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
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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.
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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
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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
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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
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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
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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.
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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:
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(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
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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
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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.
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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,
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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):
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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.
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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.
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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.
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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
$119,209
392
41
433
3
436
% Investment
Grade
Rated (2)
40.6%
84.8%
44.2%
28.3%
43.9%
Remaining
Wtd. Avg.
Lease
Term
10.2 yrs
11.9 yrs
10.3 yrs
4.9 yrs
10.2 yrs
Annualized base rent is in thousands.
(1) Represents annualized straight-line rent as of December 31, 2017.
(2) Reflects tenants, or parent entities thereof, w ith investment grade credit ratings from Standard & Poors, Moody's, Fitch and/or NAIC.
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Tenant Diversification
The following table presents annualized base rents for all tenants that generated 1.5% or greater of our total
annualized base rent as of December 31, 2017:
($ 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):
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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
$119,209
% of Ann.
Base Rent
12.3%
7.7%
5.8%
5.5%
5.4%
5.1%
4.7%
4.4%
3.9%
3.8%
3.7%
3.6%
3.1%
2.8%
2.7%
2.6%
2.6%
2.6%
17.7%
100.0%
(1) Represents annualized straight-line rent as of December 31, 2017.
(2) Includes sectors generating less than 2.5% of annualized base rent.
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Geographic Diversification
The following table presents annualized base rents, by state, for our portfolio as of December 31, 2017:
The following table presents scheduled principal payments related to our debt as of December 31, 2017 (in
Notes to Consolidated Financial Statements
December 31, 2017
($ 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
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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 $109.6 million after deducting the underwriting discount.
The proceeds from the offering were used to repay borrowings under our revolving credit facility to fund property
acquisitions and for general corporate purposes.
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Lease Expirations
The following table presents contractual lease expirations within the Company’s portfolio as of December 31, 2017,
assuming that no tenants exercise renewal options:
Gross Leasable Area
% of
Total
($ 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.
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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.
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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
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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
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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.
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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
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2019
2020
2021
2022
Total
Thereafter
Acquisitions
2017.
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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
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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.
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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
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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
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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.
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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
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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.
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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
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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
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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
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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.
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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
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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).
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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
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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
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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
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Reports of Independent Registered Public Accounting Firm
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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
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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
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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.
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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
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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).
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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
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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
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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
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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
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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
$
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($ 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
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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.
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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
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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.
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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
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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
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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.
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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
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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.
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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
$
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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.
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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.
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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.
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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.
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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.
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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):
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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.
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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.
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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.
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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
$119,209
17.7%
100.0%
(1) Represents annualized straight-line rent as of December 31, 2017.
(2) Includes sectors generating less than 2.5% of annualized base rent.
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1
Tenant Diversification
The following table presents annualized base rents for all tenants that generated 1.5% or greater of our total
annualized base rent as of December 31, 2017:
($ 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):
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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.
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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.
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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):
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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.
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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):
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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,
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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.
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(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
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(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
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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
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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:
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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
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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
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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
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Regulation
Environmental
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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
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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.
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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.
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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.
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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.
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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
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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
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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
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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
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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.
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Financial Highlights
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153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side B Yellow
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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
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Period Ending
DTP SB To Match Hant 8.25 x 10.75 (23 X35) .25 HT
] 4 Page Out
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153938 TOPPAN agree realty_Text_Insert_Cover Signature 1 Side A Yellow
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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)
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(cid:3)
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(cid:21)(cid:19)(cid:20)(cid:25)
(cid:21)(cid:19)(cid:20)(cid:26)
REAL ESTATE ASSETS
(in thousands)
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(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