensation to our employees or in connection with public offerings or acquisitions. Any future issuances may substantially increase the cash required to pay dividends at current or higher levels. Our actual dividend payable will be determined by our board of directors based upon the circumstances at the time of declaration. Any preferred shares we may offer may have a fixed dividend rate that would not increase with any increases in the dividend rate of our common stock. Conversely, payment of dividends on our common stock may be subject to payment in full of the dividends on any preferred shares and payment of interest on any debt securities we may offer. price of our shares. If we do not maintain or increase the dividend on our common stock, it could have an adverse effect on the market 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. We face risks relating to information technology and cybersecurity attacks, loss of confidential information and other business disruptions. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes and we rely on commercially available systems, software, tools and monitoring to provide infrastructure and security for processing, transmitting and storing information. Any failure, inadequacy or interruption could materially harm our business. Furthermore, our business is subject to risks from and may be impacted by cybersecurity attacks, including attempts to gain unauthorized access to our confidential data and other electronic security breaches. Such cyber-attacks can range from individual attempts to gain unauthorized access to our information technology systems to more sophisticated security threats. While we employ a number of measures to prevent, detect and mitigate these threats, there is no guarantee such efforts will be successful in preventing a cyber-attack. Cybersecurity incidents could cause operational interruption, damage to our business relationships, private data exposure (including personally identifiable information, or proprietary and confidential information, of ours and our employees, as well as third 8 DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 2 22 4 3 - F compete with alternative forms or retailing, including online shopping, home shopping networks and mail order catalogs. 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 loss of rental income attributable to the affected 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 may be subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants” below. Bankruptcy laws will limit our remedies if a tenant becomes bankrupt and rejects its leases. 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 for unpaid future rent would be an unsecured pre-petition claim subject to statutory limitations, and therefore any amounts received in bankruptcy are likely to be substantially less valuable 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. areas. Our portfolio is concentrated in certain States, which makes us more susceptible to adverse events in these Our properties are located in 43 States throughout the United States and in particular, the States of Michigan (where 47 properties out of 436 properties are located or 12.1% of our annualized base rent was derived as of December 31, 2017), Texas (31 properties or 8.5% of our annualized base rent) and Florida (33 properties or 7.4% of our annualized base rent). An economic downturn or other adverse events or conditions such as natural disasters in any of these areas, or any other area where we may have significant concentration in the future, could result in a material reduction of our cash flows or material losses to our company. There are 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 the revolving credit facility or other forms of financing that will result in a risk that permanent fixed rate 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 anticipated project costs. Furthermore, new project commencement risks also include receipt of zoning, occupancy, 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 finance 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, as well as general investment risks associated with any new real estate investment. We own certain 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 a limited number of 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 shareholders and the trading price of our common stock. 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. (cid:2) The capital markets may limit our sources of funds for financing activities. Our ability to access the capital markets may be restricted at a time when we would like, or need, to access those markets. This could have an impact on our flexibility to react to changing economic and business conditions. A 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 may be 7 7 1 0 2 , 1 3 r e b m e c e D i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S n o i t a r o p r o C y t l a e R e e r g A ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 2 ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Cyan after those documents are filed with, or furnished to, the SEC. These filings are also accessible on the SEC’s website at www.sec.gov. Item 1A: Risk Factors The following factors and other factors discussed in this Annual Report on Form 10-K could cause our actual results to differ materially from those contained in forward-looking statements made in this report or presented elsewhere in future SEC reports. You should carefully consider each of the risks, assumptions, uncertainties and other factors described below and elsewhere in this report, as well as any reports, amendments or updates reflected in subsequent filings or furnishings with the SEC. We believe these risks, assumptions, uncertainties and other factors, individually or in the aggregate, could cause our actual results to differ materially from expected and historical results and could materially and adversely affect our business operations, results of operations, financial condition and liquidity. Risks Related to Our Business and Operations Economic and financial conditions may have a negative effect on our business and operations. Changes in global or national economic conditions, such as a global economic and financial market downturn or a disruption in the capital markets, may cause, among other things, a significant tightening in the credit markets, lower levels of liquidity, increases in the rate of default and bankruptcy and lower consumer spending and business spending, which could adversely affect our business and operations. Potential consequences of changes in economic and financial conditions include: (cid:120) (cid:120) (cid:120) changes in the performance of our tenants, which may result in lower rent and lower recoverable expenses that the tenant can afford to pay and tenant defaults under the leases; current or potential tenants may delay or postpone entering into long-term net leases with us; the ability to borrow on terms and conditions that we find acceptable may be limited or unavailable, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from acquisition and development activities, reduce our ability to make cash distributions to our shareholders and increase our future interest expense; (cid:120) 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; (cid:120) the recognition of impairment charges on or reduced values of our properties, which may adversely affect our results of operations or limit our ability to dispose of assets at attractive prices and may reduce the availability of buyer financing; and (cid:120) one or more lenders under our revolving credit facility could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all. 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. Such conditions could make it very difficult to forecast operating results, make business decisions and identify and address material business risks. Our business is significantly dependent on single tenant properties. We focus our development and investment activities on ownership of real properties that are primarily net leased to a single tenant. Therefore, the financial failure of, or other default in payment by, a single tenant under its lease and the potential resulting vacancy 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 impairment loss. In addition, we would be responsible for all of the operating costs of a property following a vacancy at a single tenant building. Because our properties have generally been built to suit a particular tenant’s specific needs and desires, we may also incur significant losses to make the leased premises ready for another tenant and experience difficulty or a significant delay in releasing such property. (cid:2) 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 respective businesses that may significantly weaken their financial condition, particularly during periods of economic uncertainty. In addition, our tenants 6 7 1 0 2 , 1 3 r e b m e c e D 5 3 - F i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S n o i t a r o p r o C y t l a e R e e r g A DTP SB Hcho 8.25 x 10.75 (35) .25 HT ] 32 Page 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Cyan 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 2 Regulation Environmental 6 3 - F Financial and Asset Information about Industry Segments We are in the business of acquiring, developing and managing retail real estate which we consider one reporting segment. See “Item 2 – Properties" and “Item 6 – Selected Financial Data" and “Note 2 – Summary of Significant Accounting Policies” to our consolidated financial statements for additional financial and asset information. Competition The U.S. commercial real estate investment market is a highly competitive industry. We actively compete with many entities engaged in the acquisition, development and operation of commercial properties. As such, we compete with other investors for a limited supply of properties and financing for these properties. Investors include traded and non-traded public REITs, private equity firms, institutional investment funds, insurance companies and private individuals, many of which have greater financial resources than we do and the ability to accept more risk than we believe we can prudently manage. There can be no assurance that we will be able to compete successfully with such entities in our acquisition, development and leasing activities in the future. Significant Tenants As of December 31, 2017, we leased 25 properties to Walgreens. Total annualized base rents from Walgreens were approximately 7.7%, 11.6% and 17.2% for the years ended 2017, 2016 and 2015, respectively. As of December 31, 2017, the weighted average remaining lease term of our Walgreens leases was 9.4 years. No other tenant accounted for more than 5.0% of our annualized base rent as of December 31, 2017. See “Item 2 – Properties” for additional information on our top tenants and the composition of our tenant base. Investments in real property create the 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 and, in certain instances, have conducted additional investigation, including a Phase II environmental assessment. Furthermore, we have adopted a policy of conducting a Phase I environmental study on each property we acquire and an additional investigation as warranted. We have no knowledge of any hazardous substances existing on our properties in violation of any applicable laws; however, no assurance can be given that such substances are not located on any of our 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 our properties. Americans with Disabilities Act of 1990 Our properties, as commercial facilities, are required to comply with Title III of the Americans with Disabilities Act of 1990 and similar state and local laws and regulations (collectively, the “ADA”). Investigation of a property may reveal non-compliance with the ADA. Our tenants will typically have primary responsibility for complying with the ADA, but we may incur costs if the tenant does not comply. As of December 31, 2017, we have not been notified by any governmental authority, nor are we otherwise aware, of any non-compliance with the ADA that we believe would have a material adverse effect on our business, financial position or results of operations. Available Information We make available free of charge through our website at www.agreerealty.com all reports we electronically file with, or furnish to, the SEC, including our Annual Report on Form 10-K, Quarterly Reports on From 10-Q, and current reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable 5 7 1 0 2 , 1 3 r e b m e c e D i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S n o i t a r o p r o C y t l a e R e e r g A 2 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Each platform leverages the Company’s real estate acumen to pursue investments in net lease retail real estate. Factors that we consider when evaluating an investment include but are not limited to: (cid:120) overall market-specific characteristics, such as demographics, market rents, competition and retail synergy (cid:120) asset-specific characteristics, such as the age, size, location, zoning, use and environmental history, accessibility, physical condition, signage and visibility of the property tenant-specific characteristics, including but not limited to the financial profile, operating history, business plan, size, market positioning, geographic footprint, management team, industry and/or sector-specific trends and other characteristics specific to the tenant and parent thereof; (cid:120) unit-level operating characteristics, including store sales performance and profitability, if available; lease-specific terms, including term of the lease, rent to be paid by the tenant and other tenancy considerations, and transaction considerations, such as purchase price, seller profile and other non-financial terms. (cid:120) (cid:120) (cid:120) Financing Strategy We seek to maintain a capital structure that provides us with the flexibility to manage our business and pursue our growth strategies, while allowing us to service our debt requirements and generate appropriate risk-adjusted returns for our shareholders. We believe these objectives are best achieved by a capital structure that consists primarily of common equity and prudent amounts of debt financing. However, we may raise capital in any form and under terms that we deem acceptable and in the best interest of our shareholders. We have previously utilized common stock equity offerings, secured mortgage borrowings, unsecured bank borrowings, private placements of senior unsecured notes and the sale of properties to meet our capital requirements. We continually evaluate our financing policies on an on-going basis in light of current economic conditions, access to various capital markets, relative costs of equity and debt securities, the market value of our properties and other factors. As of December 31, 2017, our ratio of total debt to total market capitalization, assuming the conversion of limited partnership interests in the Operating Partnership (“OP Units”) into shares of common stock, was approximately 24.5%, and our ratio of total debt to total gross assets (before accumulated depreciation) was approximately 33.0%. As of December 31, 2017, our total debt outstanding before deferred financing costs was $522.4 million, including $89.1 million of secured mortgage debt that had a weighted average fixed interest rate of 3.7% (including the effects of interest rate swap agreements) and a weighted average maturity of 3.0 years, $419.3 million of unsecured borrowings that had a weighted average fixed interest rate of 4.0% (including the effects of interest rate swap agreements) and a weighted average maturity of 8.3 years, and $14.0 million of floating rate borrowings under our revolving credit facility at a weighted average interest rate of approximately 2.6%. Certain financial agreements to which we are a party contain covenants that limit our ability to incur debt under certain circumstances; however, our organizational documents do not limit the absolute amount or percentage of indebtedness that we may incur. As such, we may modify our borrowing policies at any time without shareholder approval. 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 and preventative maintenance. Our properties are designed and built to require minimal capital improvements other than renovations or alterations, typically paid for by tenants. At our three community shopping center properties, we subcontract 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 our 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 helps us to maximize cash flow from operations and closely monitor corporate expenses. 4 7 1 0 2 , 1 3 r e b m e c e D 7 3 - F i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S n o i t a r o p r o C y t l a e R e e r g A 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT 7 1 0 2 , 1 3 r e b m e c e D i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S principal amount of our 4.19% senior unsecured notes due September 2029. The senior unsecured notes are guaranteed by the Company. The closing of the private placement was consummated in September 2017, and, on that date, the Operating Partnership issued the senior unsecured notes. The senior unsecured notes were sold only to institutional investors and did not involve a public offering in reliance on the exemption from registration in Section 4(a)(2) of the Securities Act. In December 2017, the Company assumed an interest only mortgage note for $21.5 million with PNC Bank, National Association in connection with an acquisition. The mortgage note is due October 2019, secured by a multi-tenant property and has a fixed interest rate of 3.32%. During the year ended December 31, 2017, we issued 2,368,359 shares of common stock under our ATM program at an average price of $49.17, realizing gross proceeds of $116.5 million. We had approximately $83.5 million remaining capacity under the ATM program as of December 31, 2017. Dispositions Leasing During 2017, the Company sold real estate properties for net proceeds of $44.3 million and recorded a net gain of $14.2 million (net of any expected losses on real estate held for sale). During 2017, excluding properties that were sold, we executed new leases, extensions or options on more than 683,000 square feet of gross leasable area throughout our portfolio. The annual rent associated with these new leases, extensions or options is approximately $6.5 million. Material new leases, extensions or options included a 147,771 square foot Sam’s Club in Brooklyn, Ohio, a 33,608 square foot Big Lots in Cedar Park, Texas and a 32,147 square foot TJ Maxx in Aurora, Colorado. 8 3 - F Business Strategies Investment Strategy Our primary business objective is to generate consistent shareholder returns by primarily investing in and actively managing a diversified portfolio of retail properties net leased to industry leading tenants. The following is a discussion of our investment, financing and asset management strategies: We are primarily focused on the long-term, fee simple ownership of properties net leased to national or large, regional retailers operating in sectors we believe to be more e-commerce and recession resistant. Our leases are typically long-term net leases that require the tenant to pay all property operating expenses, including real estate taxes, insurance and maintenance. We believe that a diversified portfolio of such properties provides for stable and predictable cash flow. We seek to expand and enhance our portfolio by identifying the best risk-adjusted investment opportunities across our development, Partner Capital Solutions (“PCS”) and acquisitions platforms. Development: We have been developing retail properties since the formation of our predecessor company in 1971 and our development platform seeks to employ our capabilities to direct all aspects of the development process, including site selection, land acquisition, lease negotiation, due diligence, design and construction. Our developments are typically build-to-suit projects that result in fee simple ownership of the property upon completion. Partner Capital Solutions: We launched our PCS program, formerly known as Joint Venture Capital Solutions program, in April 2012. Our PCS program allows us to acquire properties or development opportunities by partnering with private developers or retailers on their in-process developments. We offer construction expertise, relationships, access to capital and forward commitments to purchase to facilitate the successful completion of their projects. We typically take fee simple ownership of PCS projects upon their completion. Acquisitions: Our acquisitions platform was launched in April 2010 in order to expand our investment capabilities by pursuing opportunities that do not fall within our development platform, but that do meet both our real estate and return on investment criteria. We believe that development and PCS projects have the potential to generate superior risk-adjusted returns on investment in properties that are substantially similar to those we acquire. 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Cyan ] 32 Page 2 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] n o i t a r o p r o C y t l a e R e e r g A 2 22 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Recent Developments Investments 7.6%. Dividends During 2017, we completed approximately $359.4 million of investments in net leased retail real estate, including acquisition and closing costs. Total investment volume includes the acquisition of 79 properties for an aggregate purchase price of approximately $338.0 million and the completed development of four properties for an aggregate cost of approximately $21.4 million. These 83 properties are net leased to 51 different tenants operating in 22 sectors and are located in 28 states. These assets are 100% leased for a weighted average lease term of approximately 11.6 years, and the weighted average capitalization rate on our investments was approximately We increased our quarterly dividend per share from $0.495 in March 2017 to $0.505 in June 2017 and further increased our quarterly dividend per share to $0.520 in December 2017. The fourth quarter dividend per share of $0.520 represents an annualized dividend of $2.08 per share and an annualized dividend yield of approximately 4.0% based on the last reported sales price of our common stock listed on the NYSE of $51.44 on December 29, 2017. We have paid a quarterly cash dividend for 95 consecutive quarters and, although we expect to continue our policy of paying quarterly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our recent pattern of increasing dividends per share, or what our actual dividend yield will be in any future period. Financing In April 2017, the Company entered into a new $200.0 million at-the-market equity program (“ATM program”) through which the Company may, from time to time, sell shares of common stock. The Company uses the proceeds generated from its ATM program for general corporate purposes, including funding our investment activity, the repayment or refinancing of outstanding indebtedness, working capital and other general corporate purposes. In May 2017, the Company filed an automatic shelf registration statement on Form S-3, registering an unspecified amount at an indeterminant aggregate initial offering price of common stock, preferred stock, depositary shares and warrants. The Company may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of any offering. In June 2017, the Company completed a follow-on underwritten offering of 2,415,000 shares of common stock. The offering, which included the full exercise of the overallotment option by the underwriters, raised net proceeds of approximately $108.0 million, after deducting the underwriting discount. The proceeds from the offering were used to repay borrowings under our revolving credit facility to fund property acquisitions and for general corporate purposes. In August 2017, the Company entered into a note purchase agreement with institutional purchasers. Pursuant to the note purchase agreement, the Operating Partnership completed a private placement of $100.0 million aggregate 2 investment grade credit rating from S&P Global Ratings, Moody’s Investor Service, Fitch Ratings or the National Association of Insurance Commissioners. Substantially all of our tenants are subject to net lease agreements. A net lease typically requires the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. As of December 31, 2017, we had 32 full-time employees, including executive, investment, due diligence, construction, accounting, asset management and administrative personnel. Our principal executive offices are located at 70 E. Long Lake Road, Bloomfield Hills, MI 48304 and our telephone number is (248) 737-4190. We maintain a website at www.agreerealty.com. Our reports are electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act and 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 governance committees. The information on our website is not part of this report. 7 1 0 2 , 1 3 r e b m e c e D 9 3 - F i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S n o i t a r o p r o C y t l a e R e e r g A 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT 7 1 0 2 , 1 3 r e b m e c e D i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S 0 4 - F PART I Cautionary Note Regarding Forward-Looking Statements This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Agree Realty Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “will,” “seek,” “could,” “project,” or similar expressions. Forward-looking statements in this report include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations, our strategic plans and objectives, occupancy and leasing rates and trends, liquidity and ability to refinance our indebtedness as it matures, anticipated expenditures of capital, and other matters. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations, include, but are not limited to: the global and national economic conditions and changes in general economic, financial and real estate market conditions; changes in our business strategy; the potential need to fund improvements or other capital expenditures out of operating cash flow; 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; our ability to re-lease space as leases expire; loss or bankruptcy of one or more of our major tenants; our ability to maintain our qualification as a real estate investment trust (“REIT”) for federal income tax purposes and the limitations imposed on our business by our status as a REIT; and legislative or regulatory changes, including changes to laws governing REITs. The factors included in this report, including the documents incorporated by reference, and documents the Company subsequently files or furnishes with the SEC are not exhaustive and additional factors could cause actual results to differ materially from that described in the forward-looking statements. For a discussion of additional risk factors, see the factors included under the caption “Risk Factors” within this report. All forward-looking statements are based on information that was available, and speak only, as of the date on which they were made. Except as required by law, the Company disclaims any obligation to review or update these forward–looking statements to reflect events or circumstances as they occur. Unless the context otherwise requires, references in this Annual Report on Form 10-K to the terms "registrant,” the "Company," “Agree Realty,” "we,” “our” or "us" refer to Agree Realty Corporation and all of its consolidated subsidiaries, including its majority owned operating partnership, Agree Limited Partnership (the “Operating Partnership”). Agree Realty has elected to treat certain subsidiaries as taxable real estate investment trust subsidiaries which are collectively referred to herein as the “TRS.” Item 1: Business General The Company is a fully integrated REIT primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. The Company was founded in 1971 by its current Executive Chairman, Richard Agree, and its common stock was listed on the New York Stock Exchange (“NYSE”) in 1994. The Company’s assets are held by, and all of its operations are conducted through, directly or indirectly, the Operating Partnership, of which the Company is the sole general partner and in which it held a 98.8% interest as of December 31, 2017. 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. As of December 31, 2017, our portfolio consisted of 436 properties located in 43 states and totaling approximately 8.7 million square feet of gross leasable area (“GLA”). See “Item 2 – Properties – Geographic Diversification” for more information on market concentrations. Our portfolio included 433 net lease properties, which contributed approximately 98.5% of annualized base rent, and three community shopping centers, which generated the remaining 1.5% of annualized base rent. As of December 31, 2017, our portfolio was approximately 99.7% leased and had a weighted average remaining lease term of approximately 10.2 years. A significant majority of our properties are leased to national tenants and approximately 43.9% of our annualized base rent was derived from tenants, or parent entities thereof, with an 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Cyan ] 32 Page 2 22 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] n o i t a r o p r o C y t l a e R e e r g A 2 22 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 1 4 - F 7 1 0 2 , 1 3 r e b m e c e D [This page intentionally left blank.] i n o i t a c e r p e D d e t a u m u c c A d n a l t e a t s E l a e R – I I I l e u d e h c S n o i t a r o p r o C y t l a e R e e r g A 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side D Cyan ] 32 Page 2 22 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 Agree Realty Corporation Notes to Schedule III December 31, 2017 AGREE REALTY CORPORATION Index to Form 10-K Item 1: Business Item 1A: Risk Factors Item 1B: Unresolved Staff Comments Item 2: Item 3: Item 4: Properties Legal Proceedings Mine Safety Disclosures PART I PART II Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Item 6: Item 7: Item 8: Item 9: Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A: Quantitative and Qualitative Disclosure about Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A: Controls and Procedures Item 9B: Other Information PART III Item 10: Directors, Executive Officers and Corporate Governance Item 11: Executive Compensation Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13: Certain Relationships and Related Transactions, and Director Independence Item 14: Principal Accountant Fees and Services Item 15: Exhibits and Financial Statement Schedules Consolidated Financial Statements and Notes PART IV SIGNATURES Page 1 6 17 17 21 22 22 23 24 32 34 34 34 35 35 35 35 35 36 37 F-1 40 F-42 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side C Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT Portions of the registrant’s definitive proxy statement for the annual stockholder meeting to be held in 2018 are incorporated by reference into Part III of this Annual Report on Form 10-K as noted herein. DOCUMENTS INCORPORATED BY REFERENCE 2 1 5 3 9 3 8 T O P P A N a g r e e r e a l t y _ T e x t _ I n s e r t _ C o v e r S i g 2 ] 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 AGREE REALTY CORPORATION By: /s/ Joel N. Agree Joel N. Agree President and Chief Executive Officer Date: February 22, 2018 KNOW ALL PERSONS BY THESE PRESENTS, that we, the undersigned officers and directors of Agree Realty Corporation, hereby severally constitute Richard Agree, Joel N. Agree and Clayton Thelen, 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 Annual Report on Form 10-K filed herewith and any and all amendments to said Annual Report on 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 Annual Report on 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 22nd day of February 2018. By: By: By: By: By: By: By: By: By: /s/ Richard Agree Richard Agree Executive Chairman of the Board of Directors /s/ Joel N. Agree Joel N. Agree President, Chief Executive Officer and Director (Principal Executive Officer) /s/ Clayton Thelen Clayton Thelen Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) /s/ Merrie S. Frankel Merrie S. Frankel Director /s/ Farris G. Kalil Farris G. Kalil Director /s/ John Rakolta John Rakolta Jr. Director /s/ Jerome Rossi Jerome Rossi Director /s/ William S. Rubenfaer William S. Rubenfaer Director /s/ Leon M. Schurgin Leon M. Schurgin Director 40 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 Date: February 22, 2018 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side B Cyan ] 32 Page 2 ] 2 g i S r e v o C _ t r e s n I _ t x e T _ y t l a e r e e r g a N A P P O T 8 3 9 3 5 1 [This page intentionally left blank.] UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 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, 2017 Commission File Number 1-12928 AGREE REALTY CORPORATION (Exact name of Registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 38-3148187 (I.R.S. Employer Identification No.) 70 E. Long Lake Road, Bloomfield Hills, Michigan 48304 (Address of Principal Executive Offices) Registrant’s telephone number, including area code: (248) 737-4190 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. 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 Yes No Yes No Yes No 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. 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). 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes No Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). The aggregate market value of the Registrant’s shares of common stock held by non-affiliates was approximately $1,313,587,447 as of June 30, 2017, based on the closing price of $45.87 on the New York Stock Exchange on that date. At February 20, 2018, there were 30,992,597 shares of common stock, $.0001 par value per share, outstanding. 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 3 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 6 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 5 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 4 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A RGS 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 2 Side A Cyan ] 32 Page DTP SB Hcho 8.25 x 10.75 (35) .25 HT (cid:36)(cid:42)(cid:53)(cid:40)(cid:40)(cid:3)(cid:53)(cid:40)(cid:36)(cid:47)(cid:55)(cid:60)(cid:3)(cid:38)(cid:50)(cid:53)(cid:51)(cid:50)(cid:53)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49) Financial Highlights (cid:49)(cid:60)(cid:54)(cid:40)(cid:29)(cid:3)(cid:36)(cid:39)(cid:38) (cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:16)(cid:3)(cid:41)(cid:82)(cid:85)(cid:3)(cid:60)(cid:72)(cid:68)(cid:85)(cid:3)(cid:40)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15) (cid:21)(cid:19)(cid:20)(cid:26) (cid:21)(cid:19)(cid:20)(cid:25) (cid:21)(cid:19)(cid:20)(cid:24) (cid:3)(cid:3)(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3)($000's) (cid:3)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)($000's) (cid:3)(cid:3)(cid:41)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)($000's) (cid:3)(cid:3)(cid:41)(cid:88)(cid:81)(cid:71)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72) (cid:3)(cid:3)(cid:39)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72) (cid:51)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:92)(cid:3)(cid:51)(cid:82)(cid:85)(cid:87)(cid:73)(cid:82)(cid:79)(cid:76)(cid:82)(cid:3) (cid:3)(cid:3)(cid:53)(cid:72)(cid:68)(cid:79)(cid:3)(cid:72)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3)(cid:68)(cid:87)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:3)($000's) (cid:3)(cid:3)(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3)($000's) (cid:3)(cid:3)(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:71)(cid:72)(cid:69)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:70)(cid:70)(cid:85)(cid:88)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)($000's) (cid:3)(cid:3)(cid:49)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:72)(cid:86) (cid:3)(cid:3)(cid:42)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3)(cid:79)(cid:72)(cid:68)(cid:86)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:68)(cid:3)(sq. ft.) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:20)(cid:20)(cid:25)(cid:15)(cid:24)(cid:24)(cid:24) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:28)(cid:20)(cid:15)(cid:24)(cid:21)(cid:26) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:25)(cid:28)(cid:15)(cid:28)(cid:25)(cid:25) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:23)(cid:23)(cid:15)(cid:24)(cid:28)(cid:26) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:22)(cid:24)(cid:15)(cid:27)(cid:22)(cid:22) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:21)(cid:26)(cid:15)(cid:25)(cid:21)(cid:26) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:26)(cid:25)(cid:15)(cid:21)(cid:26)(cid:20) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:24)(cid:28)(cid:15)(cid:20)(cid:25)(cid:27) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:23)(cid:23)(cid:15)(cid:19)(cid:24)(cid:19) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:21)(cid:17)(cid:26)(cid:21) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:21)(cid:17)(cid:24)(cid:23) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:21)(cid:17)(cid:22)(cid:28) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:21)(cid:17)(cid:19)(cid:21)(cid:24) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:20)(cid:17)(cid:28)(cid:21)(cid:19) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:20)(cid:17)(cid:27)(cid:23)(cid:24) (cid:21)(cid:19)(cid:20)(cid:26) (cid:21)(cid:19)(cid:20)(cid:25) (cid:21)(cid:19)(cid:20)(cid:24) (cid:7)(cid:3)(cid:3)(cid:3) (cid:20)(cid:15)(cid:21)(cid:28)(cid:28)(cid:15)(cid:21)(cid:24)(cid:24) (cid:7)(cid:3)(cid:3)(cid:3) (cid:20)(cid:15)(cid:19)(cid:20)(cid:28)(cid:15)(cid:28)(cid:24)(cid:26) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:26)(cid:24)(cid:24)(cid:15)(cid:27)(cid:23)(cid:28) (cid:7)(cid:3)(cid:3)(cid:3) (cid:20)(cid:15)(cid:23)(cid:28)(cid:26)(cid:15)(cid:19)(cid:23)(cid:20) (cid:7)(cid:3)(cid:3)(cid:3) (cid:20)(cid:15)(cid:20)(cid:23)(cid:20)(cid:15)(cid:28)(cid:26)(cid:21) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:27)(cid:19)(cid:26)(cid:15)(cid:19)(cid:23)(cid:21) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:24)(cid:21)(cid:24)(cid:15)(cid:27)(cid:20)(cid:20) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:23)(cid:19)(cid:25)(cid:15)(cid:21)(cid:25)(cid:20) (cid:7)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:22)(cid:21)(cid:19)(cid:15)(cid:24)(cid:23)(cid:26) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:23)(cid:22)(cid:25) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:22)(cid:25)(cid:25) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:21)(cid:26)(cid:27) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:27)(cid:15)(cid:25)(cid:25)(cid:22)(cid:15)(cid:19)(cid:19)(cid:19) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:26)(cid:15)(cid:19)(cid:22)(cid:22)(cid:15)(cid:19)(cid:19)(cid:19) (cid:3)(cid:3)(cid:3)(cid:3)(cid:3) (cid:24)(cid:15)(cid:21)(cid:19)(cid:26)(cid:15)(cid:19)(cid:19)(cid:19) (cid:55)(cid:50)(cid:55)(cid:36)(cid:47)(cid:3)(cid:53)(cid:40)(cid:55)(cid:56)(cid:53)(cid:49)(cid:3)(cid:51)(cid:40)(cid:53)(cid:41)(cid:50)(cid:53)(cid:48)(cid:36)(cid:49)(cid:38)(cid:40) (cid:21)(cid:25)(cid:19) (cid:21)(cid:21)(cid:19) (cid:20)(cid:27)(cid:19) (cid:20)(cid:23)(cid:19) (cid:79) (cid:72) (cid:88) (cid:68) (cid:57) (cid:91) (cid:72) (cid:71) (cid:81) (cid:3) (cid:44) 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Spot 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Spot 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Cyan ] 4 Page In (cid:20)(cid:19)(cid:19) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:21) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:22) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:23) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:24) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:25) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:26) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:3)(cid:53)(cid:72)(cid:68)(cid:79)(cid:87)(cid:92)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81) (cid:53)(cid:88)(cid:86)(cid:86)(cid:72)(cid:79)(cid:79)(cid:3)(cid:21)(cid:19)(cid:19)(cid:19) (cid:54)(cid:49)(cid:47)(cid:3)(cid:53)(cid:40)(cid:44)(cid:55)(cid:3)(cid:53)(cid:72)(cid:87)(cid:68)(cid:76)(cid:79)(cid:3)(cid:54)(cid:75)(cid:82)(cid:83)(cid:83)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:87)(cid:85) (cid:44)(cid:81)(cid:71)(cid:72)(cid:91) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:21) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:22) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:23) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:24) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:25) (cid:20)(cid:21)(cid:17)(cid:22)(cid:20)(cid:17)(cid:20)(cid:26) (cid:36)(cid:74)(cid:85)(cid:72)(cid:72)(cid:3)(cid:53)(cid:72)(cid:68)(cid:79)(cid:87)(cid:92)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81) (cid:53)(cid:88)(cid:86)(cid:86)(cid:72)(cid:79)(cid:79)(cid:3)(cid:21)(cid:19)(cid:19)(cid:19) (cid:54)(cid:49)(cid:47)(cid:3)(cid:53)(cid:40)(cid:44)(cid:55)(cid:3)(cid:53)(cid:72)(cid:87)(cid:68)(cid:76)(cid:79)(cid:3)(cid:54)(cid:75)(cid:82)(cid:83)(cid:83)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:87)(cid:85) (cid:20)(cid:19)(cid:19)(cid:17)(cid:19)(cid:19) (cid:20)(cid:19)(cid:19)(cid:17)(cid:19)(cid:19) (cid:20)(cid:19)(cid:19)(cid:17)(cid:19)(cid:19) (cid:20)(cid:20)(cid:23)(cid:17)(cid:25)(cid:19) (cid:20)(cid:22)(cid:27)(cid:17)(cid:27)(cid:21) (cid:20)(cid:19)(cid:25)(cid:17)(cid:27)(cid:23) (cid:20)(cid:22)(cid:19)(cid:17)(cid:20)(cid:22) (cid:20)(cid:23)(cid:24)(cid:17)(cid:25)(cid:21) (cid:20)(cid:22)(cid:27)(cid:17)(cid:23)(cid:23) (cid:20)(cid:24)(cid:19)(cid:17)(cid:28)(cid:22) (cid:20)(cid:22)(cid:28)(cid:17)(cid:20)(cid:28) (cid:20)(cid:23)(cid:24)(cid:17)(cid:27)(cid:24) (cid:21)(cid:20)(cid:22)(cid:17)(cid:22)(cid:26) (cid:20)(cid:25)(cid:27)(cid:17)(cid:27)(cid:24) (cid:20)(cid:24)(cid:19)(cid:17)(cid:28)(cid:23) (cid:21)(cid:23)(cid:27)(cid:17)(cid:22)(cid:25) (cid:20)(cid:28)(cid:22)(cid:17)(cid:24)(cid:27) (cid:20)(cid:22)(cid:23)(cid:17)(cid:21)(cid:20) Period Ending DTP SB To Match Hant 8.25 x 10.75 (23 X35) .25 HT ] 4 Page Out 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Magenta 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Yellow 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Spot 2 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Spot 1 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Black 153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Cyan (cid:36)(cid:42)(cid:53)(cid:40)(cid:40)(cid:3)(cid:53)(cid:40)(cid:36)(cid:47)(cid:55)(cid:60)(cid:3)(cid:38)(cid:50)(cid:53)(cid:51)(cid:50)(cid:53)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49) Financial Highlights (cid:49)(cid:60)(cid:54)(cid:40)(cid:29)(cid:3)(cid:36)(cid:39)(cid:38) FUNDS FROM OPERATIONS (in thousands) (cid:3) (cid:3) (cid:21)(cid:19)(cid:20)(cid:22) (cid:21)(cid:19)(cid:20)(cid:23) (cid:21)(cid:19)(cid:20)(cid:24) (cid:21)(cid:19)(cid:20)(cid:25) (cid:21)(cid:19)(cid:20)(cid:26) REAL ESTATE ASSETS (in thousands) (cid:7)(cid:27)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:26)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:25)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:24)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:23)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:22)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:21)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:20)(cid:15)(cid:23)(cid:19)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:20)(cid:15)(cid:21)(cid:19)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:20)(cid:15)(cid:19)(cid:19)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:27)(cid:19)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:25)(cid:19)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:7)(cid:23)(cid:19)(cid:19)(cid:15)(cid:19)(cid:19)(cid:19) (cid:21)(cid:19)(cid:20)(cid:22) (cid:21)(cid:19)(cid:20)(cid:23) (cid:21)(cid:19)(cid:20)(cid:24) (cid:21)(cid:19)(cid:20)(cid:25) (cid:21)(cid:19)(cid:20)(cid:26) ANNUAL REPORT for the year ended DECEMBER 31, 2017 Agree Realty Corporation (NYSE: ADC) is a fully-integrated, self-administered, and self-managed real estate investment trust (REIT) focused on the acquisition and development of properties net leased to industry-leading retailers throughout the Building upon the foundation of excellence established throughout the past four decades, Agree Realty continues to be a market leader in the net lease space. At December 31, 2017, our growing portfolio consisted of 436 assets in 43 states, portfolio consisted of 436 assets in 43 states, containing approximately 8.7 million square feet of gross leasable space. ANNUAL REPORT for the year ended DECEMBER 31, 2017 Agree Realty Corporation (NYSE: ADC) is a fully-integrated, self-administered, and self-managed real estate investment trust (REIT) focused on the acquisition and development of properties net leased to industry-leading retailers throughout the Building upon the foundation of excellence established throughout the past four decades, Agree Realty continues to be a market leader in the net lease space. At December 31, 2017, our growing portfolio consisted of 436 assets in 43 states, portfolio consisted of 436 assets in 43 states, containing approximately 8.7 million square feet of gross leasable space. United States. United States. United States. United States. CORPORATE INFORMATION EXECUTIVE OFFICERS Richard Agree Executive Chairman Board of Directors Joey Agree President Chief Executive Officer Director DIRECTORS Merrie S. Frankel President Minerva Realty Consultants, LLC Adjunct Professor Columbia University New York University Farris Kalil Former, Director of Business Development of Commercial Lending Michigan National Bank John Rakolta, Jr. Chairman Chief Executive Officer Walbridge Annual Meeting of Stockholders Tuesday, May 15, 2018 - 10:00 am Embassy Suites 850 Tower Drive Troy, MI 48098 Auditors Grant Thornton LLP 27777 Franklin Road Southfield, MI 48034 Clay Thelen Chief Financial Officer Secretary Laith Hermiz Chief Operating Officer Daniel Ravid Chief Administrative Officer Jerry Rossi Former, Group President The TJX Companies Chief Executive Officer R&R Consulting William S. Rubenfaer President Rubenfaer Associates, PC Leon Schurgin Of Counsel Dawda Mann Counsel Honigman 39400 Woodward Ave., Ste. 101 Bloomfield Hills, MI 48304 Registrar & Transfer Agent Computershare P.O. Box 30170 College Station, TX 77842 

Continue reading text version or see original annual report in PDF format above